Does "Management Discretion" Have a Future in Rewards?

My experience would suggest that the discretionary "bonus" award is alive and well today, but I wonder about its life expectancy over the longer term.

Pay mix, the relative proportion of the "fixed" (wage/salary) and "variable" (bonus/incentive) pieces of our pay packages, is shifting.  The picture below, drawn from recent Hewitt Associates research, shows what has happened to the pay mix of a typical salaried exempt employee in less than two decades.  Note that the red portion of each bar represents the average base salary increase and the blue portion represents the average variable pay budget.  Telling, is it not?

 
Some expect this trend to continue even further.  Given this, how acceptable will it be to let these increasingly important bonus/incentive awards hang on management discretion?  On management's "feeling" about how well things went?

I think: not much.  If we expect to shift more of the risk associated with their pay over to employees, we owe them a clear, upfront explanation of things they must accomplish to obtain those additional dollars.

Even beyond that, the whole rationale behind variable pay is supposed to be a better return on a company's compensation dollars.  How do we accomplish and measure that return if we don't clearly spell out what kinds of performance gains are tied to - and expected to fund - those award dollars?  What are you really getting for those dollars other than the warm feeling that it feels "right" to hand them out?

Many leaders, especially in privately held companies where they've had a hand in growing the organization from the ground up, believe that their knowledge makes them uniquely qualified to sit in judgment when it comes time to hand out bonuses.  What they don't realize is that, true as this might be, it is entirely beside the point.  The power of variable pay is to focus attention on getting a few critical things done.  Without upfront information on purpose and mechanics, your plan is pretty doggone impotent.

Do discretionary rewards have a real future in this era of shifting pay mix?  What do you think?

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting 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.

Comments

[E James (Jim) Brennan]

Until human beings are totally replaced by robots and computers, a vital place will remain for managerial discretion.

Without conceding any valid point about the best practices re precision of pre-announced attainable/stretch clear line of sight output result expectations for defensible objectives with mutually-agreeable observation standards and proper feedback systems, adequate resource support, lack of task interference, etc. (wrote a whole BOOK on performance management, fer gawd's sake)... you still need the irreplaceable element of human judgment somewhere in the loop.

People are not machines. Work is not a closed system immune from unanticipated influences or conducive to clear totally controllable predictions. Remember the Harvard Law of Behavior composed by B.F. Skinner's grad students: "Under carefully controlled labratory conditions where all outside influences are monitored and carefully controlled, the experimental subject will do as it damn well pleases."

That said, I agree that there will be more pressure for board accountability, but the current witch-hunt to expunge all risk will inevitably create some iatrogenic rebounds. The only guarantees in life are not necessarily happy ones.

[Kurt Nelson]

Ann,

While I agree that the increase in variable pay as a proportion of overall salary requires that there is more accountability and need for objectivity, I also feel that a portion of the variable pay will still be reserved for management discretion. There are a number of times when objective measures are insufficient to tell the whole story about an employees productivity. These are the instances when having a manager discretionary fund can be vital. Of course I would not expect the entire variable pay budget pool be this way, but I think it does have its place.

[Ann Bares]

Jim and Kurt:

Very valid points. I don't really mean to suggest that discretion will and must entirely go away - but I think that plans whose awards are entirely or mostly discretionary will become more problematic as pay mixes shift. My point is that we need to be careful that we are introducing or retaining discretion for the right reasons, and not because we are unwilling to make a commitment or be transparent around details and mechanics.

Thanks for the thoughtful comments!