Bonus Compensation Plans

Overview
Bonus Compensation Plans are primarily used to promote efficiency and productivity of the
workforce, but organizations can also use them to enhance employee recruitment, engagement,
retention and employer branding.
Bonus Compensation Plans stem from the theory that rewards drive behavior. Applied to the
corporate setting, incentive compensation programs enable organizations to produce targeted
results by rewarding employees who are responsible for those results.
1. Stock options

The right, or “option” to purchase company stock at a fixed price at some future
It means a type of equity compensation granted by companies to their employees and
executives. Rather than granting shares of stock directly, the company gives derivative options
on the stock instead. These options come in the form of regular call options and give the
employee the right to buy the company's stock at a specified price for a finite period of time.
In general, the greatest benefits of a stock option are realized if a company's stock rises above
the exercise price. When a stock’s price rises above the call option exercise price, call options
are exercised and the holder obtains the company’s stock at a discount. The holder may choose
to immediately sell the stock in the open market for a profit or hold onto the stock over time.

2. Restricted stock
Stock given to an employee who is prohibited or “restricted” from selling the stock for a
certain time period and not at all if they leave the company before that time period.
Restricted stock became more popular in the mid-2000s as companies were required to
expense stock option grants. These give employees the right to acquire or receive shares once
certain criteria are attained, like working for a defined number of years or meeting
performance targets.
These shares may also come with a double-trigger provision. That means that an employee's
shares become unrestricted if the company is acquired by another and the employee is fired in
the restructuring that follows.

3. Golden handcuffs
Golden handcuffs is a form of executive compensation in which the compensation is
deferred by the form of copper absorption, attractive salary (for people in high positions) or
benefits that become tools for the company to retain. Employees, make them not, cannot out
of.
For example:
An ABC company that specializes in providing credit scoring technology to financial
institutions. One of their directors is a leading expert in algorithms (algorithms), playing a
decisive role in product development, so retaining people is essential. By buying life
insurance for the director, waiting for the value to increase over time, the company can
transfer ownership to him as an added bonus. The longer you donate to the company, the
higher the benefits that person will receive.

4. Golden parachutes
The golden parachute is a contract with key executives and can be used as a kind of anti-
takeover measure, taken by a company to prevent an unwanted takeover. Benefits may
include stock options, cash bonuses, and generous severance pay. These substantial benefits
are given to top executives if the company is taken over by another company and they are fired
due to a merger or acquisition.
For example, Meg Whitman, CEO of Hewlett-Packard Enterprise will receive nearly $9
million if there is a change of control at the company and more than $51 million if fired.

5. Cash bonuses
Cash bonuses for better-than-expected performance can be awarded to an individual,
department, or entire organization depending on the extent to which performance goals are
exceeded.
For example, the company has a sales team of 15 people. Each team member is responsible for
bringing in and maintaining 10 accounts. The company can reward each employee with $1,500
at the end of each year as a cash bonus for reaching their goals.

SOURCES OF POWER
Power is the ability to influence the behavior of others with or without resistance by using a
variety of tactics to push or prompt action.
Those with power are able to influence the behavior of others to achieve some goal or
objective. Leaders can use power to benefit others or to constrain them, to serve the
organization's goals or to undermine them
Power comes from several sources, each of which has different effects on the targets of that
power.
1. Position Power
The ability and right to influence and direct others based on the power associated with your
formal position in the organization.
Position power is also known as Legitimate power. This is the power individuals have from
their role and status within an organization. Position power usually involves formal authority
delegated to the holder of the position. The higher you rise the organizational hierarchy, the
more power you have. For positional power to be exercised effectively, the person holding it
must be deemed to have earned it legitimately. For position power to be respected in an
organization, the person holding that position should be able and have the experience,
expertise and qualifications that the job requires. Written into the job description, position
power comes along with the role. You can’t take it with you when you change jobs or retire.
v Advantages
- A clear hierarchy enables the entire organization to understand exactly who has
authority over whom.
- Position power is accepted as culturally normal in most societies.
v Disdvantages
- May not be effective in the organization. For example, someone can be placed in a
position of authority but lack the skills or expertise to back up their position. This can cause
unhappiness and disappointment among their team members.
- The power can be abused. When someone with position power tries to exercise that
power over someone, they do not have formal power over. When a leader's power means that
no one can disagree with their opinion.
v Example
- An example of position power is that held by a company's CEO.
- Job descriptions make it clear as to who an employee will be reporting to and the team
that the employee will be leading if any.
- A manager who leads a team has certain responsibilities and also the right to delegate
tasks/her to his subordinates as well as review their work and give feedback.
2. Reward Power
The ability to influence and direct others that comes from being able to confer rewards in
return for desired actions or outcomes.
Reward power comes from the ability to confer valued material rewards or create other
positive incentives. It refers to the degree to which the individual can provide external
motivation to others through benefits or gifts. Anyone can have reward power in the form of
public praise or giving someone something in exchange for their compliance.
Rewards can be tangible or intangible. The key distinction between a tangible reward and an
intangible reward is that tangible rewards are physical things, while intangible rewards are not.
v Advantages:
- If used, as a motivating factor, reward power can make employees work harder and
smarter and contribute more effectively to the organization.
- The usage of rewards can help to boost employee loyalty. Example: A worker who
receives regular praise for doing the right thing will be more loyal than a worker who does not
receive any praise.
- Rewarding can create a healthy competition among employees that helps motivate them
to work better to achieve rewards.
- Rewarding can help improve retention in the organization.
- Build a strong team relationship as everyone works together to attain a common award.
- The anticipation of a reward may motivate employees to work hard in order to achieve
it.
- Giving someone praise in front of their peers for doing something right, can be a strong
motivator for them to continue to perform. It can also encourage the rest of the team to
perform, as they also want to receive the same praise.
v Disadvantages:
- Tangible rewards cost an organization money.
- Giving out the same reward repeatedly may lead some awards to lose their power.
- Reward power may also create counterproductive unhealthy rivalry among employees,
reducing cooperation and group productivity.
- If this is used in an unfavorable manner and any kind of favoritism is displayed, then it
can severely harm the morale of employees and reduce their productivity, leading to the
wastage of company resources.
- Employees may be enticed to engage in unethical or illegal behavior to meet the
requirements of the award. For example, an unscrupulous salesman may engage in fraud to
induce customers to purchase, in order to meet the production level required for a bonus.
- A manager may not have the power to give a tangible reward to an employee.
- Employees may also turn their attention away from their tasks and toward obtaining
rewards, e even at the cost of poor work quality. For example, members of an assembly line
may work sloppily in order to fulfill production objectives for an award.
v Example:
Examples of tangible rewards include monetary awards, salary increases, paid leave, bonuses,
plaques, certificates, and gifts even promotions.
Examples of intangible rewards include praise, positive feedback, recognition, and even a
well-timed 'thank-you.' An obvious advantage to intangible rewards is that they can be as
effective as tangible rewards and cost relatively nothing.
3. Information power
The ability to influence others based on your access to information and your control of
dissemination of information that is important to subordinates and others yet not otherwise
easily obtained.
Informational power comes from access to facts and knowledge that others find useful or
valuable, information that others do not have. When you have read something that others have
not read, when you are more in touch with what is going on in your business and when people
ask you for the information they need, you have the power of information
Information power is a form of personal or collective power that is based on controlling
information needed by others in order to reach an important goal. Among all types of power,
this power is a short-term power. Once an individual provides their information and the
information is exposed, their information power is no longer in effect.
v Advantages:
- What’s great about informational power is that they’re the most accessible and useful
sources of power. We have information sources all around us. All we have to do is take use of
them, and we will discover a huge source of untapped power. Information in this day and age
gives you an amazing source of power.
- Building credibility and rational persuasion.
- Information power may also serve as the basis for beneficial exchanges with others who
seek that information.
v Example:
- A project manager can know all of the information for a particular project, which gives
her "informational power." However, it is difficult for a person to maintain this power for long,
and this information will soon be exposed. This is not a long-term strategy.
- Knowing price information gives a person information power during negotiations.
- Those who are able to span boundaries and serve to connect different parts of the
organizations often have a great deal of information power.
- An information technology company’s one of the main powers is information power.
4. Punitive Power
Ability to attract and influence others based on your ability to coerce and deliver punishment
for mistakes or undesired actions by others, particularly subordinates.
Punitive power is the ability to take something away or punish someone for noncompliance.
Punitive power often works through fear, and it forces people to do something that ordinarily
they would not choose to do.
Punitive power is the power a leader has to punish or control their employees. Employees react
to this power out of fear of the negative results that might occur if they don’t comply.
v Advantages:
- Punitive power helps control the behavior of employees by ensuring that they adhere to
the organization's policies and norms.
- Ensure that the company’s rules and policies are being followed, including those related
to harassment and discrimination in the workplace.
- Punitive power, if used optimally can improve the performance of employees and make
them challenge themselves constantly.
v Disadvantages
- When using punitive power often leads to employee resentment and poor morale, it may
not be possible to win respect and loyalty from employees for long.
- It is often impossible to build credibility with punitive power, which can be viewed as
the same as workplace bullying.
- Backlash threat: employees may eventually retaliate or seek alternate employment, and
high employee turnover is very expensive to an organization.
- Doesn’t work if the threat isn't carried out: In this case the threat is counterproductive,
and your authority as a leader can be undermined.
- Reduces innovation: as everyone is under threat of punishment there is no room for
creativity and innovation.
- Lowers job satisfaction: people resent it being used on them.
v Example
Managers generally have some punitive power, such as the ability to cut salary, wage cut, or
give employees unpleasant or unwanted duties even suspend or demote them. Sometimes
managers need to be strict with their employees and are justified in expecting professionalism
and timely completion of work from them.
 Using a combination of these four sources of power to achieve positive outcomes at all
levels of your organization. Corporates and businesses can motivate their employees and have
a better implementation of work. At the same time, coordination between departments and
discipline can all be achieved with the proper use of the sources of power.

II. Personal Influence Terms Defined

Today's leaders are using more of their personal powers to influence employees than simply
using organizational power. Personal influence is a form of power that comes from three
sources.
1. Expert Influence
The ability to direct and influence others because they defer to you based on your expertise or
specialized knowledge that is related to the task, undertaking, or assignment in which they are
involved. Expert influence is derived firm a leader’s knowledge and expertise in a particular
area or situation.
 Expert Influence can be very important source of power in influencing others.

Example:
The marketing director at your company may have risen to their position because of their
knowledge in the field of marketing. They understand content creation and social media. They
get advertising and copywriting. Because of their extensive marketing knowledge, they’re
perceived within the company as an expert in the field and given the power to lead an entire
department.
Why is expert power so valuable? There are multiple reasons why. We’ll focus on the top
three:
Confidence:
When you possess specialized knowledge on a relevant topic, you’ll be able to lead more
confidently because you’ll have a firm grasp on what’s going on. Your team will also have
more confidence in you and naturally look for you to lead them. You are the expert, after all.
Notoriety
If you have ambitious career goals, expert knowledge can help you achieve them. You’ll be
able to stand out in certain areas, which could very well lead to promotions. You’ll also be able
to use your no-how to further your personal brand and build influence outside your own office
too.
Better Business
When you possess expert power, you’ll be able to run your department much better. You’ll
have the right answers and be able to successfully make crucial decisions. Your employees
will naturally fall in line and follow your lead. When both of these things happen, your
organization will run like a well-oiled machine.
2. Referent Influence
The ability to influence others derived from their strong desire to be associated with you,
usually because they admire you, gain prestige or a sense of purpose by that association, or
believe in your motivations. Referent influence comes from having others want to identify with
the leader. We have all seen or worked for leaders who have major influence over other based
simply on their charisma, personality, empathy, and other personal attributes.
Example:
Ben works as the advertising manager for a large corporation. His team recently had two new
additions. Both of these new employees made mistakes on their first week of work, but Ben
defends their actions because they're still learning the company's workflows. He makes sure to
spend more time with them to ensure they receive the support they needed to perform their job
well. Every member of his team admires him for taking the time to help and for supporting
them whenever they need it.
Disadvantage Advantage
To be able to have this kind of leadership A great referent leader can inspire workers
you need to be able to have a friendly yet to be committed to their job.
business like relationship with your
employers, so a Boss that doesn't have that
relationship won’t be able to have a
reference relationship with their
employers.
It takes time to develop trust, so referent It will show that you have a very loyal
power doesn’t work well where there is band of followers.
high employee turnover.
Referent power is also not appropriate for Bureaucratic obstacles are reduced
crisis situations, for example, a failing through good working relationships and
business unit that must be turned around effective collaboration.
as soon as possible, and there isn’t the
time needed to build the trust that referent
power needs.

3. Peer Influence
The ability to influence individual behavior among members of a group based on group norms,
a group sense of what is the right thing or right way to do things, and the need to be valued and
accepted by the group
Most people within an organization or across levels find themselves able to assemble a team to
solve specific problems, serve a group of customers, drive improvement, or perform certain
specific tasks. Leaders have the power to assign members to a team and assign responsibilities
to the group, and that's one way to ensure group impact when working with key managers.
Peer influence is when you choose to do something you wouldn’t otherwise do, because you
want to feel accepted and valued by your friends. It isn’t just or always about doing something
against your will.
 Peer influence can be seen as an effective way for leaders to influence the behavior of
others.

You might hear the term ‘peer pressure’ used a lot. But peer influence is a better way to
describe how teenagers’ behaviour is shaped by wanting to feel they belong to a group of
friends or peers.
 Conclude:
 Effective leaders do not use all of these seven types of power individually, but
often in a coordinated way, to deal with many situations where they need the
help of others.
 The best and most rational types of power and influence are determined by the
nature of the task, project, urgency, and many other factors.
 Organizational leaders like Jeff Immelt at GE use all of these powers equally to
find ways to thrive on leaders and subordinates who are effective users and
skillful in all forms of power and influence.