The Old Joel on Software Forum: Part 4 (of 5) - Performance pay

Performance pay - bonus or consolidate ?

Here's a question. Why do companies always (in my experience) put performance related payrises onto your base salary ? This seems crazy to me - current performance is no guide to future performance and all that. I think it would be better to get part-consolidated and part-bonus for good performance.

If this becomes the industry norm worldwide, I expect 1% of all salary savings for 20 years.

What do you think. Don't stint now . . .

Woodentongue
Monday, March 8, 2004

What's a pay raise? If they don't bump your salary for performance what are they going to bump it for? Besides, you always get paid for what you did not for what you are going to do, so there is nothing to stop someone from getting a raise (or even a paycheck) and then taking internal vacations till the next paycheck. It's the nature of the beast.

Kero
Monday, March 8, 2004

"Years ago" companies got into the habit of "reliably" giving raise "every year". This became so "common" that employees began to see raises as an "entitlement".

The current fashion is to redefine pay raises as "performance pay" to counteract the notion of "entitlement".

It's basically a way for companies to save money.

njkayaker
Monday, March 8, 2004

You should be happy that you get a pay raise rather than a bonus. A pay raise is typically x% of your salary, not a fixed dollar amount. If you get bonuses, you don't get the compounding effect that you would with salary increases.

pdq
Monday, March 8, 2004

don't forget about inflation guys, if you do not get a raise, it actually means your salary got lowered!

the artist formerly known as prince
Monday, March 8, 2004

"You should be happy that you get a pay raise rather than a bonus"

Pdq- I think you're missing the OP's point: he's viewing this from the *company's* perspective (or at least the success of the company).

He's right: *sales* bonus (for meeting quotas, etc.) SHOULD be a ONE time thing. They're a bonus for what you did THIS year. If you did nothing similarly outstanding next year, you should NOT get the outstanding bonus.

That would help with one problem with sales compensation: salespeople will promise the customer the world to get them to buy, so they can get thier bonus. Then, next month/year, the customer is pissed when they find out the product was overhyped.

Giving a PAY RAISE for meeting sales goals THIS YEAR would strongly encourage more of this counterproductive behavior.

P.S. As long as you ignore the viewpoint of the COMPANY you work for, you won't understand how to motivate them to give you what you want.

The real Entrepreneur
Monday, March 8, 2004

From an empolyee's perspective: I don't like bonuses much because here in the US, we have a nice tax law that says performance/comission payments are taxed at a higher rate than normal salary (in the 45% range.... yowsa!). Also, in a typical corporate environment, I can only "perform" when you give me the stage and the role. The rest of the time I am giving you my best by dilligently debugging, returning emails, petting client egoes, sharing knowledge with teammates, etc. the company doesn't see those things. "Performance" is defined by most companies as actions that have a significant immediate impact, usually in terms of profitability.

From the company's perspective: something that seemingly few in management realize is that employee morale (and more specifically their professional self-esteem) has as much impact on productivity and performance as Pavlovian bonus checks, actually more. Reward performance with challenging tasks that allow for more learning and mental stimulation. Reward employees with a salary that tells them, "I trust you and have confidence that you will strive to outshine your past work with each new project you take on." When an employee feels like that is actually true... future performance is a bygone conclusion.

Clay Whipkey
Monday, March 8, 2004

Clay:

I think you're mistaken about paying a higher rate on bonuses. They are treated as ordinary income. In my experience companies _withhold_ tax from your bonus at a very high rate. But that's not the rate that you actually pay (i.e. other things being equal, you are due a refund at tax time).

Rob VH
Monday, March 8, 2004

Yeah ... I wasn't quite sure what Clay was referring to until I considered the progressive structure of the income tax coupled with the FICA contribution.

The fact that it's a "performance bonus" instead of your normal salary has nothing to do with it. The way the income tax works, the first dollars you earn are taxed at a low rate, then the next set of dollars you earn are taxed at a higher rate, and then so on. Let's say you earned $80K a year in 2003, and then you got a $1000 bonus. Your tax rate at this bracket is 28%, plus the payroll tax of 7.65%. Together that's 35.65%. You take home $643.50, and meanwhile your employer also has to pay $76.50 because of their share of the FICA tax. If you lump in the employer contribution you're getting close to that 45% number he was talking about.

Alyosha`
Monday, March 8, 2004

Serious? That ticks me off. Every bonus of any kind of received in the past 5 or 6 years has been cut in half. That is between 3 different companies, and everyone around me has been led to believe that it was for the same reason, a special tax on incentive bonuses. Hmmm.... a corporate urban legend of sorts? I'll have to talk to my accountant (ok, ok... my friend who is an accountant).

Clay Whipkey
Tuesday, March 9, 2004

"What's a pay raise?"

Right there with you, Kero.

Caveat
Tuesday, March 9, 2004

My company puts the end of year bonus (12% across the board, past few years) directly into our 401K. No tax withheald. Doesn't count towards the ~$12,000 ceiling for 410K contribution either. A nice benefit, I think.

Sven
Tuesday, March 9, 2004

sven--
how did they pull that off? never heard of a way around the annual cap, if there was then lots of companies who liked their employees would offer them the choice of a salary reduction + equivalent bonus into 401k.

clay--check out your paychecks after the bonus. they should also be roughly 2:1 gross:net.

mb
Tuesday, March 9, 2004

sven--
looks like that can work--an employer can make a non-discriminatory distribution to all employees of amount up to a fairly large limit. something to consider for future negotiations, but perhaps not something which can be done for just one person.

mb
Tuesday, March 9, 2004