The Trend: Bonuses in Lieu of Raises

While some employers plan to restore pay and benefits to pre-recession levels this year, many compensation experts expect employers to maintain reduced salaries. Instead, they’ll offer financial incentives or bonuses as a means of controlling fixed costs and driving productivity.

But bonuses aren’t the same as salaries. Among other things, they introduce an element of risk and reward to total compensation. If you’re new to the world of variable comp, you need to learn how to evaluate a plan to determine if the bonus is a reasonable substitute for a raise, even though you may not have a choice in the matter.

Here are a few things to consider as you read the plan and make your calculations. Be sure to read the entire document very carefully, especially the fine print.

  • Payment frequency: Receiving a greater portion of your compensation through incentives will impact your cash flow, especially if your bonus is paid annually. Be sure to note the payment frequency and how termination might impact your payment, because if you quit at the wrong time, you could end up forfeiting your bonus.
  • Plan duration: While base salaries rarely change and annual raises are fairly predictable, incentives often dovetail with the company’s annual business plan, which may cause swings in your income. If the bonus plan covers multiple years, you’ll have a better shot at forecasting your future earnings.
  • Control: Raises are usually awarded based upon individual performance, which affords employees control over their income. In contrast, a good portion of your bonus may be based upon company or team results, which limits your ability to influence your pay. Consider bonuses based upon the performance of large groups as icing on the cake and look at the group’s historical performance to predict your possible share.
  • Mid-term changes: Some plans allow employers to amend or rescind incentives at any time, which could happen, when the company has a bad year. If your plan contains this provision, your actual payment may be difficult to forecast, so keep that in mind when making your estimates.
  • Estimate realistically: Calculate several financial models when you receive your plan including a "can’t miss" estimate along with the best and worse case scenarios, to see how your bonus will impact your earnings.

— Leslie Stevens-Huffman