It's a common lament this time of year. In organizations with annual bonus "plans", whether paid out at year-end or early in the new year, leaders are beginning their conversations about whether and how much should be paid out. Invariably, one of them will ask: "But what are we getting for this money?"
Many business owners and top executives have a strong preference for discretionary rewards - which often amounts to simply doling out cash in a manner that "feels right", based on available information about profits, growth, performance, etc. It's not hard to understand why. This gets them out of the admittedly difficult (particularly these days) task of pre-defining goals and bonus parameters. It may help them avoid the need to share and explain complex, sensitive company information. It leaves them in a position of complete control, relative to bonus expenditures. What's not to love?
Unfortunately, it also doesn't drive performance. It doesn't focus people's discretionary efforts or make priorities clear. It doesn't communicate a path to success for motivated employees to follow. It can create the impression, especially with any employees who receive less than others and aren't clear on the reasons why, that the program is more a popularity contest than anything else. It produces a sense of entitlement among the recipients. And it is nearly impossible to assess the return on the dollars spent - what the organization is indeed getting for its money.
I'm not sure there's a right way or a wrong way to do bonuses, really. But it is important, ultimately, to be truthful about what you intend to accomplish with a bonus program. If your objective is to express gratitude to employees - in an economic way - for their work during the course of the year, that is an admirable goal and a discretionary program could be just the ticket. Just make sure, however, that you allocate and communicate awards accordingly. Don't call it what it isn't and temper your ROI expectations accordingly.
As with any other reward, the recipe for bonus plan success relies heavily on truth, clarity and alignment!
Ann Bares is the Editor of Compensation Café, Author of Compensation Forceand Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations. She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time. Follow her on Twitter at @annbares.