programs reflect a company's definition of success, how that definition
is measured, and the extent to which that measure is met.
are similar from company to company. The reason is that most companies
subscribe to a pay-for-performance philosophy whereby bonuses are
tied to two important measures: how well you are doing with respect
to your manager's expectations; and how well your company is doing
with respect to its expectations.
and group performance goals are hard to set, because they should
be neither too ambitious nor too easy to achieve. It is best for
employees to set next year's performance goals once current year
results are known. However, the manager should resist the temptation
to base an employee's performance goals on an outstanding year.
When that happens, both employee and manager can become disappointed.
In these instances, managers often give their employees discretionary
bonuses at the end of the year to make up for the loss of performance-based
also give out discretionary bonuses - bonuses that are not tied
to a formal performance target - when it is too difficult to establish
formal performance goals.
on the bonus program and your level within the organization, your
bonus may be determined not only by your own performance, but also
by the performance of your team or work group. Some companies use
a 2 X 2 payout grid with individual objectives on one axis and a
corporate goal on the other. Under these types of bonus programs,
your actual bonus can range anywhere from half your target bonus
to double your target - or nothing.
some bonus programs, the company may have to meet targets of its
own for anyone in the company to receive a bonus. For example, the
company may need to meet a certain minimum in net income; or a certain
level of customer satisfaction; or a certain competitive position
in the market. This minimum is usually 80 to 85 percent of what
is required for the bonus target to be met.
of nonfinancial goals such as market share or customer satisfaction
is relatively new, reflecting a deepening understanding of operational
measures that indicate the economic health of the company. When
the number of goals includes many variables reflecting not only
your primary responsibility, but also how you manage your relationships
throughout the organization, your bonus grid becomes what is known
as a "balanced scorecard." This approach is becoming popular because
companies recognize the complexity of a position's contribution
to the company and want to evaluate its performance holistically.
of bonus payouts
Annual incentive bonuses are meant to be motivational. They are
designed to reward employees for fulfilling their responsibilities
and for delivering superior results. Bonus targets and their associated
payouts reflect a range of expected levels of performance.
think of a star baseball pitcher who has an incentive clause in
his contract based on the number of games he wins. For winning 15
games, he will get $1 million; for 20 games he will get $3 million;
and for 23 games he will get $7 million. This is what an annual
incentive bonus plan looks like.
a bonus plan participant, you are that star athlete who is rewarded
for performing at a level appropriate to your ability. You are also
rewarded for having a great year.
the goals given to you are unrealistic, you and your boss can be
in for disappointment and trouble. Annual incentive programs are
built around the expectations that the company has of itself and
of you. Bonus plan participants can expect to achieve minimum acceptable
performance (i.e., for their boss to remain happy with it) and receive
a bonus payment 90 percent of the time and achieve target level
of performance or better at least 60 percent of the time.
as a percentage of target opportunity
that your target bonus is 20 percent of a base salary of $100,000
and you performed at the maximum performance level. That means you
would earn 200 percent of that 20 percent bonus, or 40 percent.
This would result in a $40,000 check ($100,000 x 20%(your target
bonus) X 200% (payout level)).
most industries, the target bonus percentages are similar, and depend
on salary. Exceptions include the high-technology and investment
banking industries. In nonprofit organizations and healthcare, bonuses
bonus levels as a percentage of salary
for this range are not typical, and if rewarded, are usually discretionary.
Dwight Ueda, Salary.com Contributor