The portfolio effect: when bonus design becomes too good at finding a reason to pay

Here in the Incentives team at Burges Salmon, we've been talking a lot about bonus design recently. You can read earlier pieces on the topic here and here. 

Once an annual bonus is built around a portfolio of measures - profit, cash, strategy, customer, culture, ESG, individual delivery etc., - it becomes much easier for the overall result to look respectable even when the year itself was not especially strong.

That is the portfolio effect.

This is not a new or grand theory. It is a practical reward-design problem.

When performance is measured across a basket of outcomes rather than one concentrated result, highs and lows start to smooth out. One weak area is cushioned by another stronger one. One missed KPI is offset by two that land.

The evidence

Recent Ellason commentary is helpful here. 

In its February 2026 review of September year-end companies, Ellason noted that median CEO bonus payout had dropped from 84% to 64% of maximum in a tougher environment, while lower-quartile payouts remained relatively stable at about 30% of maximum. Ellason suggested that this likely reflects the structural effect of the balanced-scorecard approach common in the UK market: where multiple financial and non-financial measures are used, the probability of at least some payout increases.

That is why this matters.

Measurement versus cushioning

The issue is not whether scorecards are legitimate. Often they are. The issue is whether Remco's and companies properly recognise what scorecards do to payout outcomes.

A simple illustration makes the point.

Same year. Same business. Very different answers to the question: what did management really earn?

Under the single-metric plan, weak financial delivery produces a weak outcome. Under the portfolio plan, the broader scorecard cushions the result and turns it into a pretty respectable payout.

Sometimes that will be justified. Sometimes it will not. But either way, the plan is no longer just measuring performance. It is shaping payout probability.

Why this matters now

Annual bonus plans now do far more than test a single annual financial number. They are expected to capture strategic execution, risk management, customer outcomes, culture, transformation and sustainability.

That broader approach can be entirely sensible. Most businesses are too complex to be judged on one number alone. Boards also want a fuller picture of performance.

But the design consequence is obvious: the more moving parts you introduce, the easier it becomes for one element to compensate for another.

This is where the portfolio effect stops being an interesting idea and becomes a live calibration issue.

The real risk for Remco's

The real risk is not complexity for its own sake.

It is that the plan becomes too good at finding reasons to pay.

That can happen quite innocently. Each individual metric may be sensible. Each weighting defensible. Each non-financial measure may reflect a real business priority. 

But once enough of them are put together, the combined effect can be to cushion poor financial delivery more than the company really intended.

That is also why discretion starts to matter.

This is not a criticism of discretion. Remco's need it. Formulae cannot capture every contextual factor. But where discretion is repeatedly being used to pull down formulaic outcomes, that is often a sign that the scorecard is doing more cushioning than measurement. 

A technical point that matters

The portfolio effect is strongest where the underlying measures do not all rise and fall together.

If every metric is really just another way of measuring the same underlying performance driver, the smoothing effect is weaker. But where the measures are genuinely different - or where executives sit across diversified businesses, regions or priorities - the cushioning effect becomes much stronger.

That is why broad group-level scorecards can behave very differently from narrower profit-led or divisional plans. 

What Remco's should ask

• Are we genuinely measuring one enterprise outcome, or are we averaging several unrelated ones?

• Is threshold a real gate, or just the natural consequence of having enough components?

• Are non-financial measures acting as strategic modifiers, or as payout cushions?

• Is discretion genuinely exceptional, or has it become a routine way of correcting outcomes that the formula keeps overstating?

Those are the questions that matter.

A plan can be balanced and still be structurally forgiving. It can be multi-factoral and still poorly calibrated. It can be entirely market-standard and still pay too predictably.

Bottom line

That, for me, is why the portfolio effect still matters.

Not because reward needs another piece of jargon. And not because there is some grand theory to revive. It matters because many modern bonus plans are portfolios in all but name. Once that is recognised, the design conversation becomes much sharper.

The question for a company is not whether a balanced scorecard looks sensible. It is whether the architecture still differentiates properly between weak, acceptable and genuinely strong performance.

The risk in today’s market is not always that bonus plans are too stretching. Sometimes they are simply diversified into predictability.