This week, I am having another little foray into the frisky world of compensation. Everyone in HR has been enlisted to help managers plan year-end bonuses for their teams. They should not need any help. We have an app for that. The app tells them who in their team is eligible for a bonus and it tells them how much they can spend. Simple, right? If only.
The difficulty comes down to the fact we have a zero-sum pool to fund the bonus scheme. That means that any extra bonus to one employee has to be paid for by sacrificing another’s. This creates such mayhem, I really believe it would be less contentious if we handed out bonuses based on a random number generator. It would be easier to justify the result.
What I cannot explain is that in order to reward a high performer, a manager will need to give a bonus below target to a group of perfectly acceptable performers. I believe an organisation needs steady reliable people just as much as it needs the stars. The superstars will be off to their next job before you know it, but the mediocre will be there, keeping things going for years and years.
Alternatively, a manager can rate someone in the team so low that they got no bonus at all. However, typically this will be someone new or junior so their contribution to the bonus pool is small and so they need to punish even more of them. At the same time, senior people are most likely rated as high performers (however unlikely that might seem), and with higher salaries and bonus targets, they use up proportionally more of the bonus pool.
Conducting market research
When the plan was last re-designed, I did extensive market research to see if I could argue for a better way. Smarmy Consulting and several other advisors confirmed that most other organisations follow this crazy zero-sum approach. They even gave me a handy tool that I could use to work out what distribution we need to force to balance the numbers. Surely, that isn’t the point. I do not want to plan for a large proportion of poor performers; I want a plan that works for a high-performing organisation. When pushed, our consultants admitted that some organisations allocate an additional budget for high performers which allows them to continue to pay at target for the merely average. Sadly, this idea was met with derision by our incentives steering committee. I wish I had stressed how a separate fund would contribute to higher bonuses for the Higher Beings in the organisation; I might have been heard. Smarmy Consulting did say that some organisations reduce bonus targets to create an extra fund, but I cannot see that working here either.
So, we are stuck with this crazy game every year. We know that to make the numbers work, at least 10% of the organisation must be considered inadequate and the merely solid performers will still get less than their full bonus. The more managers want to reward the high end, the more they struggle to balance the books. Inevitably, there are squabbles and infighting so now most of HR are enlisted to hold their hands while they do their planning.
Allocating bonus budgets
Today, I get to help a country finance director, Jeff. He tells me there are four people missing from his list. I find that there are indeed some missing people, but they left the organisation some time ago. Jeff was hoping to add them back in and then give them no bonus which would give him some extra budget for the others. Trust a finance guy to know how to rig the numbers. I am not letting him get away with that. It takes him a full hour to tinker about giving an extra £100 here and reducing £50 here and there. I wish I had managed to sell in a more formulaic approach. All this is a such a waste of management time, particularly mine.
Next, I am working with the global head of communications who tells me his whole team are superstars and he wants to give them all the maximum. That will put him over budget so it cannot be done. Predictably, he reduces the bonus of his admin team but they are paid so little it still does not go very far. I am not sure what he wants me to do: wave a magic wand to make the numbers add up. I admit he has a very small team so I suggest he clears the overspend with his boss. Our bonus planning tool collects all the bonuses planned and rolls it up to the next level in the hierarchy, so he will have to fight it out with the CEO. That is above my pay grade. I do happen to know that the chairman has a special fund to bestow special favours, which could fund it if necessary. One thing I have learnt is it pays to keep the Higher Beings happy. If I can find a way to say yes, I will.
While I am doing this, I wonder how Big Bad Boss is getting on planning my own bonus. He only has Lazy Susan and myself as direct reports, although he has many other dotted line reports round the world. He could, like the head of communications, make a special case in my favour, but I know he won’t. Nor will he reduce Lazy Susan to give me any extra, though I could give him a list of reasons why that would make sense. Sigh.
That said, in this crazy year of furloughs and lay-offs, I realise how lucky we are that the organisation still made enough profit to be paying a bonus at all. Frankly, I will be grateful whatever I get.
Next time… Candid looks at HR big data.