A Few Questions:

• Does your bonus program work (I mean really work; as in you know what you’re getting for your money?)?
• Does your bonus increase performance?
• If you’re not sure, read on…

In my first post for the WTIA, I thought we could talk about bonuses, one of the most overexposed (and overheated) terms used in the English language recently?

You may have noticed that bonuses have been in the news a bit this year. Unless you’ve been living in a cave in Afghanistan, it would have been difficult to have missed the recent uproar over the AIG bonuses (announced publically on a Saturday and paid out the following day – who pays bonuses on a Sunday?), or the $3.6 billion handed out at Merrill Lynch just before their purchase by Bank of America was completed - because they were in financial trouble.

It would be difficult for even the great Mark Twain to wordsmith the AIG or Merrill Lynch bonuses as “pay for performance.”  If he were with us today, I’d love to hear his thoughts on the subject—he’d have a field day!

First, let’s talk about what a bonus is, and why executives should be talking about incentives, instead of bonuses. The terms are often used interchangeably or synonymously, but they are not the same.

A bonus is simply a one-time payment, which may or may not be tied to “performance” (or anything, for that matter).  Conversely, an incentive payment is a payment that that is tied to the achievement of pre-determined performance goals.  Unlike with many bonus programs, with a well-designed incentive program we usually know what we’re getting for our organization’s hard earned dollars, because it’s thought out, pre-determined objectives are set, built into the business plan, budgeted for (hopefully!), and paid only when certain performance thresholds are reached.

Since a bonus is just a one time payment, we get all kinds of interesting ones, including some that make sense and some that don’t.  Among the many types of bonuses, we have “spot” bonuses, hiring bonuses, retention bonuses, the Christmas bonus, discretionary bonuses, and my all-time favorite, the “guaranteed” bonus, which apparently many of the AIG ones were.

Instead, to add greater common sense and accountability to how we spend our compensation dollars we should move the discussion away from bonuses to incentives, since there is a meaningful difference.

Executives, shareholders, and other stakeholders in a business’ success are generally not opposed to paying for performance, assuming performance is defined (and then earned), as in the case of well thought-out incentive program.  Well-designed incentives help add direction and emphasis to goal-driven behavior, and can help organizations work towards common strategic goals and the achievement of other key objectives. Bonuses are just payments, which may or may not deliver anything of value.

So, the next time the topic of bonuses or pay for performance come up, let’s step up and talk about incentives; real ones, ones that will make a positive impact on your organization.  You’ll be doing yourself and your organization a huge favor.

Doug Sayed, SPHR, CCP, is principal at Applied HR Strategies, Inc., a Seattle-area compensation consultancy, author, and developer of the upcoming StrategicPay^TM Series, a series of “do it yourself” toolkits designed to help HR  and business professionals develop key strategic compensation programs.