October 04, 2007

Earning A Bonus

Should an entry-level employee earn a bonus that is based on company performance?

In my formative years at Lands' End, entry-level employees earned a bonus based on company performance. As a statistical modeler, I did have an impact on the company. If I built a model that improved sales by 1%, that resulted in $7.5 million in demand, maybe $2.5 million in EBIT. So the bonus was important to me. I eagerly watched our financial results. I learned how my work contributed to the success of the company.

Maybe more important, I felt valued at Christmas when I received half my bonus check, and again in March when I received the other half. I still felt valued when the bonus check was tiny.

I've experienced the opposite effect.

I once led a group of individuals in a division of a company that offered bonuses. This division merged with another division. The other division did not offer bonuses. As a result, the combined division would not offer bonuses.

Take an employee who earned a salary of $40,000 per year, with a bonus range of between 6% and 15% (not the actual percentages used at this company). The bonus could vary between $0, and $6,000.

In this case, the employees earned 15% bonuses each of the past two years. Their division performed well above expectations, they deserved to share in the success.

The decision makers did not have the courage to tell the employees of this decision. My directors and I had to communicate this message to my employees.

I recall being in an Executive meeting, where about ten of us were discussing the consequences of this decision with Human Resources. I was the only person who spoke up. And oh my, did I speak up. I detest when big companies step on tiny employees making entry-level salaries.

Let's go back to our employee earning $40,000 per year. Each of the past two years, this employee earned $46,000. This coming year, the employee could do a great job. The employee would earn $40,000 (though some received a very small salary adjustment, maybe 1% or 2%).

You can imagine the grim looks the employees wore on their faces when we communicated this decision to them.

The harsh feelings lasted for years. Employees quit. Some became downright bitter, less productive. Some resented me. I recall one individual, tears in her eyes, faulting me for letting her down, faulting me for not doing my job, for failing her.

There are many incentives for employees. When a business matures, and grows at a standard 5% to 10% per year, bonuses give employees a first-hand understanding of the ups and downs of a mature business, as well as an incentive to drive profit increases.

Take that incentive away from an employee, and you damage a fickle relationship between employees and employer.

Two questions for you, the loyal reader.

First, should entry-level employees receive an annual bonus based on company performance?

Second, what should have been done for the $40,000 per year employee I described in this article? If a bonus is to be taken away from this employee, what (if anything) should be done for this employee?