Bonus or no bonus? That is the question. This is the time of year where expectations are high, and so is the volume of chatter around the water cooler in anticipation of that great corporate tradition – the year-end bonus. So what’s it going to be this year; a turkey, an extra paid day off, a cash bonus, stock/options/warrants, something creative, or nothing at all? In this article, I’ll take a look at the well-intentioned but often misguided practice of year-end bonuses.
Complicating matters further for CEOs, Boards, and Comp Committees attempting to determine what to do about bonuses is all the recent media attention and public outrage in regard to what is perceived by many to be excessive, frivolous compensation. There are legions of those who praise the value of incentive compensation and just as many who passionately argue against the practice. There is a tremendous amount of conflicting data as to whether or not incentive compensation in any form is an effective motivation tool.
Perhaps the best argument I’ve seen against incentive compensation is this short video by Daniel Pink…
While I agree with much of what Dan puts forth in his video, my experience is bonuses are absolutely effective given this caveat: they must be structured and implemented properly. I think it’s quite possible to do everything Dan espouses and reward people with performance-based compensation. Regardless of which camp you fall into, this is one of the great leadership lessons of all time – no matter what you choose to do, there will be people who find fault with your decision. Keep this in mind; leadership is not a popularity contest – it’s about doing the right thing.
In order for bonuses to be truly effective, they must be relevant, meaningful, in alignment with cultural values, and tied to the right set of metrics. It is not the bonus that is right or wrong, but the manner in which it is rolled-out. I have witnessed company bonuses work marvelously well, and I have seen them create great animosity and discord. I have witnessed bonuses motivate the correct behaviors and I’ve watched them motivate abhorrent behavior. The validity of a bonus should not be at issue, but the wisdom, motives, and expertise of the bonus program architects should come under great scrutiny. Keep this in mind – the best bonus plan in the world won’t retain top talent if the qualities mentioned in Dan’s video above are not present as well.
I can’t even begin to communicate the number of times I’ve heard employees complain about the size of their year-end bonus…It was as if they felt entitled to significant rewards solely based upon the fact that they happen to be employed. Is a year-end bonus a right of entitlement or a privilege to be earned? I believe that it can actually be both, but that decision lies solely with the employer and is not really up to the employee no matter how much they might feel it is.
Some employers believe in providing a little something extra to all employees during the Holiday Season as an expression of gratitude for their loyalty and contributions during the year without regard to performance. While showing gratitude for work well done is in alignment with the proper spirit behind a bonus, regrettably, it is in this type of culture where I believe employee expectations can easily confuse the difference between a gift and a reward. Let’s say that in the previous year the company provided what was considered by most to be a fairly generous bonus, but in this calendar year, the company struggled, while also needing to make heavy expenditures in Q1 of the upcoming year, so it opted to distribute no year-end bonus. How do the employees feel about this? One would hope that the employees would understand and put the needs of the enterprise ahead of their expectation that this year’s bonus should eclipse that of the previous year, but would they? I’m certainly not distributing a bonus would only spawn a sense of resentment among many, and the gossip at the water cooler would shift to criticizing the CEO’s car, or how much vacation time he/she took that year. A sense of entitlement is one of the great risks to any enterprise.
As contrasted with the environment discussed above, some cultures distribute annual bonuses based on a formulaic approach calculated on metrics designed to reward individual, team, or company performance according to the goals of the specific entity. While many tend to favor this structure, it is far from perfect as well. It is very typical in this type of environment that the controversy shifts from company vs. employees to employee vs. employee. As an example, the marketing assistant who receives a comparatively small bonus when contrasted to that of a salesperson feels that his/her contribution is minimized and feels treated unfairly. Imagine working at Goldman Sachs where bonuses in any given year are expected to range from secretaries receiving $10,000, analysts garnering close to $100,000, junior executives seeing as much as $2-4 million, and top income producers receiving upwards of $40 million dollars in bonus money…You don’t think there’s a bit of green-eyed bonus envy at Goldman Sachs each year?
Regardless of whether your firm embraces a meritocracy, a tenure-based system, a highly sophisticated compensatory system, or some form of a benevolent dictatorship, bonuses are always an issue. Should bonuses come off the top-line, bottom-line, be based on contribution margin, be subjectively or objectively distributed, be paid in cash, stock, options, profit sharing, perks, or some other mechanism? The structures of corporate bonuses are as varied as there are numbers of entities.
At the end of the day, employers should hire well, bonus generously, and provide public thanks where merited. Employees on the other hand should be thankful for the privilege of having gainful employment and be grateful for any bonus compensation received. Whatever the bonus, I hope it works for the grantor as well as for the grantees. For those on the receiving end, I hope you enjoy your good fortune, and will perhaps consider giving some of your bonus to those less fortunate this season…
I’d be interested in hearing your thoughts about incentive compensation. Please leave a comment and let me know whether or not you think bonuses are effective, describe creative bonus structures you’ve observed, or share what you’re thinking about doing this year if anything.
