Fair And Equitable Compensation – The Foundation For All HR Programs

BONUS ADMINISTRATION

General

1. At a minimum, and consistent with the availability of budgeted bonus monies and the standard practice in the outside labor market, bonuses should be provided for appropriate technical, professional, management and executive employees.
2. Bonus monies should be placed into the financial budget for both spot bonuses that can be utilized as needed throughout the year and annual, end-of-year bonuses.
3. Typically, spot bonuses are “triggered” by the achievement of certain important, specific performance results by an employee or team of employees, while annual bonuses are “triggered” by the achievement of certain specific division or business unit end-of-year financial objectives.
4. For management and executive personnel, salary and bonus amounts are considered together as “total cash compensation” when determining whether an employee’s pay level is fair and equitable.
5. There is usually a hierarchy of ascending “target” bonus levels for each bonus plan, which is expressed as a percent of salary for each plan participant, that increases by regular percentage intervals (e.g. 15%, 25%, 35%, etc.) up to the executive level.
6. Recommended bonus amounts should be reviewed and approved by all management levels, prior to the review by the CFO and CEO.

Specific

1. Annual, end-of-year bonuses are based on the division or business unit meeting one or a mix of certain financial objectives, such as operating profit, net income, earnings per share, sales, etc., in which the target objective represents 100%. Typically, the dollar amount of the 100% target is placed into the annual financial plan and budget.
2. Usually, if the final financial results for the end-of-year bonus are less than 90% of the target; no bonus pool monies are paid out. If the final results are between 90% and 99.9%, a much lower, prorated amount of the bonus pool would become available, such as 60% or 70%.  The results at or over 100% might typically be represented by the following chart:

            Financial Results %                                           Bonus Pool %

              100 to 105%                                                      102.5%

              105 to 110%                                                      110%

              110 to 115%                                                      120%

              115 to 120%                                                      130%

              120 to 125%                                                      140%

              125% and over                                                   150%

3. Regardless of the bonus plan calculation for the total division or business unit bonus pool, what matters most is the amount of money that has been reserved by the Finance department for this purpose. If the division or business unit head desires to exceed the dollar amount, such an overage will have to be absorbed in some other part of the Income Statement.
4. The bonus target for any individual employee is set as a percentage of salary. So, if the division or business unit achieved a 105% bonus pool, the consideration of a bonus for any individual employee would typically start out at 105%.  Then, based on the evaluation of the employee’s performance results, the final percentage would go up or down from that starting point.  If the employee’s overall performance was far less than satisfactory, either no bonus or a dramatically lower one would be considered.
5. To ensure that the bonus plan continues to be perceived as an incentive for improved performance only; payouts should not be used to correct any internal or external inequity problem.
6. When the final bonus payout awards are determined, an updated total cash compensation amount for each appropriate employee should be calculated for use in any future compensation analyses or pay comparisons.
7. Specific dollar amounts for spot bonuses should be set aside in the budget and used exclusively for that purpose, regardless of the division or business unit’s financial performance for the annual, end-of-year bonus. Such bonus amounts should be administered separately and the spot bonus monies should not be commingled with the annual, end-of-year bonus pool monies.

In conclusion, if the majority of employees feel that they are being fairly and equitably compensated, they will tend to appreciate and take advantage of the full value of all other HR programs.  However, if they do not feel that way, the reverse is the case and the company will diminish the benefit of such programs.