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Distributing a bonus pool

Distributing a bonus pool

Four broad approaches to distributing the proceeds of a bonus pool in a profit- sharing plan are listed below:
1. Each person's share is based on salary
2. Each person receives an equal share
3. Each person's share is based on position in the organization (larger payments to people at higher levels).
4. Each person's share is based on individual performance relative to some target.

Required:
a. Give two reasons to support each alternative
b. Give two reasons to oppose each alternative
c. Pick the alternative that you think is best and support your choice with a brief argument.

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Solution
1. Each person's share is based on salary
Support: Salary is a proxy for contribution to annual results
Support: Salary is a measure of level of responsibility and workload
Oppose: Salary is static and does not reflect the activity or contributions during the year
Oppose: Using salary favors those with the most tenure, skills, and education--those folks are already likely working at their maximum because they are career driven - instead give incentives to those that are not already working at their maximum

2. Each person receives an equal share
Support: Everyone feels like part of the team and works towards mutual goals
Support: Newer and those closest to the "front line" get a larger share as a proportion of their compensation and so the bonus is a ...

Solution Summary

Your response for "support" and "oppose" is in bullet style so you can create a write-up in your own words. A choice for preferred method is given in 94 words. A caveat is added at the end of the preferred method about C-level executives.

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