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Archive for May, 2011

The Case Against Bonuses

It’s time to confess what many of my clients already know.

I don’t like bonuses.

I LOVE profit sharing.

Here’s why:

THE DIFFERENCES BETWEEN BONUSES AND PROFIT SHARING

Bonuses are given.

This is the fundamental problem with bonuses. They are presents, gifts. They are determined by the whim of the giver. I have had more than one person confess to me that they determined the bonus in part on how they personally felt about the individual. That is, people they liked were sometimes treated better than people who were a pain in the neck.

Profits are earned.
Profit sharing is based on a formula everyone is privy to. “If profits are X, for example, 15% of everything over that will be distributed in the following manner….”

Not everyone gets a bonus.

Since bonuses are often arbitrary, the decision as to who “Santa” visits can include some and exclude others adding to the “have” and “have not” feeling many people already experience in organizations. In addition, the bonus giver can decide from year to year not to give with no explanation required.

Everyone shares profits.
Profit sharing is based on the philosophy that everyone’s job is important to the bottom line so everyone is rewarded. Certainly, some functions are more important to the bottom line. This is recognized by having some people share a larger percentage of the profits. That’s perfectly acceptable as long as no one is left out.

Bonuses can create a scarcity or “us/them” mentality.
Since only some people receive bonuses and since bonuses are sometimes given in secret (In some organizations people are told NOT to tell others they receive a bonus.), the unspoken message is there is very little to go around and only a few people are eligible to share in it. Or it may give people the message that there is plenty to share but it’s just not going to be shared with everyone.

Profit sharing encourages an abundance mentality.
The profit sharing model fosters a “we’re all in this together” mentality that can only result in increased morale. There is a strong correlation between involvement and commitment. If you want everyone committed to making a profit, make sure everyone is involved in sharing those profits.

After a few years, people expect bonuses.
On more than one occasion, I have witnessed clients giving bonuses when there was no profit. The reason given was that the employees expected a bonus because they received one every year and would be upset if that changed. For employees receiving a paycheck every other week, the bonus had become the “twenty-seventh paycheck.”

People do not take profit sharing for granted.
Profits can only be shared if they exist. If there is not a distribution, it is because there was not a profit to distribute. This is something everyone can understand.

Bonuses do not require financial disclosure.
Since bonuses are discretionary, the financial formula (if there is a formula) on which they are based is often not available to the general corporate population.

Profit sharing requires a financial disclosure.

One of the main goals of any organization is to move the numbers in a northerly direction. Sharing financial information is the equivalent of giving people the score during a game. Sharing financial information starts by making available to all employees information critical to the company’s success. Once people know the goal (revenues of X by year end) and once a system is in place to track the goal, people naturally become more enthusiastic. They know they get to share in the success of achieving or surpassing the goal.

Bottom Line: I am an unapologetic fan of sharing the wealth. For some people this is really semantics. Your “bonus plan” is actually profit sharing. If that is the case it’s easy to simply change the name of the plan and identify it with its real name. If, however, you truly have a bonus arrangement, you might want to give some thought to changing to a more inclusive plan. If you or your organization needs help in this area, I am just a phone call or email away!

CTS Consulting, Inc

3126 Berkshire Road

Baltimore, Maryland 21214

phone 410-444-5857

cell 443-286-2488