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In wake of AIG debacle, 10 steps toward better bonuses

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in Leaders & Managers,Management Training,Performance Reviews

Bonuses have gotten a bad name lately. Disclosure in March that executives at failed insurance giant AIG accepted $218 million in bonuses after the government took over the company caused howls of outrage on Capitol Hill and across the country.

With employers nationwide struggling to avoid layoffs and pay the bills, most workers won’t have to wrestle with whether they should return bonuses, as some AIG execs did. They don’t have bonuses to give back.

In fact, companies have been scaling back variable compensation programs for months now. Half of all employers surveyed by Towers Perrin in March said they were cutting back on bonuses and incentive rewards of all kinds. That’s twice as many as the firm’s researchers found in December 2008.

“The recession has shone a light on executive pay [in particular], causing many companies to re-evaluate the long-term implications of their pay policies,” says Andrew Goldstein, who leads the executive compensation consulting group at Watson Wyatt.

Take a fresh look at bonuses

Yet the spotlight that shone on AIG provides some illumination on variable pay in general—and perhaps provides a chance for you to take a clear look at your own bonus, incentive and reward plans.

“The blanket demonization of bonuses is an issue—and a communications/PR problem—for those of us in the business of designing and implementing rewards,” says Ann Bares, a partner with the compensation advisory firm Altura Consulting Group.

That’s no reason to shun bonuses entirely. In fact, they remain one of the best ways for employers to get workers to focus on critical tasks. After all, you get what you pay for. People focus on what they are rewarded to do.

“These are not at all the dirty, under-the-table exchanges that many are asking us to believe, but a fair way of ensuring that important and difficult work gets done,” says Bares.

10 tips for better bonuses

Now’s a good time to review variable compensation, whether you have a program now or hope to start one when the economy rebounds. These 10 tips will help you create a bonus system that supports your organization’s goals.

1 .Make achievement of measurable goals the basis for your pay-for performance plan. Business guru Peter Drucker always preached, “We manage what we measure.”

2. Base variable pay on a broad range of metrics that focus on achieving productivity, process and market-share goals.

Many of the executive bonuses that drew ire this spring rewarded unsustainable short-term financial gains. That doesn’t mean financial goals are off-limits; they just need to be tied to true, long-term performance improvement.

3. Explain the metrics to employees. Make sure they know how you’re measuring results. Don’t be coy about it either. Spell out bonus criteria in documents everyone can access—and understand.

4. Explain how you developed your plan. In scary times like these, skeptical employees value transparency more than ever. Tell them why and how you came up with your plan and what you hope it accomplishes.

5. Provide a mix of rewards. Cash is great, but it’s also in short supply. Look for other ways to “bonus” your staff. Extra time off, first dibs on attractive assignments, time to pursue a project of special interest, more training—these are all valuable and valid

6. Keep a long-term perspective. Someday, the downturn will end. Will your variable pay and incentive system help your organization capitalize when the economy revs up? Will it be sustainable in good times?

7. Consider different time frames. Maybe a yearly bonus is just too distant to motivate staff. Would quarterly work better, in light of your business cycle or production schedules?

8. Make supervisors and managers ambassadors for change. Equip them with all the tools they need to communicate with employees.

9. Double up management training on how to do performance appraisals—the first step in deciding who gets bonuses and other rewards.

10. Don’t forget to say thanks—no matter how big or small the rewards you’re able to offer. In a business environment as stressful as this one—when just showing up for work can sometimes seem like a Herculean accomplishment—it means a lot to know that the top brass really does appreciate employees’ efforts.

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