Companies & Industries

Navigating Bonus Season


Harvard blogger Amy Gallo sheds some light on the process of deciding whom to give what and why

Posted on Harvard Business Review: December 17, 2010 10:48 AM

Bonus season can be a tough time for managers. They have to make difficult decisions about who to reward and how to best reward them. Recent years have been especially challenging. Many companies have slashed or even eliminated year-end perks. But surviving bonus season doesn't mean simply grinning and bearing it. With the right understanding and tools in hand, leaders can make sure their decisions are morale boosters rather than motivation killers.

What the Experts Say

Few managers make year-end compensation decisions in a vacuum—many more have their hands tied by company regulations. If you're in the latter group, the best you can do is become familiar with your company's bonus process and the rationale behind it. This understanding will help you explain to your employees what the figure on their checks means (or doesn't).

Some organizations, however, grant their managers greater authority when it comes to year-end rewards, giving them input in the process or even deciding on allocations themselves. If you're a boss in this situation, it's not only important to understand your company's process but also to use an approach that minimizes anxiety for both you and your team. Those who remember that bonuses are only one part of year-long process to reward and retain employees fare better than those who don't. "If you think of the bonus season as a way to make up for sins throughout the year, then don't waste your money," says Aubrey Daniels, best-selling author of several books including Bringing Out the Best in People.

Unfortunately, for some, the idea of providing or receiving a bonus is still a distant dream. But money doesn't fix all problems, according to Iwan Barankay, an associate professor of management at Wharton School of Business who studies workplace incentives. He says that bonuses can actually have a detrimental effect on employee behavior in some cases. It's important that as a manager, you be thoughtful about how you reward your people, whether you have money to give away or not. Here are a few principles to keep in mind as you embark on your upcoming bonus season.

Pay for performance or pay for showing up?

Whether you are making bonus decisions or simply delivering them, the first step is to understand your company's philosophy toward "pay for performance." Do you reward your high performers for their extra efforts or do people get paid for their jobs no matter how they perform? Most management experts believe the former is the better approach, but there are merits to equitable pay as well. "On the one hand, giving bonuses to top performers encourages a repetition of such behavior in the future and also motivates others to follow suit. Equitable rewards, on the other hand, foster a joint sense of mission as long as it does not create free-riding," explains Barankay. However, Daniels argues, "You should get bonuses that are commensurate with your accomplishments." Whatever your company's policy, be sure you understand it before trying to explain it to your people. Sit down with your boss or with HR and ask for clarification if necessary.

Know what you are rewarding

"The first thing you've got to ask is 'What are we trying to achieve with this?'" says Daniels. If you are responsible for allocations, or at least providing input into them, you need to know what your aim is. Do you want to retain high performers or build team spirit? Discretionary compensation is most effective in motivating and retaining employees when it is linked to specific accomplishments. "The public display of performance rankings—like Walls of Honor—can be very conducive to performance when bonuses and rewards are closely tied those rankings," says Barankay.

Be sure that your people know what they need to do to receive any extra compensation. Daniels says about his own consulting company, "We start out so people know what they have to do and what they're going to get." (See Case Study #2 below.) Avoid using a single metric. For example, "You don't earn your quota just by making the sale," says Daniels. In those cases, what if the salesman made the sale but the client never ordered from him again? You don't want to reward the sale if it was done at the cost of efficiency or in conflict with your organization's values.

Be aware of the message you're sending

It's no secret: employees talk about bonus figures. News of who received how much spreads quickly. "Recent years have made it very clear that the allocation of bonuses and their size can receive a lot of attention internally, within the company, but also externally in the media," says Barankay. You may be tempted to try to get the largest benefit possible for your group, but be aware of what that says to the rest of the organization. "In some companies this will be seen as seeking recognition where it's due but in others it will be interpreted as amassing assets at the expense of the company in times of low cash flow," says Barankay.

Money can't buy you love

"Some people give bonuses because they want people to feel good about the company," says Daniels. This is rarely the effect, especially if bonuses are something people expect rather than something they earn. "A lot of people are using bonuses as deferred compensation so if they don't get it, they are disappointed," says Daniels. Plus, monetary rewards have their limits in terms of motivation. In fact, many people say they would prefer to know they are doing a good job, rather than getting more money. A manager should give rewards that are valuable and meaningful to the individual. "What's reinforcing to you is not necessarily reinforcing to the person next to you," says Daniels. Instead of relying on bonuses to create good will, get to know your people and understand what uniquely motivates them. As Daniels points out, "Money's a poor substitute for good management. The most important this is how people are treated every day."

Delivering the news

Telling people they are getting extra compensation seems like it should be an easy conversation, but, that's not always the case. Whatever the amount you give, be sure you communicate to the recipient that she is valued. If the reward is generous, point to specific accomplishments and strengths that went into the bonus allocation. Impart that you expect her performance to continue to improve and provide stretch targets she can hit next year. If the employee was expecting more, be sure to emphasize the broader context of the company's approach to bonuses. Again, highlight her contributions and detail what she might do to earn a bigger bonus next year.

Remember the rest of the year

Year-end bonus figures shouldn't come as a shock or a disappointment. Keep your employees informed throughout the year about the company's approach to awards and what you might be able to do come bonus time. Provide regular feedback to employees so that there are no surprises. And perhaps most importantly, if you aren't able to give bonuses, rely on other motivational levers such as advancement opportunities, recognition, and pride in the work, which have shown to have a greater effect on employee commitment.

Principles to Remember

Do:

Understand your company's philosophy toward bonus allocation

Connect bonus awards directly to employee accomplishments

Make clear to employees what they need to do to earn the benefit

Don't:

Rely on bonuses as your only way to motivate people

Assume that discrepancies in bonus figures are private and won't be talked about

Wait until bonus season to give feedback

Case Study #1: When rewarding high performers means punishing others

In his role as vice president of compensation and benefits at CEMEX, Gerardo Guerra knows the ins and outs of bonuses. A few years back, one of the managers he was advising faced a dilemma trying to divide up his bonus pool. Company policy was that each group would get 90% of the total target bonus for all employees. Then it was up to managers to make decisions about who got what. This manager had four employees with varying salaries and bonus targets. The highest paid of the four had made the biggest contribution that year and the manager wanted to reward him accordingly. However, because he had the highest target bonus number, to give 100% bonus to this employee, he would have to give percentages in the range of 50-75% to the others. This was not the message he wanted to send, especially since they were solid performers.

He needed to figure out how to reward his star without penalizing the others. Company policy prevented him from increasing the pool. "Changing the rules of an incentive plan post-facto is frowned upon," says Gerardo. Instead he decided to give his high performer only 91.6% of his target bonus so that the others could receive 85 – 87.5%. However, when the manager sat down with the high performer, Gerardo joined them. They explained that he was receiving a higher percentage because of his impressive performance. In addition, they upped his merit increase and offered him company-sponsored training. This communication went a long way. "He understood the problem and did not want to unfairly punish his colleagues," says Gerardo. "Furthermore, he explained to us that he was very happy to be identified as the most important source of value that year and that the monetary difference in itself was not as important as the recognition itself." Gerardo points out that the company's incentive scheme has since evolved to allow further discretion when necessary.

Case Study #2: Forget year-end, try monthly bonuses

Aubrey Daniels (one of our experts above) started a consulting firm, Aubrey Daniels International (ADI), to help companies improve performance by applying the principles of behavioral science. Many years ago, looking to improve the way that discretionary effort was rewarded, Daniels and ADI's President, Darnell Lattal, discarded the traditional model of providing year-end awards and established a system of monthly evaluation and rewards. For each staff position—from the greeter at the front door to the person in charge of their financials—they identify several metrics to evaluate performance. These metrics are directly tied to company goals, but every employee is rewarded for their individual efforts. Each person has a scorecard with their metrics on it, which they are responsible for updating each month to discuss with their manager.

The company sets aside a certain percentage of profit as a pool for monthly bonuses. Every employee knows what percent of that pool they can receive if they meet their targets. "It's not guaranteed. There may be months when there is no profit to share. They know they have to work through the lean and the green," says Lattal. What Lattal likes most about this system is that "it is related to work and not gratuitous giving."

It may sound like a lot to manage, but Lattal disagrees. She says people have learned to work smarter and it's actually less work for management in the end. "I feel quite liberated from the type of management where you wonder what everyone in your company is doing" she says. And since employees are responsible for updating their metrics each month, there is little for supervisors to do once the metrics are in place, other than occasionally refining them. Employees are happy with this system too. "In the past, I knew my work was somehow important but, having monthly payout opportunities ensures that I understand the effect I have on monthly results and profit now, as well as in the future," says one of ADI's marketing staff.


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