When is a Bonus Not a Bonus?

We refer to many different types of payments to employees as bonuses. They range from very modest amounts paid for specific activities to substantial components of a worker’s total compensation package.

Merriam-Webster defines “bonus” as “money or an equivalent given in addition to an employee’s usual compensation.” That’s seems simple enough, but what constitutes “usual” compensation? Is a holiday gift that’s pegged to length of service a bonus? Is a specific share of the profits set aside to be divided among the employees a bonus? Since both are expected and delivered according to formulae, they are arguably part of usual compensation.

None the less, most business owners would refer to both those situations as a bonus. I have one client who celebrates any record sales month with a bonus of several hours of extra vacation for each employee. Although non-monetary; that is also clearly a bonus. It is irregular, typically outside the control of any individual employee, and can’t be anticipated.

Full bucket of golden coins / Полное ведро золотых монетThe misuse of the term bonus occurs most frequently when the amounts are a normal and contractual part of an employee’s compensation package. When the payments are regularly scheduled (monthly or quarterly), and are determined by an employee’s individual achievements, it is pay for performance.

Bonuses have a natural cut-off point. I think it’s between 10% and 20% of an employee’s total compensation. Once you exceed that level, an employee begins to budget the expected amounts into his or her lifestyle choices. A failure to reach individual goals that results in adjustments to their household budgets isn’t missing a bonus, it’s taking a cut in pay.

Commission isn’t a “sales bonus”, it’s compensation. Pegging 30% or 40% of an executive’s annual compensation to profit performance isn’t a bonus, it’s part of his pay package.Production incentives that arrive in every paycheck aren’t bonuses for the same reason.

Using the term bonus for all flavors and varieties of incentive and performance compensation isn’t by itself bad, but it is sloppy. The problem comes when some employees start to ask why they have to achieve individual objectives to receive their bonuses, while others in the company receive them without such requirements. It confuses what bonuses are really for, which is to express your appreciation for a job done well.

Pay for performance isn’t an expression of appreciation, it’s part of a deal.

 

My new book, Hunting in a Farmer’s World: Celebrating the Mind of an  Entrepreneur, is now available on Amazon in paperback, hardcover and Kindle. It is an ownership book, not a management book, and is illustrated with the stories of real entrepreneurs who faced challenges that apply to us all.

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