It may seem counterintuitive. But when a company is in crisis, more executive bonuses (at least of a certain type) might help promote a longer-term rebound and financial success.

With that in mind, while bad results might spur a board of directors to sack the executive in charge, some forgiveness instead of a quick change could be beneficial, according to new research from the Stanford University Graduate School of Business.

“During bad times, when things are going really poorly, you lose motivation and control over people if you punish them too severely,” Peter DeMarzo, of the Stanford Graduate School of Business and a study co-author, said in a statement. Incentives of some significance, on the other hand, can inspire management to plant the seeds for a rebound, if they’re tied to future corporate health and not given until that goal is reached, he said.

“If things go well, the manager will get a huge bonus and have a big stake in the firm. He will care about the firm’s survival,” DeMarzo noted.

DeMarzo, along with study co-authors Dmitry Livdan and Alexei Tchistyi of the University of California Haas School of Business, focused on a concept known as “optimal-contact theory,” where promise of payments can elicit calm, successful work from executives when a company hits a rough patch.

Their recommendations include:

  • In a crisis, companies should let some lapses go, so executives can focus on turning a situation around rather than worrying about the risk of being fired.
  • Offer long-term bonus incentives payable if and when a company passes the crisis point and survival becomes a clear outcome.
  • Increase the value of those long-term incentives for top executives during a crisis. This can boost motivation, give executives a sense of ownership in resolving the major problems and boost the chance of success, the researchers said.

Source: Stanford Graduate School of Business