Question

. How does the setup of managerial bonuses sometimes create poor decisions by the managers who are to receive the bonuses?

Answer 1

Very often managerial bonuses are based upon profits, which means that higher the profits, higher will be the growth and in order to generate higher profits so as to be able to earn huge bonuses managers often take poor decisions. Often managers make decisions that might sometimes provide short term gains but in long run are a loss to the company.

Further, managers may tend to comprise the quality of the product in order to reduce cost and earn better profits or else reduce such by compromising on quality and consequently reduce selling price and thereby generate more demand but poor quality product will ultimately destroy the market of the company and will be a poor decision on managers' part.

Therefore, set up of managerial bonuses sometimes create poor decisions by managers.