Is a bonus better than a raise?
August 29, 2006
Depends on who you ask.
Via digg.com, I came across an article from the WSJ entitled “Employers increasingly favor bonuses to raises” - which discusses the whole concept of performance-linked bonuses. According to the article, 80% of companies will offer some from of bonus program this year up from 78% last year and 67% in 1997. The article discusses the pay-for-performance initiatives of Whirlpool, which has made more employees eligible for bonuses and increased the maximum bonus that can be achieved.
According to the article “Whirlpool also awards merit raises based on performance. But it considers bonuses a more powerful motivator. “It starts breaking away at the notion of entitlement,” says David Binkley, Whirlpool’s human-resources chief. With merit pay, “if you just spread it around, it just raises your costs.” Across corporate America, he notes, “those days are coming to an end where everyone just automatically gets this 3.6%, 3.7%” merit raise.”
In case you were wondering, the average raise for 2007 is projected to be 3.7%, up from 3.6% this year – according to data from Hewitt.
For those who aren’t familiar with the web 2.0 darling that is Digg.com , Digg is a website where visitors submit articles from around the web which are then “dugg” by the community. The articles with the most “diggs” get pushed to the top of the list. It’s a sort of journalistic meta-data with users voting on which stories are the most interesting for the benefit of other users.
Users are also given the opportunity to comment on submitted articles, and the WSJ article really got a response. You can read all the comments here. People seem really conflicted about the shift from merit increases to bonuses. On the one hand, there is the opportunity to achieve higher overall compensation, but on the other, bonuses are taxed more and the size of the bonus is often dependent on factors outside of an individual employee’s sphere of influence.
As one commenter, mtalon, notes: “Sorry but bonus < raise in this employee’s mind. I’ve been screwed out of too many bonuses because of the underperformance of a company that had nothing to do with my personal performance. Because the sales department couldn’t get their act together, any effort I put out had no impact.”
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3 Responses to “Is a bonus better than a raise?”
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One thing that needs to be made clear is the difference between merit increases and cost-of-living adjustements (COLAs). This is the one area where the US Federal Government is actually doing something right with regimented payscales that explain the difference between pay increases and inflationary adjustments to employees. The way the federal government GS schedule works, all pay grades are given a COLA. Then, employees might be moved up steps within their pay grade depending on “merit.”
Since there is an average of 3% inflation per year, all employees expect an increase in pay that is at or better than inflation–anything less and you are effectively earning less money.
Bonuses are nice, but they are not a given. Like stock options, they are a compensatory bet that the employee makes on the company. If done right with clear criteria for getting the bonus that is weighted towards the individual employee’s performance, this is good thing–because you are effectively betting on yourself. However, most employees at least want a COLA to help “hedge our bets.”
One must be kidding to think that merit increases in this age of global competition should exceed that on inflation etc. You want to give merit hikes to thos folks who matter, not to every TDH..most managers and most companies peanut butter their increases to include as many people as possible, that means the best of the best get almost the same as the mediocer and the also-rans..i am glad that there is a shift to bonus based pay, atleast there is some consideration given to high performers. Remember that people are not your most important assests, the “right people” are!
Merit increases that include performance ratings address the issue of the “right people”. A matrix system based on performance rating and comp ratio is finding favor in the retail industry.