Time to Rethink the Year-End Cash Bonus
Executives at a large company in Boston figured out an easy way to increase the size of their annual yearend bonus without actually earning it. The CEO of the company would personally distribute the checks at the annual holiday party, but the amount of the bonus was highly “negotiable,” explains an executive compensation consultant who worked with the company.
“The other executives learned that if they got another Scotch into him at lunch, then the checks were a lot bigger,” says Jim Moniz, president of Northeast VisionLink, who casts a skeptical eye on cash bonuses. “So if you’re looking at it as an investment, we’re not talking about a real return here.”
The CEO’s alcohol-inspired generosity might not be a common scenario, but it illustrates just how arbitrary critics say annual bonuses can be.
Cash is king in the current economic climate. But business leaders, executive coaches and human resources consultants mostly agree that the traditional cash bonus is not an effective way to reward and retain top talent. If used, a cash bonus must be tightly based on performance metrics, most say, but lower-cost alternatives to the year-end check often pay higher dividends.
The Trouble With Bonus Checks
More than half of small businesses that handed out bonuses in 2007 decided not to last year because of the recession, according to a December, 2008 survey of 75,000 small business customers of Palo Alto based payroll management software company PayCycle Inc. Moniz says it’s still a common practice among employers that can afford it. Meanwhile, recent research by HR consulting firm Watson Wyatt International shows no trend away from cash bonuses by large corporations.
Regardless, critics of the cash bonus insist that the one-time reward usually is quickly forgotten; becomes expected each year as opposed to appreciated; is often inconsistently applied; and ultimately does little to motivate or retain. And if a company suddenly stops its bonus program but fails to replace it with something else, it can be demoralizing to the staff, Moniz says.
“A lot of companies will say they’re going through trying times, and then they’ll stop things in a preemptive fashion,” Moniz says. “If you take away a reward without replacing it or doing a great job communicating it, that person will feel betrayed.”
That betrayal comes from a sense of entitlement, says Chicago-based author and consultant Babs Ryan, who draws from her experience working in both the automobile and banking industries. “Both are crumbling despite high wages and massive bonuses,” she says, due primarily to an unwillingness to use the stick – i.e., terminating low performers – along with the carrot. Simply firing “anti-change” employees, Ryan says, is much more effective than handing out bonuses to top performers.
January 2009 | California Executive
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