How Not to Put Yourself Between a Rock and a Hard Place: The Plan Costing Imperative

I got a telephone call awhile back from the HR Manager of a local company.  We'd had no previous contact, but she was calling with a rather urgent question and was hoping I could provide some off-the-cuff guidance.

After initial introductions and background, the call went something like this:

HR Manager: So, here's the issue.  We put a new bonus plan in place at the beginning of the year.  It's a plan for all our employees.  Top management designed the plan - I was involved, too - and we rolled it out in our all-staff meeting at the beginning of the year, so that employees would understand how the plan worked.

Me:  Mmmm hmmm.  Sounds good so far.

HR Manager:  Well, now the year is done.  I think it was a decent year for us - not great, but decent.  And what that means, in terms of how we designed and explained the bonus plan to employees, and in terms of the company performance measures, is that everyone should get the maximum bonus amount.

M:  OK.

HR Manager:  Here's the problem.  Top management doesn't want to pay out this much money.  It ends up being way more than they expected and they don't feel that the company has performed well enough to justify paying that kind of bonus to employees.

Me:  At the beginning of the year, in the all-staff meeting when you explained the bonus plan to employees, did you tell them that they would receive the maximum award amount if the company performed at this level?

HR Manager:  Basically ... yes.

Me:  So ... did your top management not understand how much these maximum level awards would amount to?  I mean, did nobody sit down and actually do the math?

HR Manager:  I ... I don't know.  I guess not.  It's just way more than they expected.  So, what we wanted to ask you is this:  What should we do?

I'll cut the dialogue short here.  Unbelievable?  Yes, it was kind of a surreal phone call.  My response to her, after a few more moments of fact gathering (to make sure that I was really hearing this correctly):  You pay them.  You pay them, as you promised you would pay them, or you can pretty much kiss morale, trust and credibility (along with your most talented employees) goodbye.  Perhaps there are economic circumstances that would necessitate doing otherwise, but not at the end of a so-called "decent" year.

Top management of this company had been hoping to get the blessing of an outside "expert" to go ahead and payout a more "reasonable" amount than promised, after which they would put in a new and improved bonus plan for the coming year.  As if there would have been even a shred of faith left at that point.

The moral of the story:   Always, always figure out the cost of a bonus/incentive plan before you finalize it.  Certainly before you communicate it to employees.  You'd better be absolutely sure that there is an acceptable balance between the value of the performance improvements to the company (increase in revenues or income, decrease in costs, whatever) and the value of awards to employees.  And do it considering the full spectrum of possible performance scenarios: from worst possible to most likely to best possible.  Then make sure these costs, and this balance, are completely understood by anyone who matters - anyone in a position to toss a roadblock in the path of payment at year end.

There's simply no excuse for finding yourself between this particular rock and hard place.

Comments

[HR Wench]

I've been in a similar situation so, sadly, this is very believable to me.

[Wally Bock]

A variant of this same issue happens when the new sales compensation system results in a salesperson out-earning the CEO.

[Ann Bares]

Thanks, HRW! And I have enjoyed the related quiz on your site - fun to see different perspectives and takes on the situation.

Wally: Been there and seen that one, too. Another situation that can produce some interesting conversations.