What a perfect time to talk about bonuses, one of the most overexposed (and overheated)
terms used in the English language recently.

You may have noticed that bonuses have been in the news a bit lately. Unless you've been living in a cave in Afghanistan, it would have been difficult to have missed the recent uproar over the AIG bonuses (announced publicly on a Saturday and paid out the following day – who pays bonuses on a Sunday?), or the $3.6 billion handed out at Merrill Lynch just before their purchase by Bank of America was completed - because they were in financial trouble.

It would be difficult for even the great Mark Twain to wordsmith the AIG or Merrill Lynch bonuses as "pay for performance."  If he were with us today, I'd love to hear his thoughts on the subject—he'd have a field day!

First, let's talk about what a bonus is, and why we compensation professionals should
probably be talking about incentives, instead of bonuses. The terms are often used
interchangeably or synonymously, but they are not the same.

A bonus is simply a one-time payment, which may or may not be tied to "performance" (or anything for that matter).  Conversely, an incentive payment is a payment that that is tied to the achievement of pre-determined performance goals.  With a with a well-designed incentive program we do though, because it's thought out, built into the business plan, budgeted for (hopefully!), and paid only when certain performance thresholds are reached.

Since a bonus is just a one time payment, we get all kinds of interesting ones, including
some that make sense and some that don't.  We have "spot" bonuses, hiring bonuses, retention bonuses, the Christmas bonus, discretionary bonuses, and my all-time favorite, the "guaranteed" bonus, which apparently many of the AIG ones were.

Instead, to add greater common sense and accountability the business of incenting for higher levels of performance, we should move the discussion from bonuses to incentives, since there is a meaningful difference.

Executives, shareholders, and other stakeholders in a business' success are generally not
opposed to paying for performance, assuming performance is defined (and then earned), as in the case of well thought-out incentive program.  Well-designed incentives help add direction and emphasis to goal-driven behavior, and can help organizations work towards common strategic goals and the achievement of other key objectives. Bonuses are just payments, which may or may not deliver anything of value.

So, the next time the topic of bonuses or pay for performance come up, let's step up and
talk about incentives; real ones, ones that will make a positive impact on your organization.  You'll be doing yourself and your organization a huge favor.

Doug Sayed, SPHR, CCP, is one of the Base Pay Toolkit authors, and lead developer of the StrategicPay Series, a series of "do it yourself" toolkits designed to help HR professionals develop key strategic compensation programs.