Employers Choose Bonuses Over Raises
wsj.com
wsj.com
> a move that gives them more flexibility to dial back that compensation if the economy turns sour.
To add further, though salary cuts can be done by companies (this may vary across geographies), it's usually a little more cumbersome and also sends a different message to employees. It's a lot easier to put in vacation caps (thus chopping off the ability to use the provided compensation completely) or not pay a bonus. While bad for morale, at least some employees may not consider these moves as a loss from the status quo. That's why different kinds of variable pay schemes is very attractive for employers so that they have several knobs to control.
As far as I'm concerned, employees should consider their base salary, benefits and some expected bonus as their fixed compensation so that they can better understand if the company is just skimming money and not rewarding their work because top executives want the bonuses for themselves (even when the situation looks like it wouldn't hurt to give some additional compensation). This behavior is quite common in many companies, and is probably one of the reasons why the CEO to average employee compensation has become increasingly skewed over time and is getting worse.
On the other hand, given a choice, most employees would choose a salary increase (continuous increase) over an unpredictable and one off bonus or any other benefit that can be easily cut.
My current employer is documented: it calculates your pro-rated fraction at each grade level for the bonus period two deal with promotions and then divides by 2 (bonus is paid out in two payments per year) and then multiplies grade level * company performance * employee performance. Any employee can calculate exactly how their manager ranked their performance. They can complain (or leave). With one weird exception people's grade levels are visible to others which means their bonus target is visible. For some people, 100% of their details (everything: base, etc.) are sometimes known to anyone who is interested (this applies to me).
(I should note that I don't think the compensation is transparent at VP level and above and know from experience there are tons of shenanigans there.)
When I worked for companies that did not document the bonus methodology, it was appalling. Bonuses were for glory hounds and friends of management. Terrible. A lot of employees didn't even know bonuses were paid.
I think the same issues exist for compensation (equity and base as well as special packages or retention bonuses) that exist for bonuses. It would be interesting to see if you could meaningfully execute a company with total transparency but I don't think it would survive contact with reality.
I think you can. There are some companies that do it already and places like military and Congress (they fully publish salaries) are transparent without falling apart. Secrecy around salaries is just a tool for employers to keep salaries low.
https://www.theatlantic.com/politics/archive/2014/09/how-did...
More public salaries: https://publicpay.ca.gov/Reports/Explore.aspx
It's doable.
In the private sector, salaries have more to do with subjective criteria like "how much do I think this person is worth" or "will this person go looking for other jobs if I only pay x."
Envy is not as much of an issue when people in the same role all make the exact same amount. It is an issue when pay is set by the will of a manager/HR person whose perception of things differs wildly from the employee's perception (regardless of whose perception is more correct). That being said, paying people by perceived performance, for all its flaws, is still better than rigidly paying someone based on what the sign on their desk says, with no consideration of how well they actually do their job.
someone else mentioned employers would have to be fair - yes, but that would not address the problem that 33% of your employees are crazy and/or delusional.
Entire countries manage it. Sweden, Finland and Norway publish all income tax returns.
Each year they announce how much, by percent, the bonus pool will be funded. And as long as I've worked there the bonus pool has been funded at >100%. The company is very fiscally responsible and they do everything in their power to meet their targets.
There are 4 categories of performance and if you meet the top two, you're guaranteed 100%. The policy for how much bonus % you receive is in the employee handbook. So your bonus is: (your base bonus percentage) * (performance percentage) * (bonus pool funding percentage) * (base salary). The only way you can get screwed is if you're tagged as underperforming. I've only known one person who's to ever receive that tag, and he was definitely underperforming.
That’s the only thing that makes sense. Asian economies learned this a while ago —but it leads to seasonal departures (after bonus distribution).
But yeah much easier to say bonuses will be reduced than to say salaries will get cut during lean times.
* though they do seem to get a lot of one offs...
It's a lot more cumbersome, and will create a lot more friction and problems.
The key reason there's even a distinction between salary and bonus is that a salary is guaranteed as long as you work there, while the bonus is not.
I am pretty sure it was deliberate, a way of cutting way back without having to give severance or make the news.
Doesn't sound like that "excuse" is working for them.
> I am pretty sure it was deliberate, a way of cutting way back without having to give severance or make the news.
It's the absolute worst way of doing layoffs. As you observed, the people walking out are the best performers who have great options elsewhere. Guess who stays?
Adverse selection in action.
As an employee, if you're given the choice between salary increase and bonus, the salary increase is worth way more in the long run.
I understand employer's perspective here: they don't know how well the company will perform, you can't predict everything. So bonuses are a good way to say "if we achieve our goal, you will get part of it as a reward".
However, very often recruiters include the bonus as part of annual salary when presenting the offer. This is unfair to the candidate - since bonus is not guaranteed, it shouldn't be included in the annual compensation, it should always remain separate with a clear information about conditions under which the bonus will or won't be granted.
Once-in-a-year bonuses give very little incentive to produce efficient work day-to-day. Because bonuses are given far in the future, employees have little to no rapid feedback on their work; and being far in the future some employees simply forget about them (or believe they might change jobs before bonuses are given so why work hard anyway).
Giving weekly or monthly bonus would give a rapid a powerful feedback to employees; and bonuses would be much connected to actual work than the corporate politics that happen just before the yearly bonus.
Another thing that employers risk with this policy is employees leaving en-masse as soon as the bonus is given. Some consulting/audit companies give bonus after the summer, just before their busy season starts; and employers learn the hard way that giving the bonus as late as possible is not as smart as it first sounded.
In finance it used to be the norm and is largely moving back that way.
Using it as a lever for employee performance is a secondary effect (that can be done just as effectively with salary). Primarily it allows the firm to manage comp costs to be in line with the firm's performance. During a downturn it allows you to cut comp by like 25% without reducing headcount. The possibility of employees leaving en masse is certainly considered but it's not very common.
Finance is a special case because if a lot of traders leave at the same time, the ones who stay will have more capital to play with.
Consulting/contracting/auditing firms are very different: they are committed to specific projects for specific clients and have already negotiated the fees. So it's real trouble if employees leave all at once--you cannot simply move their projects/clients to the employees who stay (because it creates even more overworked employees who will leave asap after the next bonus).
Also these projects may be much shorter than a year, some audit works are done within one-two weeks. If the firm negotiated a 2 weeks project for $XX fees and the employees on that project manage to finish the project for far less resources, the firm knows that they made a huge profit on that project. The firm may give these employees an instant bonus so that the employees are incentivised to reiterate the performance for the next project.
But it's not considered bonus, it's considered part of the salary and it's guaranteed.
Their direct reasoning for this was that the company offered strong end of year bonuses up to a ridiculous amount which in the fine print was dependent on a bunch of nebulous criteria. This was a company making money hand over fist.
Needless to say I ended up not going along with that offer. As you've mentioned companies likely do this because not only can they fluff up an offer letter to look better, but because they have multiple avenues to deny you the bonus and save even more money rather than paying candidates a proper amount.
They were offering me monthly salary which was a lot lower than what the startup offered (the one I eventually joined which was CTC = 95% fixed + 5% bonus). I tried to strike a balance with GS HRs but they were adamant and low monthly salary and an insane year end bonus. It was simple take it or leave it. I declined. I think it was a good call. That year that team got fried and bonus was low and there were firings too (knew some people in that team).
From my experience I have noticed something that goes on in almost every company - your yearly bonus is dependent directly on your final rating and your final rating, love it or hate it, is almost entirely decided by the last few months and god help you if your manager changes towards the end.
And next year the goal post gets raised. That's how it works at my company.
- If good outcome, pay a huge amount of money.
- If bad outcome, pay 0 (or even negative, by getting money from the employee).
This will incentivize workers for good outcomes. Of course this is unfeasible and difficult to measure, but bonuses make contracts closer to this theoretical contract.
On the one hand as engineers get more senior it becomes more possible for them to 'move the needle' in the parlance and do something really impactful for the company. Its also possible that they might do something really great one year and nothing notable for the next four years. So bonuses allow you to reward for work done "above an beyond" without a long term salary expense hit that might not be as justified in later years. So in that regard I think making more of the pay variable as you get more senior makes a lot of sense.
But then bonuses can also be used as tools by managers to foster unhealthy behavior. When they are a 'beauty contest' (basically people who the manager likes get good bonuses unrelated to their contribution) then they are demoralizing to the group and promote sycophantic behavior over outstanding technical contribution.
When I was at Google they tried to have their cake and eat it too, on the one hand they said your bonus was all algorithmic (personal multiplier, company multiplier, salary) but they refused to tell you what your personal multiplier was. So your manager could give you a really happy sounding review and a personal multiplier of .1 or something and you had no way of knowing if what you did was really useful or if they were just blowing smoke. It was pretty clear that management reverted to what managers do, which is lean the rewards toward people that supported their agenda and away from people who didn't, regardless of "impact" (positive or negative!) to the company.
Bonus plans that work are ones where you establish clear measurable goals for the year which can be objectively adjudicated. If you make all the goals you get the full promised bonus, you make a fraction of them, you get the prorated bonus. Weak managers will push back on those because they don't have the tools to evaluate the difficulty of the goals. Something I suggested at Google could be peer reviewed (they still didn't like it).
I don't have any magic bullets here, having experienced no less than six differently structured bonus programs they all seemed to leave some folks feeling they were treated unfairly.
Similarly I suspect people take a bonus of X amount more happily than a raise that would work out to the same amount (like credit purchases talking about monthly costs making a purchase seem cheaper, even when you end up paying more). Of course it’s possible a lump sum all at once has more intrinsic “value” to the recipient (eg getting a bonus right now vs more money spread over the next year)
I think most people know that a bonus is a much worse deal for most people who aren't VP and above level. A salary increase locks you in for the next year but the bonus can be taken away.
Don’t get me wrong: I know that in general a bonus is probably cheaper than an actual wage increase for the company, but there’s a fairly large group where it can legitimately be worth more to someone.
(Please no one respond with “poor people waste the bonus” it’s not helpful and also largely not true)
If you need your car to get to your job, then if it needs immediate repairs you have no choice but to get the money for a mechanic immediately.
If you’re on a low or minimum wage there is not any kind of safety buffer for you, and banks won’t lend to you (collectively low income people are higher risk of default so it’s easiest for banks to just say no than do it case by case).
The problem is that once you have needed a payday loan once, you’re trapped: if you’re living paycheck to paycheck, then once they take their cut you don’t have enough money to pay the rent, so you need a loan ...
And so from a single loan they now have a permanent source of income, and it’s a higher interest rate than any other (10-20% per week is “reasonable”)
In principle I don’t have a problem with the concept of a payday loan (it’s essentially a secured credit), but something about that industry drives them to fee gouge and ruin people’s lives.
Salary increases can also decrease, but you get something VS a bonus which could be 0 - some percentage of your base salary in some cases.
Compare this with getting a raise.
But, yes, it would a better world if people read links before upvoting/downvoting/commenting.
A commenter usually helpfully pastes a link, like this one has today: