Mar 18, 2019

Bonus Pay Best Practices

Ryan Lafferty, CPABy Ryan G. Lafferty, CPA

By the end of March, many of us will have received our year-end bonus, if one was coming. While some will be happy, many will not. Bonus time can be a difficult few weeks, especially if our bonuses don’t meet our expectations. And often the expectation shortfall can be pinned on management.

"Performance" and a Measuring TapeMany companies do a fine job of communicating company performance to outside stakeholders; unfortunately they fail to communicate sufficiently to their own employees, the people responsible for performance. This communication breakdown can lead to surprises and often anger. Aramark, an employer of about 270,000 people, including close to 14,000 here in Pennsylvania, recently made headlines for not providing year-end bonuses to a large number of its employees. The company now faces litigation and a public relations nightmare.

How can a company avoid a shocking or devastating scenario for its employees? Following the “Four C’s” of bonus practices should help alleviate the pain:

  • Clarity – Bonus plans should be clear and simple. Plans that are largely “discretionary” are ripe for controversy. A bonus plan that doesn’t have precisely defined parameters for payment or is intentionally vague or nebulous often leads to the mismanagement of expectations. Employees should have a clear idea of how bonuses are determined, and the plan should not be overly complicated.
  • Calculation – In a perfect world, bonuses should be based on a mathematical calculation. Introducing judgement or subjectivity into the calculus leads to differences in opinion and interpretation. Recognizing that not every desirable measure of good performance is easily assigned a numerical value, employers should strive to at least make the majority of the bonus calculation determined quantitatively. Doing so makes the bonus number objective, determinable, and leaves little room for argument.
  • Connectivity – Allowing the employee to participate directly in the achievement of a bonus payment is important. To the extent that an employee feels connected to the performance measure and has the ability to influence the outcome, bonus payments can provide a sense of ownership and autonomy. From the employer’s perspective, when an employee has autonomy to succeed and is directly connected to outcomes, a greater sense of accountability is achieved.
  • Communication – As in most aspects of life, communication is the key to success. In the Aramark case, employees were blindsided by the late and poorly communicated declaration of no bonuses this year. Employees had been expecting a significant payout, and in years past had consistently received payment in accordance with expectations. When the decision to not pay bonuses was made this year, it took months for the news to trickle out to the employee base. Communication was weak and late. The issues Aramark faces now could have been avoided with more timely and clear communication.

Ryan G. Lafferty, CPA, is a partner with Attolon Partners LLC in Philadelphia. He can be reached at rlafferty@attolon.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.