A lump-sum bonus is more likely to prompt a disengaged worker to resign than to perform, says Retention Partners director Lisa Halloran.

"When we talk about engagement, it's about people's positive expectations being met or exceeded," Halloran says.

A bonus can have a positive impact if the way it is calculated and distributed, and the net amount people receive, equals or exceeds their expectations. The problem is, the effect will be short lived.

"It's like the glycemic index. You can get a really big sugar rush by having a Mars Bar... but it doesn't last for very long," she explains.

And now that bonuses are an established practice, the word has become "a bit of a misnomer". The concept of coming back to the office one day to find "a random cheque" has been replaced with the annual expectation of a hard-earned right. A true bonus would be more "out of the blue", she says.

A disengagement event

Rather than increasing employee loyalty, bonus time can be "a disengagement event" - something out of the ordinary that can cause workers to go home and have "different conversations" about a "different future".

Bonuses will not have an adverse affect on workers who are happy and engaged, but the more discontent the worker, the more likely they are to take the money and run, Halloran says.

"It's not so much about the quantum of the bonus, or what someone else got compared to what I got," she says. It's more about "holding out" until bonus time, then thinking, "I deserve that... and now I'm going to start to look around".

The solution does not lie in the outright rejection of an established practice, but in tweaking the system to maximise gains and minimise risk. By way of example, Halloran recalls consulting for a law firm whose statistics showed a significant number of employees were resigning at the same time each year.

When asked what was on the workplace calendar at that time, the client replied, "Well, the only thing that's really happening is the bonus payment". Exit interviews confirmed the connection, and the company addressed the issue by replacing the lump-sum bonus with a series of staggered payments.

"Maybe it still is a Mars Bar, but it's a little bit more portioned out - and there are more opportunities for the organisation to say to its employees, 'Thanks guys, well done, here's some money; thanks guys, well done, here's some more'," she says.

It pays to lie

The way many bonus systems are structured "actively encourages" the destruction of shareholder wealth, and discourages transparency, says Juno Partners managing director Justin Bown.

In a whitepaper entitled The Dirty Dozen, Bown outlines 12 problems with executive remuneration, and explores possible solutions.

One problem with many systems is that "it pays to lie", Bown says. Bonus targets are often set by reference to the budget - "hit the budget and you get your bonus", he explains.

"But by writing the rules of the game like this, boards unwittingly encourage managers to downplay their forecasts: the lower the budget they put forward, the greater the chance of receiving a bonus."

Budget preparation then becomes a drawn-out negotiation. "And in a negotiation, the party with the greatest amount of information usually wins," so it pays managers to guard information tightly, he says.

"This is the exact opposite incentive you want in a budgeting process."

Business moving from short to medium-term incentives

"For senior executives, the two major themes in Australia at present are a greater reliance on financial performance measures, and the increased use of some kind of deferral mechanism, so that bonuses are not paid out in full in the year they are granted," Bown says.

Executives are pushing for less subjectivity, and boards are pushing for additional safeguards to ensure rewards reflect sustained performance, he says.

"The global financial crisis... brought attention to some of the glaring deficiencies of paying people charged with making long-term decisions, for short-term performance.

"The result is a move away from 'short-term' incentives towards 'medium-term' incentives, which means multi-year financial targets and some kind of incentive reserve, into which payments are made and held subject to loss if performance is not sustained or the employee leaves the business," he says.