On Granting Annual Discretionary Bonuses
It’s that time of year! How will you decide bonuses for your team?
Unlike performance bonuses which create incentive by rewarding achievement of pre-set goals for the year, discretionary bonuses are purely subjective and parceled out as you see fit. Compensation experts caution that a discretionary bonus not only fails to create incentive but can even be a “dissatisfier” when a recipient is awarded less than in prior years or, worse yet, heard at the water cooler that someone less deserving received more! Nevertheless, many companies prefer discretionary to performance bonuses because they can decide after the numbers are in whether bonuses will be paid and, if so, how much.
Let’s say it has been a good year. Your company will give discretionary bonuses and you have been notified how much has been allocated for you and your managers. If you are like many executives, you first decide your cut – then put your feet up on the desk, ponder who has been “naughty and nice,” and decide how to distribute what’s left. Seriously, you are thoughtful and want to be fair but, no matter how you slice it, who gets what is still entirely subjective.
The good news is that if your company won’t budge from its policy of paying only discretionary bonuses, you can still provide some structure and bake incentive into your year-end “gift giving”. Here’s how:
For 2015 bonuses, which are likely be decided around this time next year, establish a framework now for determining individual bonus awards and share it with all eligible participants on your team so they know how their bonus, if any, will be determined. Be sure the framework is simple to understand, and that it reinforces the individual and/or group behavior you believe is required for your division to get the best results. Perhaps each manager working alone with her / his department’s employees is essential to the division’s success, or maybe your managers and their teams must work together closely to achieve what you expect. Whichever is the case, your framework must drive the desired behavior.
If departments in your division operate independently as “silos”, notify each department manager that their “discretionary” bonus next year will be based on their department’s contribution to overall division results. For example, if revenue producing, each department’s pro-rata share of division net revenue or operating profit could be used to prorate individual department manager awards. If inequities could arise by strictly distributing the bonus pool in this way, set aside 60% of the fund for this purpose and award 40% with your “feet on the desk.” For departments which do not produce revenue and are “overhead”, consider allocating the bonus pool based on the degree to which each manager meets his/her expense budget for the year; and, again, if flexibility is needed, tell them what portion will be distributed in this way and how the balance will be awarded, even if the latter will be purely at your discretion.
To the contrary, if close collaboration among departments is crucial to attaining desired division results, tell your department heads that their year-end bonus will depend on it! To reward teamwork, two-thirds of the bonus pool might be allocated based on each manager’s salary as a percent of total department head salaries – and the remaining one-third awarded at your discretion to recognize exceptional individual performance. Some managers might be new so will not have worked the entire year, and others might have taken leave of absence, so to be fair to all pull the payroll record and utilize actual W-2 salaries earned and not the annualized salary rates of each manager when doing your calculations.
To conclude, whatever framework you put in place keep it simple, communicate it clearly to your managers early in the calendar / fiscal year; and, make no guarantee that bonuses will be paid at all, but if they are, assure them the awards will be made according to the framework you laid out. Finally, your managers must be clear that only those in good standing at the company and employed on the date the awards are made will be eligible to receive a bonus. Apply these basic principles and you just might get a return on investment from those “discretionary” bonuses you paid to your team –bonuses compensation experts say are a waste of money!
Fred Clayton
Chief Executive Officer
Berkhemer Clayton, Inc.
