Insights on Year-End Bonuses

Upper Saddle River, NJ - February 3, 2010 - 2009 was a tough year for many businesses.  For those who were able to survive and, in some cases, turn a profit, many were faced with another problem - how to distribute bonuses.

Year-end bonuses allow a company to share in the profitability and successes that it achieved during the year.  Unfortunately, since the bonus determination is an after-the-fact process, it is very similar to the biblical “manna from heaven”; we don’t fully understand where it came from, but we’re not going to give it back.  The problem with bonuses is two-fold:  there is little or no linkage between the payout and performance, and it tends to become an expectation, and, therefore, an entitlement.

Incentives, on the other hand, have a clearly identified cause and effect relationship.  By setting the expectations up front, not only is there a much greater probability of achieving those goals, but the rationale for the payments is understood.  On the other hand, if the desired performance is not met, the lack of results supports the lack of any rewards.

One issue with implementing incentive plans over after-the-fact bonuses is that the organization must determine performance goals up front.  Without identifying specific performance measures and targets, there is no way of defining when success is achieved.  It would be like playing football without any of the field markers, lines, or goals.  It may be an exciting game, but there is certainly going to be a lot of bickering on what happened.  Surprisingly, many organizations don’t establish their “goal lines”, but still expect their employees to know what they are supposed to do.  However, once a company has determined its expectations and communicated these to its management and employees, it is much easier to develop the reward mechanism which will pay for performance.  In very simplistic terms, this is how incentive plans work.

Since we have agonized through 2009 and are now starting a new year, companies should now finalize their 2010 objectives and convert their year-end bonus programs into much more effective incentive plans.  Call a member of our consulting staff to discuss how we can assist your company to eliminate entitlements, and introduce real pay-for-performance programs.