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Bonus Traps

Bonuses come in all shapes and sizes, and generally they can be a good way to supplement the salary portion of your compensation.   However, in a few instances, they can also be bad, and yes, they can even be ugly.    When you are in the middle of a job change it is a good idea to understand how bonuses can impact the compensation and its respective negotiation.

Most bonus programs are performance based with monthly, quarterly or annual payouts.  Second line managers, those managers with salaried supervisors as direct reports, usually have a ten per cent of base as their maximum bonus, whereas general managers and VP level positions tend to have maximums in the 20 to 25% range.

The HandCuff

Although all bonuses have good intentions, let me give an example of how a slight twist can make it bad.   A hotel laundry manager in Colorado is earning a base of $ 47,000 with a 20% bonus, and in 2007 earned $ 56,000 including a $9000 year end bonus.  He has some concerns the newly hired hotel general manager is considering closing the OPL.  I recently arranged an interview with a client who subsequently offered a $ 55,000 salary plus a 10% maximum annual bonus.  On one hand the $ 8000 raise seems very fair, but then do the math.  In the calendar year 2008 there will be 6 months at a $47,000 rate and six months at a $ 55,000 rate for an average of $ 51,000.  Meanwhile, the new employer has a fiscal year end of July 31, so the next bonus payout will not show up until late in 2009.

So is it a step ahead financially with an $ 8000 raise, or is it a step back with only a 10% bonus?  Is the current employer leveraging a below average salary with an above average bonus rate as a “golden handcuff” of sorts, in order to discourage a key manager from leaving?  Very possibly.  For someone who receives an after tax paycheck of $ 1350 twice a month, the vision of a $ 9000 bonus (even a net $ 7000) can have the effect of a “stay bonus”, and allow the employee to rationalize reasons / excuses for staying.

“Stay, Just a little bit Longer, Please, Please”

Speaking of the “stay bonus”, this is the term used for the carrot offered to middle and senior managers when their organization is in the process of being acquired.  Sometimes the incentives are offered in dollar amounts, and sometimes as stock grants.   The strategy is intended for the purpose of keeping the management team intact because that represents value to the organization being “shopped”.  While the bonus amounts in these situations can range anywhere from $ 25,000 to $40,000 on up, they cause the individual managers to roll the dice with their careers and employment earnings. The acquisition company may choose to keep you, or they may not.  Moreover if they don’t keep you, and end up replacing a large number of managers at the same time then the adverse effect is the increased competition for available job openings at any one time within our industry. Just ask the Unitog and RUS general managers if they were competing against each other for industry openings in 1999 and 2002 respectively.   On the other hand, most of the National Linen Service general managers are still in place after their plants were acquired by ALSCO.   Since you generally don’t know who the acquiring company is until the end of negotiations you may just have to roll the dice.

The Chief Engineer Bonus

A clear example of a bad bonus is the incentive program set up for the chief engineer, in which the bonus is tied to monthly maintenance and equipment expense. What were they thinking? Creating an incentive to not spend money on maintaining and repairing equipment might put an extra few dollars in someone’s paycheck but at the end of the day who loses? 

Al Jenneman from Kemco met up with me a few months ago at an open house tour for a new plant in Florida and the conversation swung around to this chief engineer bonus topic. Al had the right idea  – create standards and track data in the categories of utility usage, machine downtime, boiler feed water and water softener

Separate from good and bad bonus programs is the ugly bonus, which sometimes shows up in large multi-plant organizations split into regions.  Have you heard this one?  The key managers at any one plant receive their performance-based bonus if they meet their numbers AND the region’s collective group of plants makes the region’s numbers.  Good for company morale and teamwork? I don’t think so. It is a great way to de-motivate good performers at the more successful plants and create underlying anger towards the “home office” and the underperforming plants in the region.

The Interview

When you are interviewing for a position which has a performance based bonus system in place you should get clear information on the performance criteria, the timing of the payout and the history of payouts over the past two years.

If you are hired in the middle of an annualized bonus program, often the hiring employer will provide an opportunity for you to earn a pro-rated amount based on your performance.

Is it fair to request a guaranteed bonus for the first one or two quarters, especially if you are considering leaving a successful environment and being asked to  “turn around” a failing laundry plant? Yes it is, though some hiring employers believe strongly bonuses should only be paid if and when a manager achieves goals.

What if the hiring employer does not have a bonus program in place but is asking you as part of your job responsibilities to create and implement a bonus program for your position. Sounds reasonable, but what if the salary portion of the offer represents a lateral move financially? 

What if the hiring employer, in an effort to confirm your salary history and bonus results, requests a copy of your most recent W -2 and a recent pay stub?  You don’t have to share these documents, but it is unlikely you will go further in the hiring process if you don’t.  If you have embellished your earnings during the interview process and then are asked to provide your recent W-2 and pay stub then what will they think about you when they see the discrepancy?    What would you think if you were in their shoes?  You may think somebody has a hole in their shoe where they just shot themselves. On the other hand, if your answer is “everybody does it” then in my book you just failed Ethics 101.

Quick Rinse - News From Around The World

LAUNDRY FIRE – Guests Evacuated

CHEEKTOWAGA, NY — A fire in a Days Inn laundry room forced guests to evacuate the building during the evening hours. The fire which began in a dryer was contained to the laundry room and there were no injuries.