Bonuses and Other Profanities

Bonus has become a dirty word.  This was made clear to me in a discussion last week with a local reporter in the wake of the AIG bonus debacle.  He asked why companies would use bonuses (his voice dripping with disdain as he mouthed the evil word) when they could simply add any additional amount to an employee's base salary (obviously, to him, the only ethical thing to do).  Problem solved.

Never mind the whole "making a reward contingent on accomplishing the thing you mean to reinforce" concept.

There is some precedent here, especially - in my experience - in heavily unionized organizations.  I have had a number of employees from these organizations explain to me that a bonus (as distinguished from an incentive) isn't something you have to earn.  It is just given to you.  While many in HR and the reward profession tend to use these terms interchangeably, it may be important for us to note that the rest of the world does not. 

I don't know all the details behind the AIG bonuses and neither, probably, do you.  I do know that retention bonuses are a legitimate way to entice people to stay and finish an onerous task (like implementing an acquisition when they will likely have no job on the other end ... or dismantling a failed financial institution) when they have other better options and rewarding them when they do so in a manner that meets established standards.  When thoughtfully designed and implemented, these are not at all the dirty, under-the-table exchanges that many are asking us to believe but a fair way of ensuring that important and difficult work gets done.  Whether they were appropriately designed and implemented in the case of AIG, I have no way of knowing and probably neither do you.

I do know, however, that the blanket demonization of bonuses is an issue - and a communication/PR problem - for those of us in the business of designing and implementing rewards.  How much of a challenge we may only learn after the smoke clears.

Comments

[Paul Weatherhead]

I'll never forget trying to explain to a US Senator how the increase in variable pay into the total compensation mix would actually save money in the long run, even though in the short run the expenditures appeared greater. He had no appreciation for the compounding and the annuity value of salary increases versus the requirement to re-earn variable lump sums every year. I could sense his eyes glassing over as I spoke.

Further, despite the existance of a bipartisan Congressional Budget Office that tries to take a long-run look at federal expenditures, most budget negotiators only look at year-to-year expenditures. So a long range view of variable and fixed pay is very difficult in the federal environment.

[E James (Jim) Brennan]

Let's all agree to call them performance incentives and achievement awards, from now on. It's what they should be, anyway.

[Andy Cheseldine]

Paul's point about short term budget focus is well made and applies world-wide. Acweek is a long time in politics.

Most employees (at least in the UK) who do not have the opportunity to earn / "be given" bonuses do have the opportunity of earning overtime. In fact many of them rely on it.

Those that are paid bonuses are typically on fixed annual salaries, paid monthly, that do not recognise the 5% to 100% extra-contractual hours often worked.

We need to explain this to the media and politicians - who themselves have lots of opportunities for variable pay. Equally it would help if we brought more transparency to compensation strategy. Even then, many will argue about the fairness of pay and benefits. Its about perspective, eg:
* I am underpaid for the serious responsibilities I have
* You are paid fairly for the hours you work
* He is grossly over-rewarded by any measure

[steve]

It is not safe, prudent, or proper to assume that anyone else shares you level of awareness or ignorasnce on any particular topic, let alone to assume that for a broad, diverse audience.

News reports are the primary way that people know and understand the issues.
According to news reports on both sides of the political battle, it is clear that the AIG retention bonuses were NOT "thoughtfully designed and implemented". Yes, retention are a "legitimate way to entice people to stay and finish an onerous task", but when they are paid out to people who no longer work there (assumedly people who have not stayed and finished the onerous task), they are not thoughtfully designed and implemented.

[Jake]

Too many companies give their executives easier bonus metrics than they give their rank & file employees. I have seen companies reduce the employee bonus pool by 20% due to company performance and turn around pay all of their executives at 150% to 250% of target for company performance. Another company has not paid bonuses to employees for two years due to company performance. However their executives earned around 60% of their target bonus since the company achieved certain performance metrics.

As long as a double standard exists, communication/pr is not going to do much.

[Ann Bares]

Paul:

Sound points on the Federal pay climate and perspective from one who knows - thanks for sharing here.

Jim:

Completely agreed. Time to get our vocabulary straight.

Andy:

Thanks for sharing the UK perspective - interesting! And I would agree that the onus falls on us to clearly define the terminology here - and to bring more transparency to the table.

Steve:

From my perspective, the fact that news reports are what most people rely on for their information and understanding is a good part of the problem - so we may have to agree to disagree on that. I don't believe we have the information - via news reports, at least the ones I've seen - to completely judge the design and implementation of these "bonuses". While I have to agree with you that the payment of bonuses to people after they are no longer employed looks bad and was probably a poor decision from a political/PR point of view, there may have been legitimate reasons (or at least reasons that appeared legitimate at the time) for doing so.

At any rate, it is valuable to understand the issue from all angles and points of view - and I appreciate your sharing yours here.

Jake:

Agreed - companies where leadership is not bearing at least their fair share of the pain and burden - or where leadership is given an easier road to earning incentives - do not impress me as places I would want to work or invest my money. And, as you say, there is little that communication/PR can do in these circumstances to turn the proverbial sow's ear into a silk purse.

Thanks all for the great discussion here.

[Keith]

To Steve...talk about ignorance....these people did stay and complete the onerous tasks they were asked to do. Some finished those tasks in November and were terminated at that time...some in December, January etc. all were told that regardless of when they finished "bonuses" would be paid on March 15. Some additional info you should know...some of these people have receive no salary($1) for 2008 and all their compensation was tied to this bonus...something congress failed to mention.

[Ann Bares]

Keith:

Thanks for filling in the facts that the news reports and congress somehow managed to omit. To Steve and the rest of us - let's be sure we have the facts before we start throwing sticks and stones.

[Wally Bock]

Good post and discussion. One aspect of this is the way news is covered today. With the exception of those at larger organizations, most reporters do not work "beats" as they did twenty years ago.

Then, a new reporter at a newspaper might be assigned to the "police beat." He or she would learn the ins and outs of the news in that area. There might be a "business beat" and a "fashion beat" and a "community affairs beat" and a "local government beat."

No more. What's been true for TV reporters for a couple of decades is now true for most reporters. The one with the attitude about bonuses probably covered several totally different stories that day. When my brother-in-law was a TV reporter he would go from a story about Flatnose the tree-climbing dog to the city council chambers to a house fire and finish the day with a high school basketball game.

When you do that, you don't develop the expertise you need to cover many stories.

[Ann Bares]

Wally:

Interesting piece of perspective - that is something I have often wondered about. Makes it tough for reporters to do a credible job of addressing complex and nuanced topics, and makes it unlikely that we can rely on them - as some suggest we should - for providing us all the relevant facts and information on a controversial situation. Thanks!

[Wally Bock]

Congratulations! This post was selected as one of the five best independent business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2009/04/01/4109-midweek-look-at-the-independent-business-blogs.aspx

Wally Bock

[Rodney Johnson]

Bonuses and incentives are created with the goal of improving results and driving certain behaviors. The challenge is, how to get it right. Personally, I've seen more bonus programs with clearly designed goals that carried unintented consequences with them. And its the unintended consequences that are having such a dynamic impact today on the global economy today.

[Ann Bares]

Wally:

Thanks for the recognition here - and the chance to be part of the always-informative Midweek Review!

Rodney:

Unintended consequences are certainly the bain of incentive plan design. Unless sufficiently vetted and tested, plans that we believe are well targeted with clear goals can often turn out to perform in unanticipated ways. Thanks for the thoughts!