Keeping Bonus Programs Fair and Equitable

AUSTIN, TEXAS — Much light has been shed on inequitable compensation, driving many organizations to close base pay gaps that reflect conscious or unconscious biases about employees' gender, race, ethnicity or other criteria unrelated to performance. Many employers, however, continue using bonus programs that worsen equity gaps, with decisions about payouts made by a small group of leaders who tend to be mostly white and male.

What organizations spend each year on their bonus programs "represents a significant portion of their employees' total compensation," said Chandra Storrusten, co-founder, CEO and chief value creation officer at Cary, N.C.-based Visible Value, an organizational strategy firm.

Speaking Oct. 26 at SHRM INCLUSION 2021, held in Austin, Texas, and virtually, Storrusten explained that "complicated bonus spreadsheet formulas no longer cut it for a workforce looking for immediate feedback and transparency about their compensation and incentives."

She called bonus programs "the ugly duckling of compensation," but said they could be swans.

Typically, she said, employees receive bonuses based on a percentage of their salary and their level in the organization; these complicated programs are rarely transparent, often leading to inequitable pay.

Storrusten cited a January 2019 report by the ADP Research Institute showing large disparities between men's and women's bonuses, with women's bonuses coming in 69 percent lower than men's, on average.

"The lifetime income impact is hundreds of thousands of dollars in lost earnings over the course of a typical 40-year career," she said.

Among the factors making bonus programs inequitable, she said, are that:

• Decisions about bonus amounts are made behind closed doors by a small group of leaders who don't work regularly with the employees receiving the bonuses.
  

• Bonuses are capped based on a percentage of salary or another limit.
  

• Information provided to employees about their bonus is limited to the amount.
  

• Employees have no idea what to do to receive a larger bonus.

These factors have led to a widening of the equity gap, as well as employee disengagement that has worsened the problem of rising resignations.

Problem Is Fixable

Bonus programs can be made more equitable, said Ryan Jolley, chief strategy officer at Jones & DeMille, an engineering firm with 150 employees in Richfield, Utah.

"Transparency is the No. 1 driver of equity in bonus programs," along with giving employees frequent performance feedback, Jolley said. "You can change from a 40-column worksheet to a simpler method" based on profit sharing and individual performance, he advised.

Jones & DeMille redesigned its bonus program because it wasn't driving performance and engagement. Initially, the firm used a simple profit-sharing model but found some unanticipated consequences. "Engineers are smart," Jolley said. "They knew how to maximize that [bonus] amount by pushing short-term profitability," even if it meant cutting corners on quality, which could eventually result in decreased client satisfaction.

So the firm readjusted its approach to take into account performance, Jolley said. Under the current program, which has noticeably raised employee satisfaction, total bonus amount eligibility comes from each worker's impact on profitability, revenue, savings and other measurable factors. The payout employees receive is adjusted based on their individual performance ratings.

Jolley listed the program's five key components as:

• Measure success.
• Link to profitability.
  
• Solicit employee feedback.
• Make the program transparent.
• Make the amount of a potential bonus unlimited.
  

"Define what it means to earn an 'A' and what employees need to do to get there," he advised. "Profitability is still essential; it's what bonuses are paid from," he noted, but "transparency is key to the whole thing. Most bonus programs are not transparent, with decisions made behind closed doors."

If you put limits on bonus maximums, "that's the maximum employees are going to work," he said. A better approach is to link higher profits, tied to better performance, with larger rewards.

Jones & DeMille presents a report to every worker showing their performance review scores, or "what they did to help earn those profits." Bonus adjustments are made up or down based on the performance review to ensure that employees are not rewarded for cutting corners, for instance.

The firm found its approach so successful it has spun off a separate business, ourlinQ, which helps clients customize bonus-program platforms to reward employees for their impact on profitability and their overall performance. An online assessment is available to benchmark bonus programs.

Storrusten noted that organizations in certain industries may find it's not appropriate to use profitability as the underlying metric for determining bonus pools, and that "other ways of measuring individuals' tangible impact on the firm could include budget saved," for example.

"If you look at the money employers are spending on bonuses, it's staggering," she concluded. "Ask whether you're getting results from the money you're spending."

Advised Jolley, "Get it right. It's worth it."

Related SHRM Articles:

Minority Wealth Gap Isn't Just About Income, SHRM Online, October 2021

Addressing Racial Inequities in Retirement Savings, SHRM Online, September 2021

Use Variable Pay to Retain Top Performers, SHRM Online, September 2021