Are Bonuses for Reward or Retention?

Posted on May 27, 2014.

It depends.  I know that sounds very lawyer-like, but the reality is that bonuses can and should be used for both reward and retaining top talent.  The difference lies in how well the company is performing and what expectations have been set.

In a recent WSJ article, “Staples Defends Executive Bonuses”, the company clearly felt the need to provide payouts, despite recent poor performance.   Of course, the corporate governance firm, Institutional Shareholder Services, objected. But I’ve seen first hand where bonuses during a difficult time are not only necessary to retain top talent, but also the right thing to do.

In good times, it’s easy to set goals, track folks throughout the year, and provide an indication of payout levels both up front and at year-end.  The key to a “reward” type of bonus is that the communication is crystal clear. Is your employee’s bonus based on his or her individual performance only or does the team’s performance impact the pool of money to be paid? For that matter, does the entire division or organization’s attainment of goal impact someone’s payout? 

The key to any bonus system used to reward great behavior is that expectation are set up front and clearly stated.  It’s almost as bad to fall short of someone’s expectation, as it is to not pay anything at all. 

But the Staples situation reminded me of a time during one of the banking downturns of the mid-to-late 1980s. We bought a very distressed bank and many of my colleagues were asked to help clean it up.  They worked literally 80 -100 hours a week for a year or more.  These were primarily junior associates who were not highly paid. While there was some compensation time negotiated, bonuses were not in the offing. Many of these folks quit within 2 years following the clean up. Would a hefty bonus have kept them? It certainly would have helped.

I realize that large executive bonuses don’t compare to smaller lower level dollars, but the concept is the same. If someone has worked tirelessly to try to fix a bad situation, these are people you don’t want to lose.

I think the exception to the theory of retention bonuses might be if the very same people that created the problem are being rewarded for saving the day, In cases like that, and Staples C-suite executives may fall into that category, bonuses for any reason seem counterintuitive.  But to make blanket statements that bonuses should only be paid for exceptional performance might result in unexpected and unwanted turnover.

The bottom line is that bonuses can and should be used for both reward and retention.  That said, there should be a clear distinction in payout amounts. Clearly, high levels of performance should command a premium, over helping restructure or  salvage a bad situation.