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As a company owner, I have always prefered giving bonus rather than salary increase. Because a salary increase is "permanent". Very difficult to remove if the company does not make profits next year !

So I have tried to workout a system :

1) All employees have a yearly bonus based on the profit of the company. As the law allows, this "bucket of money" is distributed (half of it on time worked, and the other half, prorata on the base wages - this is what the French law permits).

2) Each of the managers has written goals. His bonus is dependant on the fact he has reached each goal. Of course, they should not be surprised about the money they get because they have had O3 all year long.

3) Of course, people like also their salary to increase from year to year because the cost of things increases from year to year.
The salary increase people get is linked to the acquisition of new skills, competence or responsibilities. Because by improving them, they are increasing the value of the company and their own value on the market (we are talking about skill that are helpfull for the company, of course).
To be clear :
- I look at the "national cost of life" evolution for the year
- if it is 3%, I would, for example, allow a 4% salary increase (in total)
- employee who did not improve will get less than 2%, those who improved their skill would get 4%, and those who have changed responsibilities, will get more than 4%.

So WAGE INCREASE is on VALUE. BONUS is on PERFORMANCE.

* When people ask for more wage increase than I can give, and I think they deserve it. I always try to increase the bonus maximum level for next year. For example, John had a bonus that could reach 20% of his wage this year. Next year, this maximum can reach 25%. So I offer him the possibility to gain more if he performs well.

US41's picture

A wage increase helps defer the increasing cost of living from year to year. Every year inflation increases prices. If you rely on bonuses, and I am a top performer of yours who gets the top bonus every year, my buying power is actually decreasing year by year.

Think about that.

Personally, I want both the wage increase and a lump sum for my performance if I am really good at what I do. I also want special parking, a window seat, a nicer laptop, a better phone than others get, an office with a door, a trophy on my desk, an expensive watch... There are tons of ways to compensate top performers.

None of them compare to acknowledging my efforts and rewarding me with positive feedback. But if you have a top performer who is blinded by financial and substantial offerings from recruiters trying to talk him into leaving you, you might want to take another look at freezing salaries permanently and perhaps offer wage increases.

You'll want to keep those top performers during lean years. You'll need them then more than ever.

cwatine's picture

That is what I meant : good performers that add usefull skills will get more than the price increase and more than the average.

Bonus :
- one part is linked to the company performance
- one part is linked to individual performance (goals met)

Company cars you can use for your own, etc are considered as permanent.
A nice watch or a troffy or a gift are like bonuses.

Generally speaking, I have noticed that the environment (ambiance, management style, autonomy, etc.) are much more important to people than money (except if there is a huge difference with the market)

US41's picture

[quote]Bonus :
- one part is linked to the company performance
- one part is linked to individual performance (goals met) [/quote]

I recommend you do not tie bonuses to company performance - just individual. The individual's goals should contribute directly to company performance anyhow. There is no reason to deny the person rewards because others did not contribute effectively. You want to reward top performers. Using company performance as part of their compensation is just an excuse to lower the amount of compensation you give to them and make them average again.

I think these address this issue:

http://www.manager-tools.com/2007/10/annual-reviews-and-compensation-par...

http://www.manager-tools.com/2007/10/annual-reviews-and-compensation-par...

These do as well:

http://www.manager-tools.com/2006/01/delivering-the-performance-review-p...

http://www.manager-tools.com/2006/01/delivering-the-performance-review-p...

Mark's picture

I agree with Ced here. While US41 is right, that group incentives can reduce the pay of a star performer (I've put it a little less starkly), rampant individualism is also harmful in its own way.

Neither do we want to be sheep together in a pen nor mustangs charging over a cliff at top speed.

There is no ideal pay and performance mix. There are only attempts to incent performance in concert with mission and values.

To say nothing of the fact that pay is only one lever a manager pulls.

Mark

cwatine's picture

Thank you for the links US41.

Still, I like the bonus linked to the performance of the company. By performance I mainly mean profit.

Why ?

For two reasons :

- if there is more profit, then there is more money for everyone. If there is no no profit, there is no money to share. That is basic common sense.
- the only valid purpose for good individual performance is to get a better total (team) performance. If it doen't help the team result, it is useless.

I understand your concern about having the global bonus decreased because of the poor performance of one peer. It seems unfair.
But this is just plain reality. In a team there are people who perform above and under the average (by definition 8) ) ...

By putting everything on an individual basis, you risk to kill the team spirit.
For example, a sales guy should feel concerned when the tech doesn't meet the target. A tech should feel happy when the sales guy hits the target, because it means a better outcome for everyone.

jhack's picture

The inherent problem is that individual goals can never be perfectly aligned with profits: the sales person could generate more revenue if the services were free and the ad spend was higher...but that would erode margins.

John

Mark's picture

Who cares about perfect?

These are human systems, and as such always start with the fundamental premise that they are imperfect.

Too many (High C) executives go way past the point of diminishing returns trying to get to a perfect system. (Of course, to be fair, too many High I executives create processes with a lick and a prayer.)

Mark

jhack's picture

Apologies for the lack of clarity; my point is: having part of the bonus based on the overall performance of the company mitigates the problems caused by everyone acting purely in self interest.

Perfection (individual goals perfectly aligned with company goals) is not possible, so having rewards for overall performance will help folks keep their eyes on the real goal.

John (who is rarely confused with being a perfectionist!)

cwatine's picture

I fully agree with your statements.

- giving a bonus on overall profit allows you to be more specific with individual goals which are not completely linked with profits
- when I give a "main" target to a manager, I try to give another one which allows to balance and avoid vicious effect. Example : if I give a target like "zero back order", I also give "at constant stock level"

Ced (who sometimes is too perfectionist - "perfect is the enemy of good ... perfect is the enemy of good ... perfect is the enemy of good ... perfect is the enemy of good ... perfect is the enemy of good ... perfect is the enemy of good ... perfect is the enemy of good ...perfect is the enemy of good ...perfect is the enemy of good ...perfect is the enemy of good ...perfect is the enemy of good ...perfect is the enemy of good ... " )

jhack's picture

LOL!

John

Todd G's picture

Ced,

Persoanally, I think US41 is on the right track. I see where both of you are coming from. You want to make it right for all, and US41 is stating that as a top performer, I get a certain percentage of the bonues along with the low performer.

Pay for performance is the way to go. This should be incentive enough to continue performing and meeting and or exceeding the company's goals as they meet the mission and vision.

All too often, I hear from my staff that we all get the same raises, and some of my staff bust they rears and others just come to collect a paycheck. Believe me, I have been trying to move those individuals out, but due to HR policies, we have to follow the process.

We have an Optional Pay for Performance based on company profits for the previous year. This is based on several factors. (1) Customer satisfcation scores greater than 85%, (2) 75% return on employee satisfaction surveys, and (3) The money left over after the "bills" are paid. We may see some this year, but definately less than last year. This isn't due to lack of effort from employees, it is due to the economy, decrease in reimbursement from the government, and decrease in patient census.

So in essence, where is the incentive to work harder when staff knows they will get the same raise as their peers. The reward for me is knowing that I have the commitment and drive to continue doing what I do which allows me to move up the career ladder faster.

Great post.

Todd

jhack's picture

It's a combination: the "bonus" has a component based on individual performance and one based on company performance.

If your individual goals are perfectly aligned (they never are) then you wouldn't need corporate goals.

We aren't suggesting that there be no differentiation between top and other performers. The base salary, the individual component of the bonus, and promotions all serve to reward the top players. The overall performance goal is a way to share the overall success, and to ensure that folks who perform well otherwise also align themselves with the organization.

Frankly, a "top" performer who was demotivated by such a system might be a little too much in it only for him/her self.

John

US41's picture

[quote="jhack"]
Frankly, a "top" performer who was demotivated by such a system might be a little too much in it only for him/her self.

John[/quote]

I only care what they _do_. "In it for themselves" is a conclusion - not a behavior.

I can see that if you tie them to organizational performance at the highest levels of an organization, they will be less likely to show excellent performance by selling the company down the river. However, in a 50,000+ man operation, people on the front lines are not able to do that to an organization as a whole.

Do you really want to tie the performance of a private to the overall numbers of the Department of Defense? To me, that's absurd. No private is ever going to be motivated to work harder or smarter if the DoD is performing poorly. He's going to think that unreachable people at unreachable heights mismanaged their stuff, and his behavior will not change.

Tying them to just [b]our team's performance and their own performance [/b]makes sense to protect us from wild stallions running off the cliff, but tying a performer to the performance of an entire corporation will not control bad behavior nor will it reward good behavior. It will come from "out there" where they have no influence and will be a waste of money.

jhack's picture

[quote]"In it for themselves" is a conclusion - not a behavior. [/quote]

You're right.

And I can see that in large organizations (where I've spent little time), the overall component becomes more of a profit-sharing program than an incentive or performance program. In small companies, everyone has a direct link to overall performance.

John

cwatine's picture

Some time has passed since that post, but here comes the time of deciding on yearly wage increase (it is in July for one of our companies).

When re-reading this post, I realised I should have started by saying I am the owner of a SMALL sized company (30 employees in total). Maybe is it the reason why our Company bonus works so well.

To sum-up, employees get two bonuses :
1) one is purely based on the operating result of the Group
2) one is on their personal performance
And I still say it is the best system we have used.
For a good performer, (1) is about 45% of (2).

Regarding raises, I will ask my managers to classify their direct following this rule :
(0) : No raise. No improvement.
(1) : Low raise. Low improvement.
(2) : Average raise. Average improvement
(3) : High raise. High improvement.
(*) : Special : change in position.

I will base the (2) level on the general inflation of this year.
If 3% is the GI of this year :

(0) : 0%
(1) : 1%
(2) : 4%
(3) : 6%
(*) : case/case