There's no f in bonus

Bonus season winds down here in the financial industry, and we're left to consider what it all means. The bonus pool is particularly sensitive on Wall Street because financial firms rely on it excessively, outweighing regular pay for some employees. Many workers in the industry and in my company took a zero bonus.

What is the purpose of a bonus? Reward for individual productivity? Incentive to stay? Alignment of interests between employee and employer? Profit-sharing?

If your answer is all of the above, then I think there's no chance the bonus system at your company is working. It's just another form of compensation, so there's almost no reason to have it; just give a regular salary.

The general public is fuming about Wall Street firms' bonuses this year, in light of having their received taxpayer assistance. The public views these bonuses as a type of profit-sharing; thus, no profit, no sharing.

Individual employees view these as productivity rewards. Thus, the ones who worked very hard and had measurable positive results this year are upset about low or no bonuses.

Middle management typically views it as a key employee retention tool. Thus, even though Mary Developer didn't have the opportunity to produce like in previous years (maybe a couple of her projects were canceled), and Joe Programmer out-produced Mary this year, rarely would a manager consider switching their bonuses if Mary is viewed as the foundation of the group.

I would guess that senior management most commonly views these as a way to align employee and employer interests. Unfortunately, the payouts encourage the employee's short-term interests, which may be at odds with the company's long-term interests.

Underlying all these interpretations: a bonus that doesn't grow or, worse, shrinks feels like a punishment, even if the bonus is advertised as variable or tied to profits.

I think the biggest problem is that most companies haven't really thought specifically about what the bonus should accomplish. Thus, it tries to do all of the above by default, only because everyone interprets it however they want.

One of the most important decisions a company's executives makes is how people will get paid. If they want use bonus payments effectively, they need to be crystal clear about their purpose, and drive that down through the company.

On Wall Street, they would likely have revamped the entire bonus structure, probably eliminated it. Unfortunately, the issue has now spun out of control, and the revamping will be imposed.