Question

A COMPANY HAS A BONUS PLAN THAT STATES THAT states that managers with division income ranked below the average of all managers receive no bonus for the year.

What biases might arise in this system?

Answer 1

Managers with income below the average income of all managers receive no bonus. This puts all the managers having income below the average with no bonus at all. And assuming even spread of income across the managers, there will be half of the managers having income below the average income for all the managers.

For example, if there are 4 managers with income of $1000, $1500, $2000 and $2500, the average income comes to $1750. Hence 2 managers fall below the average and will not be eligible to receive bonus.

The biases it will create are:

1. The managers in the lower income group will know beforehand that irrespective of the hard work they put in, they will not get any bonus. So they will be less inclined to put in their best.
2. There will be friction among the lower income and higher income managers because of this express differentiation for bonus, leading to friction and conflict during work.
3. The managers already getting above average salaries, will push the whole company to work harder, but people with good salaries will only get the benefit of good performance, while the lower income employees will not get any fruits of the hard work, discouraging them to contribute.
4. The oevrall performance of the company will severely get affected because of skewed disribution of bonus.