Friday, June 26, 2009

Should Bonuses Be "Fair"?

Earlier this week I had a meeting with some of my fellow executives in which we discussed awarding bonuses to company employees for achieving important company milestones. We started to argue about how such bonuses should be paid. Should they be awarded to those individuals who truly did an amazing job and performed above and beyond the call of duty? Should they be distributed equally among the entire team according to seniority level? There were three of us in the room and I quickly found myself arguing a 2:1 minority position.

My take is that bonuses should be awarded to those who truly over performed. I think that we need to differentiate between those who merely perform and those that outshine the rest of the pack. In every organization there are a few individuals who carry more than their fair share of the load. These stars should be publicly recognized and lavishly compensated. They are the example for the rest of the team. My colleagues believed that differentiating in this fashion would lead to frustration and discontent among those individuals who would not receive a bonus. They think that the bonuses should be paid as a reward to the entire team on a job well done, not to reward individuals.

My colleagues' position should be divided into two parts. First let's look at the discontentment argument. My problem with this argument is that it can easily be reversed. In my opinion, if we gave our star performers the same treatment as everyone else, THEY would be demotivated. Why work harder if you get the same treatment as everyone else? In addition, as long as the criteria for awarding the bonuses are clear and fair, and everyone knows that they too could achieve the same rewards by executing to those standards, what is there to complain about? My point is that business should be a meritocracy, not a commune. Yes, as heartless as some think it sounds, some people do deserve more than others because they give more to the organization. What's wrong with that?

The second argument made by my colleagues is a bit tougher to deal with. They claim that the team as a whole should be recognized for the achievement and that this would encourage team work and limit political behavior. Possibly that's true. However, I think that we can recognize the team's overall performance by giving some kind of group award, such as having a big party, giving each team member a small token of appreciation (a bottle of wine? a certificate to Amazon?) or having a fun event. That does not mean that the bonus pool needs to be "fairly" shared...

By the way, just so that I am not suspected of ulterior motives, no-one is talking of giving a bonus to the executive team. In fact, our bonuses this year were eliminated in recognition of the economic environment, while the rest of the team received their bonuses as scheduled.

I would love to know what the rest of you are thinking about this issue, but I can't promise to change my mind.

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Ren said...

I have two comments about this topic.

First, I think that a good way is to have the bonuses allocated both ways. That is, a portion of the bonus should be allocated based on overall results and another portion allocated based on individual results.

Second, different people are motivated by different things and the key to generated consistently good results is for the management to properly understand what motivates each individual. I believe numerous studies have shown that money is not the biggest motivator for most employees, though it is the easiest to measure.

As an example of this second point, at one time I received a very rare recognition (public) at my job that was accompanied by a large cash award. That same year I was excluded from the annual company trip for top performers.

I was surprised at this exclusion and when I discussed it with my manager I found that the reason for my exclusion was that I had received the cash award and they had other people that they needed to reward. I expressed the fact that I was disappointed by this but even more, I would quite possibly have preferred the trip to the cash, even though it was almost certainly of less value.

asgreen said...

First I have to say that I've never had a job that actually gives out bonuses. Saying that I really believe that they shouldn't be given to everyone just because. I could see myself getting bitter when someone who slacked and didn't pull their weight received the same bonus as me.

The second point about building teamwork is a good one. I have to say that considering this I would agree with Ren. Perhaps bonuses should work as salary increases do. The base cost of living, plus merit to those who deserve it.

Great post, really got me thinking.

Neongreen said...

I personally think that Ren has it - divide the bonus pool into two portions, so that every teammember gets a bonus, but the outstanding performers get a bit more.

The flipside of that is as Ren said(I hate to be working off his material so much, but he said what I wanted to say..), maybe allocating the same bonus to each member of the team, but recognizing the outstanding performers in a way that they would feel valued is potentially the crux of the matter.

Barry Ritz said...

I think bonuses should be shared equally even though money is not the prime motivation for most employees.

But since money is being used as an incentive, it is hard for those who performed better to receive the same rewards as the slackers. That will only result in lower productivity in the company.

Nevertheless, the team spirit in the company could also be affected if the star performers are more interested in taking credit from others and put their fellow colleagues down.

Florin said...

I think your position about the fair (or rather “unfair”) distribution of bonuses is both correct and incorrect at the same time.

What I mean by that is that depending on different circumstances it may work or not.

Your method of “unfair” distribution of bonuses could work perfectly in a small organization where the executives know personally each staff member and what each of them has contributed to the company. Assuming the absence of any office politics on the part of the executives, then they could easily and correctly identify the “stars” and reward them. Would those looked over feel inclined to feel a little disappointed /frustrated/discontent? Yes, of course. (That’s where that token of appreciation you were mentioning could come in handy). But so what? Without star performers a small enterprise could a lot more easily succumb than a bigger one. Then your “frustrated” workers would find themselves out of a job, not just a bonus. (And good luck finding a new job in this economy).

“Unfair” bonus distribution may not work as well within a much larger business. Let’s take the example of my hospital network which has several thousand employees. A few years back, our executives decided to award bonuses to the “star” employees. What they forgot to do was to define for all of us exactly what a “star employee” was. They left the selection process to the department managers. They also did not make known to any of us the criteria they used in making their selection. Should they have had to make public the criteria they used? I do not know. What I know is that all of a sudden those overlooked felt very disappointed and unappreciated. And disappointed hospital workers sooner or later results in dissatisfied patients which in turn leads to a decrease in the revenue stream. Our executives took notice of this, identified the problem (as revealed in the employee and patient satisfaction surveys) and corrected it. Nowadays, if the individual hospitals reach their established financial and patient satisfaction goals, all the employees of that hospital will receive a bonus, the amount varying slightly based on three levels of seniority. And the employee / patient satisfaction surveys positively reflect that as well as the organization revenue.

So a star employee may be critical to a small enterprise where a meritocracy system is essential whereas in a larger organization this system may be a lot more difficult to implement.

jesus said...
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