Four Rules About "The Bonus"

"The Bonus" is a great thing. . .a reward of cash and/or equity for a job well-done.  The bonus is also an emotional issue and, if not managed properly, an element that can work contrary to the good of the enterprise.   I've been in and out of bonus programs. . .so here are a few observations that I believe should be rules of the road regarding the bonus.

1.   Do not frame it as part of the base compensation.    I have seen cheap CEOs and CFOs try to get away with this:    "well yes, the salary is low. . .but if the individual is really good they will earn their bonus and be on par with their peers in the remainder of the industry."

For the love of God - pay people what they are worth.   If you make the mistaken assumption that the bonus is only to get someone on par with a competitive wage, you've committed a grievous error.   You will not be able to attract and keep top talent.

A "bonus" is called a "bonus" because it is just that. . .a reward for a job well done - not part of  a base compensation.

2.  The bonus should only be paid if the enterprise makes its goals.    I have seen bonus structures go both ways:    an individual may make their bonus based on individual performance if the enterprise does not make their goals or the enterprise as a total has to make their goals before any individual can bonus.

Granted there are arguments to be made on both sides;    the stronger is the latter.    If individuals can bonus without the enterprise making its goals, it opens up the world of fiefdoms, backstabbing, land grabbing and all sorts of unpleasantries because individuals are so focused on getting their money - they are not concerned with the overall health and welfare of the organization.

All team members within an organization must be pointed in the direction of making the overall goal.

3.  The bonus should be paid annually.    The more I work with financial numbers the more I  have come to realize that a short-term vision does not result in long-term benefits.  Quarterly performances can be too unpredictable and too swayed by anomalies.   Go for the annual bonus.

4.   Behaviors can (and should) be part of the bonus equation.   If the enterprise is rewarding on numeric performance only - they are developing a cultural void and have no hopes of achieving some of the finer parts of the art.      Yes, judging and evaluating behavior can be tricky - but that's what we are paid to do.  Establish metrics and outcomes and measure against those. . .and also have the guts to evaluate if the individual is behaving according to the laws of the land.

The "Bonus" is indeed a reward for the individual - but it should also be properly structured so that it is a bonus to the operation of the entire enterprise.

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