Are discretionary bonuses a waste of money?

baseball scoreboard

My goal with this post is to get you to not waste your money on discretionary bonuses. A discretionary bonus is by definition optional. This also means employees don’t know if they will get a bonus or how it is calculated. Of course, who doesn’t like some extra cash that they weren’t expecting?
But the question is – did paying this discretionary bonus motivate the employees or drive company performance? Isn’t the reason to pay a bonus is because of good performance? I don’t believe discretionary bonuses do this.
Look at the chart below. It is interesting that employees who make less than $75K a year by and large only get discretionary bonuses.

Typical Bonus Levels as a Percentage of Salary
Base salary Target bonus (%)
Less than $75,000 0*
$75,000-$99,999 10-15
$100,000-$149,999 15-20
$150,000-$199,999 20-30
$200,000-$299,999 30-40
$300,000-$499,999 40-60
$500,000 or more 60-100
*Bonuses for this range are not typical, and if rewarded, are usually discretionary.
The data was put together by Salary.com.

So let’s think about this. The discretionary bonus is decided after the fact, at the owner’s discretion (or whim). Let’s relate this to baseball. I went to my nephew’s baseball game today and it made me think, how would the teams feel if the rules weren’t known and after the game the umpire got to decide who won the game? That would be pretty discouraging. I don’t think players would be too excited about the game if the winners and losers were chosen at the whim of the ref and the player didn’t know the rules to the game.
In a lot of ways, discretionary bonuses programs are setup that way. It doesn’t have to be that way.
Studies show there is more to motivating people in the work place than just money. But if people weren’t motivated by money why would they come to work at all and why are bonuses for the higher income levels so significant? Obviously companies think money must motivate employees that is why they give them.
So, how should a bonus be given? You need to think about and define the rules or critical numbers (like net profit, cash flow, etc) for winning / receiving a bonus. If you structure the bonus correctly and you include your employees in on how they can earn the bonus, and then let them track progress toward earning the bonus on a regular basis. It will be great motivation tool! More times than not they will be motivated to figure out a way earn the bonus – wouldn’t you?

Next week I will give you some ideas on the specifics of how to structure a performance based bonus program.