Is Your Bonus Program on Automatic Pilot?

Do you pay out incentive awards to your management staff on the basis of their performance, or simply because the year is up and it's time to cut those checks?

Silly question?  I wish it was.  But think about what happens behind the scenes during your year-end bonus processing cycle.

Perhaps your company's variable pay plan, that which you may have touted across hither and yon as your "pay at risk" program, operates more like a delayed compensation scheme when the facts are known.  Does the message that your pay practices deliver to employees sound like, "not to worry, you'll get it; you just have to wait a bit"?  Are your eligible employees concerned that their annual incentive payment is money at-risk, that they could actually take a hit at year-end if they and the company haven't performed well?  Or are they fairly certain that they will receive at least an on-target payment?

 Design vs. practice

There probably aren't too many plan designs out there these days that don't make a strong case for early-on objective setting, periodic mid-course correction meetings and a thorough year-end assessment of quantifiable results.  But does the implementation practice follow this path?  There lies the rub.

Give yourself a quick quiz.  Ask yourself, how many of your incentive-eligible employees routinely receive their target bonus amount - or even higher?  Has that been your standard practice, that almost everybody wins?  Then ask, how do the average performance ratings compare with the overall business rating?  Is there a strong correlation?  Do your overall bonus payments fluctuate to the same degree between good and bad business cycles?

Note:  It would be a good idea to make sure that this information is captured as part of your compensation metrics.

Every year management incentive plans pay out substantial amounts in total reward payments, but do you know whether you're gaining some real ROI for your money, or is your plan only going through administrative motions - like the process is on automatic pilot?

The administrators rule!

By the time the performance year nears its close and the incentive assessment and payment cycle starts almost no one is looking at these questions.  That ship has sailed.  Attention would now be focused on the processing, the administrative busy work of getting checks out on time.  With all the paperwork passing through multiple hands, the quality control effort usually relegates itself to proper completion and signature of forms, not on whether individual performance has warranted the payments.

I remember one business unit President scanning the management incentive apprasial forms with a dark frown, then saying, "just tell me how to get Bob an above average bonus."  Process went out the window.

When the clock is ticking and Finance is clamoring for the numbers there is little time left for self-reflection about the effectiveness of your reward programs.  Some might even shrug off your concerns with a "we have the money budgeted," as if somehow that solves the design vs. practice dilemma.

It may already be too late for this year.  But before you start the next incentive year cycle, before your administrative processes take on a life of their own, have a look-see at whether your variable pay plans are really variable; whether they're really working for you.

There's a lot of money at stake.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats. 

Image: Creative Commons photo by arose771999

Comments

[Laura Schroeder]

That BU president demonstrates the underlying problem: Companies see bonuses as a tool to further the goals of the business, managers see them as a tool to further their own goals, such as rewarding or inspiring loyalty, returning a favor, sending a signal or avoiding an unpleasant situation. Sometimes to two agendas dovetail nicely but rarely by design.

[Chuck Csizmar]

My conversation with that BU president came after the company had spent over 6 months redesigning the performance appraisal process. Within five minutes he relegated that effort to the trash heap. Wouldn't use it - and therefore neither did his management team, and through trickle down thinking so went the rest of the BU.

One of the key takeaways from this experience was to avoid designing employee-oriented plans in a bubble. You have to bring in the users to help design / test something that will actually be used. Duh!

[Andrew Hibbard]

Hey Chuck,

Good post. It never ceases to amaze me that companies spend millions on incentives without applying the same diligence that they would to any other expenditure of that magnitude. Involvement of the key stakeholders in program design, ongoing communication with participants, and a solid "wrap up" report can help improve the ROI.

It is a process, not an event!

[Chuck Csizmar]

Too often the defensive reaction of poor managers is that "we have the money," or "it's been budgeted", as if somehow having the money is a justification as to how it should be spent.

Hmmm, I wonder if they follow that same practice with their own money .

It makes you want to rap your head against the wall.