I had an interesting conversation yesterday about bonus pay, incentive pay and performance.

Bonus Pay

Bonus pay is not necessarily related to individual performance and may even be contractual in some cases.

In those cases the amount is generally fixed both as to when and how it is paid. t could have some dependency on company profit or revenue or it could be fixed subject to review at time of a contract renewal.

This is a kind of incentive pay but not also as clearly objective as the sales example.  This is because performance is a subjective measure in many companies.

Incentive Pay

While incentive pay has a lot of similarities to bonus pay, and many call it that, the key difference is the connection to individual performance.  Say a salesman gets an an additional bonus of 2% when their sales reach $100,000 overall – that is an example of incentive pay.

Bonus pay can be  a kind of incentive pay but is not as clearly objective as the sales example.  This is because performance is a subjective measure in many companies.

 Handle with care

Our discussion centered around the linkage between bonus compensation and performance.  We all had experience with bonus pay in a variety of Corporations and based on the conversation it was clear  this kind of compensation can cause negative reactions if the program is not both clearly communicated and administered consistently.

When tied to performance it is critical to make sure the measure is objective.  If subjective their is certainly the opportunity for the recipient to feel more slighted than rewarded.

And finally, everyone who might recieve bonus compensation needs to clearly understand whether it is varible orfixed and has a performnce compnent or not.