What Can Make a Corporate Bonus Program Fail?

By Christie Summervill

What Can Make a Corporate Bonus Program Fail?

“It’s not fair!” These three words are the kiss of death to an incentive plan.

Right or wrong, this misperception can spell problems. It is better not to have a corporate bonus program than to have one that leaves the impression it is unjustifiable or unreasonable. This scenario is most likely to exist when the bonus is based on a discretionary decision at the end-of-year performance review. Employees are left waiting to see what the mood of the board or executive management decides to give. This type of bonus hasn’t incentivized any results and has become an expensive “thanks, guys!”

Another common reason the annual bonus creates the notion of inequity is when everyone in a certain job classification is paid the same bonus payout regardless of their performance. At the Teller level, for example, the average bonus amount is likely to be 4% regardless of the asset size of the financial institution. If the Teller is a “superstar” and receives the same 4% as those who are “not bad enough yet” to terminate, it affirms the mediocre performance of one and tells the Superstar Teller that extra efforts are not valued.


Setting Expectations

It is imperative that the bonus documents stipulate how the bonus will be treated if an employee is out on maternity leave or disability to minimize the appearance of illegal bias. A well-written plan document will spell out if the employee must be employed at the time of payout to be eligible to receive the bonus or if being on a Performance Improvement Plan during the year will disqualify them. Documenting that the bonus plan could be changed or canceled midyear under extreme economic conditions exist is important to set realistic employee expectations.


Line of Sight 

A corporate bonus program is intended to create a clear path between what an employee’s job duties are and the accomplishment of key corporate goals. It is designed to give employees “skin in the game.” Can a teller impact the capital ratio or efficiency ratio? If employees can’t articulate how their job drives change to the key performance indicators the bonus is built around, it is not worth the expense of the bonus. Using 1 or 2 well-known and understood corporate goals, with a couple of department goals and the individual performance score, would be an effective way to align the focus and efforts of non-exempt and most exempt employees. The weighting of these goals will clarify the priority. Executives are more likely to impact corporate goals, so the weighting on their plan would be higher. However, adding the executive’s performance score is a good idea because the performance review is likely to cover results like key projects and successful management practices.


 No Double Dipping

When a position is highly commissionable, such as a Mortgage Loan Officer position, it should be considered whether paying them an annual bonus is paying them twice for the same efforts that drive corporate results. The trend today is to not allow highly commissionable positions to also participate in the corporate bonus. Their commissions are paid out more closely to the desired results they produce, which makes it more effective in motivating the right behaviors. 


“You’re Getting a Bonus” Can Be Terrible News

Some companies are under the impression that giving an annual bonus in lieu of a pay raise is a good way to keep fixed costs down. For businesses, there are a few advantages to giving bonuses instead of raises. The biggest edge is that it’s not a permanent commitment. They dole out the money once, and the results must be repeated, or new levels attained to merit the bonus again. Since bonuses and similar performance incentives are often viewed by workers as a sort of add-on perk, they can also be used as a “carrot” to motivate workers, and they can give workers a perception that they’re more in control of how much they earn. That perception isn’t really based in reality: Performance metrics often include company-wide targets. You might be the best help-desk associate or accountant in the building, but if somebody in the corner office makes a bad decision, the company’s bottom line could tank, and you can kiss that bonus goodbye. If an employee’s base pay is at the midpoint or above, this approach can work. But newer employees or those paid below the midpoint will never get to the midpoint of their salary range. Under this arrangement, they are likely to look for employment elsewhere where they don’t have to put their salary at risk.


Once is Not Enough

Communicating a corporate bonus plan and the current corporate numbers is something that needs to be emphasized to eligible employees at least quarterly in order to effectively get the full value of the bonus. Managers should be trained to bring this information into their monthly meetings with staff to reinforce the priorities of the goals and explain how specific positions impact the accomplishment. Enlist the help of your marketing team to graphically display how the team is doing on departmental and corporate goals. Bonus plans are expensive, and optimizing the value derived from them is more than a once-a-year document that is sent to employees.

A well-documented and understood corporate bonus program can inspire better morale and more productivity. It demonstrates the cultural value that “we succeed together.” Another key advantage is the program’s ability to boost earnings for your company by creating a culture that regards and compensates team results. When you give your employees an incentive to push and achieve their goals, you’re helping them achieve corporate goals and reinforcing the results that are valued. On the other hand, a poorly documented bonus plan not based on understood performance metrics that are relevant to the essential functions of each position becomes a corporate group hug and thank you that did not produce any net gains. 

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