How About We Talk About Incentives, Instead of Bonuses?

We at the Compensation Café have promised “Serving up straight talk, original thinking and caffeinated discussion on everything compensation,” so why not talk about bonuses, one of the most overexposed (and overheated) terms used in the English language recently?

You may have noticed that bonuses have been in the news a bit lately. Unless you’ve been living in a cave in Afghanistan, it would have been difficult to have missed the recent uproar over the AIG bonuses (announced publicly on a Saturday and paid out the following day – who pays bonuses on a Sunday?), or the $3.6 billion handed out at Merrill Lynch just before their purchase by Bank of America was completed - because they were in financial trouble.

It would be difficult for even the great Mark Twain to wordsmith the AIG or Merrill Lynch bonuses as “pay for performance.”  If he were with us today, I’d love to hear his thoughts on the subject—he’d have a field day!

First, let’s talk about what a bonus is, and why we compensation professionals should probably be talking about incentives, instead of bonuses. The terms are often used interchangeably or synonymously, but they are not the same.

A bonus is simply a one-time payment, which may or may not be tied to “performance” (or anything for that matter).  Conversely, an incentive payment is a payment that is tied to the achievement of predetermined performance goals.  With a bonus program, we don't necessarily know what we're getting for the company's money. With a well-designed incentive program we do though, because it’s though out, built into the business plan, budgeted for (hopefully!), and paid only when certain performance thresholds are reached.

Since a bonus is just a one time payment, we get all kinds of interesting ones, including some that make sense and some that don’t.  We have “spot” bonuses, hiring bonuses, retention bonuses, the Christmas bonus, discretionary bonuses, and my all-time favorite, the “guaranteed” bonus, which apparently many of the AIG ones were.

Instead, to add greater common sense and accountability to our trade, we should move the discussion from bonuses to incentives, since there is a meaningful difference.

Executives, shareholders, and other stakeholders in a business’ success are generally not opposed to paying for performance, assuming performance is defined (and then earned), as in the case of well thought-out incentive program.  Well-designed incentives help add direction and emphasis to goal-driven behavior, and can help organizations work towards common strategic goals and the achievement of other key objectives. Bonuses are just payments, which may or may not deliver anything of value.

So, the next time the topic of bonuses or pay for performance come up, let’s step up and talk about incentives; real ones, ones that will make a positive impact on your organization.  You’ll be doing yourself, your profession, and your organization a huge favor.

Doug Sayed is founder and principal at Applied HR Strategies, Inc. a compensation consulting firm based in the Seattle Area.  Doug is a Certified Compensation Professional (CCP) with over 20 years of HR and compensation experience.  He earned a Master’s Degree in Human Resource Management from The Ohio State University.  He is an instructor for WorldatWork, and lead author of the upcoming “hands-on” compensation resource the StategicPayTM Series, Base Pay Toolkit, slated for publication in the second quarter of 2009.

Comments

[Paul Weatherhead]

Good point Doug. The word bonus can mean many different things.

Part of the problem we had in implementing performance-based pay at the US Postal Service is that the word bonus typically meant something given after-the-fact based on a subjective evaluation of a person's contribution. When we tried to change our culture to one where COLAs, general increases, and automatic step increases were replace with merit and incentive pay, the critics still viewed the incentive pay as "bonuses." Their eyes glossed over when we tried to explain the difference between bonuses and incentives.

But you are right. We must step up and explain the differences, even though sometimes we may feel like Don Quixote tilting at windmills.

[Terri]

I'm not sure we'll ever totally erase these terms being used interchangeably, however, it is definitely worth our while to make the effort to have the discussions because the differences are meaningful.

[Matt N Johnson]

Great points in the article regarding the differences between bonuses and incentives. These need to be reinforced with organizations struggling with how to properly and fairly compensate their employees.