June Hughes: Suggestions of How Bonuses Could be Given

From June Hughes, September 21, 2009

Subject: Suggestions of How Bonuses Could be Given

............They are designed to reward employees for fulfilling their responsibilities and for delivering superior results........

Range of bonus payouts

Annual incentive bonuses are meant to be motivational. They are designed to reward employees for fulfilling their responsibilities and for delivering superior results. Bonus targets and their associated payouts reflect a range of expected levels of performance. Just think of a star baseball pitcher who has an incentive clause in his contract based on the number of games he wins. For winning 15 games, he will get $1 million; for 20 games he will get $3 million; and for 23 games he will get $7 million. This is what an annual incentive bonus plan looks like. As a bonus plan participant, you are that star athlete who is rewarded for performing at a level appropriate to your ability. You are also rewarded for having a great year. If the goals given to you are unrealistic, you and your boss can be in for disappointment and trouble. Annual incentive programs are built around the expectations that the company has of itself and of you. Bonus plan participants can expect to achieve minimum acceptable performance (i.e., for their boss to remain happy with it) and receive a bonus payment 90 percent of the time and achieve target level of performance or better at least 60 percent of the time.

Expected performance level Level of difficulty Likelihood of achievement Payout as a percentage of target opportunity Minimum (acceptable) 80% of target 90% 50% Target -- 60% 100% Maximum 120% of target 15% 200%

Source: Salary.com.

Suppose that your target bonus is 20 percent of a base salary of $100,000 and you performed at the maximum performance level. That means you would earn 200 percent of that 20 percent bonus, or 40 percent. This would result in a $40,000 check ($100,000 x 20%(your target bonus) X 200% (payout level)). In most industries, the target bonus percentages are similar, and depend on salary. Exceptions include the high-technology and investment banking industries. In nonprofit organizations and healthcare, bonuses remain rare.

Typical bonus levels as a percentage of salary (Click image to enlarge.)

*Bonuses for this range are not typical, and if rewarded, are usually discretionary.
- Dwight Ueda, Salary.com Contributor