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I work for a specialty contracting firm in the construction industry. We currently have a compensation system that includes an annual discretionary bonus. I was recently promoted and the "discretion" part is now on my shoulders.

My dilema is that most people are told "if you work hard, it will be reflected in your bonus". The total pool of bonus dollars are a function of the profitability of the company. The profits from this year are typically generated by some process that really occured last year. You might have an individual that really shines, but if the company has a bad year, his bonus would be low. You could also have a great year and a good bonus but that may not relate to what you did.

How do I try to convert our company to a performanced based system? These bonus checks can range from $6,000.00 to $50,000.00. Since there are no established measures, people imagine a certain bonus and then get disappointed at the end of the year. I would like to avoid handing someone a $10,000.00 check and actually de-motivating them!

Thanks in advance.

Steve

DavidB's picture

Steve,

Many of the financial firms use a concept of Total Compensation. It states that your annual comp will be based on a fixed salary, and an expected bonus. The expected bonus is usually a combination of an incentive bonus (personal performance) and of business profits. For example, my current employer uses 75% for incentive and 25% for business.

They also apply a percentage from the incentive to the business bonus. So if I receive only 1/2 of my expected incentive bonus, I only get 1/2 of the business bonus. Of course, it does not go the other way beyond 100%.

Many of the companies I have worked for have done similar.

I hope this helps.

David

bflynn's picture

What I think you're saying is that you're uncomfortable deciding who gets a big bonus and who doesn't. Well, you're the man now. Part of your job is to decide which of your directs is great, which is good and which are categorized as other. I suspect there hasn't been a great job done on communciating that information to your directs in the past and some of them have unrealistic expectations.

There are two things I would think about
1) you must rate your employees. I don't mean "rank" the way Jack Welch suggests, although his principle is true (your best people get the best rewards). You have some employees that you highly value and others that you don't value as much. Remember that it isn't personal, you aren't ranking who you like - you're rating how they contribute to the company.
2) you must make sure your employees understand their value to the company and how you rate them. The wrong time to do this is when you deliver a bonus. All the rules for delivering a performance review apply here; the bonus IS a kind of review.

BTW, you mention wanting a performance based system. I'd suggest that you already have one. When the company performs, employees get larger bonuses. If someone works real hard, but doesn't deliver results, should there be a bonus? I think you're saying you get a smaller pool, which makes the decisions on who gets bonus a little more difficult.

Brian

Mark's picture

Steve-

Great post! (Brian - you as well.)

Unless you're one of the top 2 or 3 people in the firm, the answer is you don't. It sounds to me like your firm has decided to incent team behaviors in its bonus plan, and that makes sense in the construction industry, where the owners might be concerned about a bust year where, despite best efforts, there are NO profits.

They then ask individual managers to implement the system, by giving you a pot of money and asking you to determine who did best, or slightly differently, who YOU want to incent.

The comment about "if you work hard" is in principle, accurate. It may not help you with the choices you have to make, but it's true. I wouldn't disagree with it in any way, but rather make my own point, which is, "that's absolutely true, and we do incent differentially based on individual performance."

I happen to like this system (and there are others I like too) because of the tension between org and individual performance. I like that because that is ALWAYS true - each of us can do selfish things at times, which hurt the company.

The fact that this year's bonus is based on last year's performance is true everywhere. That's just a function of pay systems.

Yes, there is the possibility that someone does great in a bad year, and doesn't get rewarded. This could happen several times, in fact, though of course that's unlikely - statistically, it will work itself out. Of course, pay is only one part of rewards. Someone who does well in bad years may just end up with a promotion.

To avoid the situation described at the end, it sounds like you need to do some educating. Once a quarter, talk to each person about how they're doing (when you do their quarterly review). Explain how the bonus works, and your evaluations might be a little different than with the previous boss. Tell them how the firm is doing, and compare that to last year, without going to the next step and saying what that would mean for them (everyone else's performance who works for you is dynamically connected to their bonus, based on relative performances). Under the circumstances, you need to know the pool the previous boss had, and how he/she allocated it.

Worry about your part of this for awhile before changing the system. What you have makes sense... and you're not driving the train just yet.

Glad you asked.

Mark

putska's picture

Thanks for all the input. I implemented the one on one's for my directs about 3 months ago and I'm working on the quarterly reviews (they have been annual at best in the past). My first priority is to begin establishing some deparment level goals and then some individual level goals so that we at least have something to base our evaluations on.

I'd just like to say how much I appreciate the podcasts in this forum. They have really given me a lot to consider and hopefully my team will be the real beneficiaries!