It’s Year-End Bonus Time – Again! Answers to the 1st Quarter Questions

02/13/12
By: Paul R. Dorf, APD, CRI

Upper Saddle River, NJ – Last week we raised nine questions that could affect your bonus decisions.  From the responses, it appears that some folks were having trouble answering all nine questions, so we decided to provide you with some helpful thoughts.

  1. Does the company’s actual performance warrant paying out any bonuses?  A big concern is “mixed messages”; if the overall performance isn’t up to par and the company is not making money, or the employee’s performance is sub-standard, don’t grant any bonuses otherwise you are rewarding mediocrity!
  2. Has your company adequately funded this plan, and is it able to pay bonuses without financial harm to the company?  A classic case in point was Lehman Brothers, which paid billions in bonuses while it was going bankrupt. Each plan should have a “circuit breaker” that prohibits any payouts if the company is in a death spiral.
  3. Are the performance goals used to justify the bonus or incentive plan consistent with your annual Business Plan and Long-Term Strategy?  Obviously, you need a business and strategic plan; otherwise how do you know you are going in the right direction?
  4. Are there any situations such as potential bankruptcy, financial meltdown, significant lawsuits, suspension of certification, or regulatory review that suggest delaying or deferring bonus payments?   Same situation as question #2; this should be a “no brainer”.
  5. Should a business head be paid bonuses if the overall company performance is lackluster?  Conversely, should they share in good company results even when their business unit’s performance is below standards?  Poor performance doesn’t warrant a bonus, stock grant, or increase.  And there is no justification for hanging on to a leader that doesn’t perform.
  6. Do all employees understand the tie-in between their efforts, the company’s performance and their awards?  Employees need to understand what is expected of them, and then be held accountable for results.  Shame on the company that doesn’t communicate the specifics, and provide that linkage.
  7. Is the bonus/incentive plan too complex?  Is it hard to explain and understand, difficult to administer, and questionable as to why employees are receiving any awards?  This is one of the most important plan killers; remember that simplicity is King!
  8. Are the bonus amounts sufficient so that employees are willing to make the extra effort?  Conversely, are the awards out of proportion with the effort and results?  This is a tough one to answer, but it is extremely important:  the award must not be insufficient, but also not be too much.
  9. What potential harm will come if the employee’s expectations about increases and bonuses are not met?  But before you answer this question, are those the employees you really want to worry about and keep?  If you are working hard to keep turnover low, make sure you identify and keep your best and brightest; those are the ones you can’t afford to lose.

Please give us your reactions to these answers. We will continue to address these issues in future press releases.