It’s Not Your Father’s Bonus Anymore

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David R. Evanson

The Career Advisor, Summer, 2004

Charlie Fitzgerald of Maitland, Florida-based Spraker, Fitzgerald, Tamayo & Moisand has bonuses on his mind. Not his, but those of his five-person support staff. He’s visiting each employee on their anniversary date, with an eye to instituting an incentive compensation policy that will make 10% to 20% of each employee’s compensation tied to specific objectives. In prior years, the firm’s bonuses were mostly discretionary.

Why the shift? “We’re seeing a lot of studies on this, and we believe it’s a better way to go,” says Fitzgerald.

Compensation experts would probably like to make Fitzgerald their poster boy. According to Lee McCullough, a principal and senior compensation consultant in New York for Mercer Human Resource Consulting, one of the biggest mistakes you can make is offering a bonus payment without any linkage to personal or firm performance.

“If all you are doing is whacking up a pot, what motivational incentive are you getting from this? You’re missing an opportunity to say to employees, ‘Here’s what we need to do to grow that pot,'” he says.

According to Don Schrieber, author of Building a World Class Financial Services Business, and a principal with Wealth Builders, Inc., in Little Silver, N.J., “I think any discretionary income not tied to performance is dangerous. If I am feeling good about an employee and give him or her a large bonus, it confuses them about what’s important to the organization.”

The latest thinking among compensation intelligentsia is that discretionary bonuses are a thing of the past and that incentive compensation should now be SOP. As a result, employers need to break total cash compensation into two big hunks: base and incentive.

Keep in mind that things can start to get complicated pretty fast once you break compensation into two moving parts because your options begin to multiply rapidly. For instance, do you want to be below median on base salaries and above median on total compensation, suggesting a very large commitment to incentive comp? Or do you want to be above median on base, but at median on total compensation?

These are thorny questions if you are gung ho on being competitive. If however, you pay what you pay, but simply want to focus on making a portion of your employees’ compensation incentive-based, you’ve still got to determine exactly what it is you are trying to encourage employees to focus on.

This requires careful consideration. For instance, Schreiber says that if you focus too much on the top line, it could prove disastrous. “The more people you have feeding off the top of the food chain, the less bottom-line accountability there is in your organization.” Think Enron . . .

Kirk Hulett, who manages human resources for Omaha based-Securities America Financial Corporation and provides human resources consulting services to the firm’s 1,500 broker/dealer affiliates, has developed what he calls a basic bonus plan that looks at four variables of firm performance to calculate each employee’s bonus. These variables are: net income, number of new clients, assets under management and client turnover.

In Hulett’s model he weights net income more heavily than the other variables. For instance, if an employee’s incentive compensation is supposed to be 10% of the base, he would pay out four percentage points of the total bonus if the firm hits its net income goals, and two percentage points each if it hits its goals on new business, assets under management and client retention. “Net income is probably the most important goal, but there are instances, such as a start-up situation, where you might place more emphasis on new business than net income.”

Hulett says if you only have one employee, or your firm has never had any kind of incentive compensation before, the basic bonus plan is the way to go. For all others however, he recommends a plan that includes practice goals as well as goals for each individual.

Mercer’s McCullough endorses setting individual employee goals, but adds that the higher someone moves up in an organization, the greater the weight that is placed on overall firm performance in the final tally of incentive compensation.

Sound like a lot of work? It is, but the good news is that it’s worth it. “The evidence is indisputable,” says McCullough, “Incentive plans work. They can shape employees and they can have an impact on how they work.”