Do You Know What A Bonus Is?

I’ve had an important lesson reinforced for me. I’m reminded again, via many conversations with employees and managers, of the wide range of definitions people hold for some very basic compensation terms.

Think there is some level of agreement on what terms like “bonus”, “incentive” and “pay for performance” mean? Well, think again.

And it isn’t just that people define them differently. It’s also that they feel strongly – even passionately – about those definitions and what they imply.

A bonus is a gift?

Take the word bonus, for starters. I met once with a group of employees up in arms about the fact their employer uses the term “bonus” to describe the organization-wide employee cash incentive plan that’s been in place for several years. Never mind the plan hurdles, design or award levels — they were upset because, to paraphrase them, “You should never use the word bonus to describe something that people have to meet certain criteria in order to earn. A bonus is something you are just given, like a gift.” It was as if they’d been promised Santa Claus and Jack Welch showed up instead.

Variable pay means control

Or there’s the group who objected to their employer’s use of the term “variable pay” to describe their annual plan. Variable pay, they informed me, implies that 100% of the variables on which plan payout is based are within employee control. “Which parts of the plan do you feel employees cannot impact?” I asked. “The economy and the market,” they replied, somewhat stunned this wasn’t obvious to me. “These impact company performance in ways we cannot control. Therefore, this plan must be called a bonus – and not a variable pay – plan.” So there you go.

How about the word incentive, which is not only a noun describing a host of different cash and non-cash tools, but has now been mangled into its own overused verb — incentivize!

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Pay for performance or merit increase?

Or even good old pay for performance. To some, it is merit increases and only merit increases. To others, it is strictly cash incentives. Others, and I put myself in this boat, consider it to encompass many forms of reward that might be linked to performance accomplishments. But even this got me into trouble the day I spent over an hour in puzzling conversation with a CEO about whether or not her organization should implement pay for performance. It took me that long to realize that for her, performance pay specifically meant an incentive plan (which she was opposed to) while the HR executive and I were talking about whether to tie salary increases to performance. That was an eye opener.

Key lesson? Never mind what you were taught, what your handy compensation glossary says or what you read in Milkovich’s and Newman’s text. Productive pay conversations, especially with new parties, require that we begin with a clear, fresh understanding of terms we use and their meanings.

Without it, your attempts to communicate will indeed be futile.

From the archives of Compensation Force.

Ann Bares is the Managing Partner of Altura Consulting Group. She has over 20 years of experience consulting in compensation and performance management and has worked with a variety of organizations in auditing, designing and implementing executive compensation plans, base salary structures, variable and incentive compensation programs, sales compensation programs, and performance management systems.

Her clients have included public and privately held businesses, both for-profit and not-for-profit organizations, early stage entrepreneurial organizations and larger established companies. Ann also teaches at the University of Minnesota and Concordia University.

Contact her at abares@alturaconsultinggroup.com.

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