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When Bonus Plans Go Wrong

So last week we talked a lot about structuring bonus plans. Because it is bonus plan season, I have heard some horror stories that I wanted to talk about.

So when a CEO at a big company is setting up his budget for the coming year, one of the top of mind things is “making my bonus”, “making my bonus”, “making my bonus”. Because really, what else is there? You want to set up the plan for success. Typically this means signing up for the smallest number possible. Signing up for a huge revenue and profit target makes getting your bonus hard. It would be way better to sign up for a smaller number, then hit the huge number and take advantage of the monster accelerator to make crazy bank.

And this is true for every part of the organization! You want to retain your best talent. That means paying out big bonuses. The problem is, if you set your goals low, you have to set expenses low. Frequently that means layoffs. You can rarely justify low revenue goals and high expenses. Even in a start-up, your revenue goals still need to increase significantly on a percentile basis year over year though expenses may exceed revenue.

Unfortunately, sometimes this works too well. When public companies lay off large numbers of employees, then pay out large bonuses 12 months later, it is disconcerting. Or when they are “getting set” for next year and do a big layoff and then pay out large bonuses simultaneously, that can be even more disconcerting.

The other situation where this is disturbing is when a company makes goal based on one-time transactions not pre-conceived by the original plan – like selling assets to generate net income.

Not to name names, but a public company that we are all familiar with just paid out on significant over achievement of plan when stockholders and third parties would probably call it anything but the plan they had in mind.


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