Bonus pay! What excites employees more? But, is HR equally as excited to manage the process? How does your organization arrive at appropriate bonus amounts, how are final bonuses calculated and communicated, and how messy is this process for HR, management, and employees?
Further complicating the bonus payout process includes the fact that while some organizations have pre-set criteria that result in a set bonus payout formula, others opt to leave some of the decision-making to the discretion of individual managers. There are organizational advantages and disadvantages to this and some mirror the discretionary merit pay process.
Why Some Organizations Allow Managers to Allocate Bonuses
- Managers See Details That Algorithms and Evaluation Processes Can’t Always Detect: There is no perfect compensation system. Managers, who pick up on subtle nuances in performance, can use bonuses to reward those who are contributing in less tangible ways. A top-down process, for all of its benefits, can’t provide the same insight.
- It Promotes Decentralization: Harvard Professor, Linda Hill, points out that “leadership is less about you setting the direction and trying to get followers to simply execute your vision. It’s more about how you shape a context in which other people can share their talents and passions…for the collective good of the organization.” This is indicative of the trend organizations are undergoing to become less centralized. The “top-down command” model of leadership is declining in its prevalence and viability in today’s fast changing environment. Becoming an organization that can effectively decentralize processes, including bonus payouts, positions you to be in alignment with newer thinking in management best practices.
- It Indicates Trust in Managers: Putting money in the hands of managers and giving them freedom to use it in ways that they think will best benefit the company sends a strong signal that managers are trusted. If there is a feeling that managers can’t be trusted to do this task then perhaps there is a greater discussion that needs to be held.
- It Deepens Your Middle Managers’ Experience: Making decisions about bonus pay encourages middle managers to think more strategically about the individuals on their team and how they impact results. Allowing them to allocate discretionary bonuses gives middle managers a reason to think through the performance of his or her team as it relates to the organization’s budget. When this is done in combination with other manager-empowering efforts, you can develop managers who more fully think through how all the organization’s moving parts fit together.
Why Some Organizations Maintain Control Over Bonus Payouts Through Pre-Set Formulas
- Prevents Confusion About Manager Intent: Some organizations want to protect their managers from the appearance of favoritism. Others feel they need to protect the organization from managerial bias. By using a pre-set formula to manage bonus payouts that is standardized, employees are less likely to feel they were treated unfairly.
- Prevents Duplication of Efforts: If each manager takes an hour to complete their bonus allocation process it could add up to a lot of time within an organization. Determine the time it might take at your company and weigh that against the current bandwidth of your leaders. There may be instances where it is better to take bonus allocations off their plate.
- Training Time: When managers aren’t involved, they don’t have to be trained in the nuances of allocating bonuses according to company guidelines. If you are an HR department of one, then perhaps your time needs to be the main factor in this decision.
- Simplicity: If a process is already in place for evaluations, the managers have already had input into those evaluations. Allowing managers to have additional discretion over bonus payouts may add a layer of unnecessary complexity for HR that does not add much value.
How Can Good Technology Help?
Budgeting for Various Scenarios: Regardless of which route you choose (or perhaps it’s a combination of both of the above approaches), technology can allow you to automate your bonus payout processes. One of the most difficult tasks to complete can be determining how much bonuses will cost, especially when they are based on complex scenarios. Technology will give you the ability to develop several bonus matrices that are unique to your needs and budget. With integration, performance management scores can be brought in instantly to be used as a variable when determining bonuses. What if your bonuses aren’t based solely on performance? Perhaps they include compa-ratios, an element for company performance, or rely solely on a manager’s discretion. No matter what the combination is, technology can help.
Facilitating More Than a Single, Annual Bonus Process: You may get feedback from your managers that they want to be able to provide discretionary bonuses at various times of the year. Using bonuses in this way can more deeply connect the ongoing actions you want to reward with the actual reward! Bonuses don’t have to be limited to annual events. Again, technology can facilitate this process.
Tracking Status of Payouts: Technology also saves you from needing to email and track manager responses. By providing a unique login to an application, managers can log in and accept HR’s recommendations, or make their own for HR to review. Then, with the click of a button, you will be able to accept those recommendations, see how they will affect your budget, and share those results with others on the executive team.
Maintain Control While Allowing for Flexibility: When it comes to managing bonus payouts, there can be a spectrum of involvement for managers. Instead of giving managers all-or-nothing control over bonuses, you can give finite guidelines for amounts or circumstances that would qualify individuals for certain amounts. Be careful to not micro-manage the process too much or managers will be frustrated by the “token gesture” and will lose motivation.
No matter what process you select, leverage technology. Spreadsheets don’t count! They are fraught with security risks, inaccuracies, and take too much time to organize and aggregate. Use an automated compensation application to help facilitate the process.
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