Bonus Banks – finally a longer term incentive

Business Week recently summarized a concept called a “bonus bank”. In short, it is an incentive plan in which a significant portion of annual bonuses, perhaps 1/3, is set aside to be paid out over time, 3 years in the BW example, based on the continuing achievement of established benchmarks over that period.

This may be “old wine in new bottles” but it emphasizes the value of multi-year incentive plans that stimulate longer term thinking rather than short term results. UBS has tried it and investors are pushing for it at places like E*Trade, Charles Schwab and others.

It’s a good way to think about incentives. It’s not without its challenges but if it succeeds in prompting a deeper look at incentives, which author Steven Levitt of Freakonomics fame, calls the “cornerstone of modern life,” it’s an appealing approach.

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