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Do bonuses need a makeover?

President Obama’s pay czar, Kenneth Feinberg,  has become the unofficial spokesman for the widespread outrage surrounding the super-sized bonuses paid to Wall Street executives. As he works to cut Wall Street bonuses down to size, Americans of more modest means are left wondering why anyone, much less many of the people who helped bring about the current financial crisis, would deserve such large sums of money on top of their regular compensation.

While the outrage is centered on Wall Street firms and their highest-paid executives, I think that people would also be unhappy if they knew what sort of bonuses the higher-ups were making at smaller, less visible companies across the country. Of course, that’s just speculation and wouldn’t apply to every company. Still, bonuses, and compensation in general, are not considered topics for polite discussion, and figures are kept as quiet as possible, which means there’s a lot we don’t know.

This secrecy leaves open the possibility that plenty of executives are being paid bonuses that would shock the average American. Moreover, enforcing a culture of confidential compensation seems to cut away at the reason for giving bonuses in the first place — as a reward for a job well done and an incentive to do even better.

Let me illustrate with an example. Charlie is an employee at a company that hands out bonuses each year. Every December, he receives about 3% of his salary as a bonus, but he has nothing to compare that with. Certainly it’s better than no bonus, but what are his peers in the office getting? If the answer is less than 3%, then Charlie should feel like he’s done a good job and keep doing more of the same. If the answer is more than 3%, then Charlie should be thinking about what he can do differently to boost his performance in the coming year.

The problem is that Charlie doesn’t know what to think, and I don’t think that’s good for him or for his company. His behavior could easily be influenced in the wrong direction because of what he imagines to be the case.

Wouldn’t it be better for Charlie and his employer if the company were open about the methods it uses to determine bonuses and about the bonuses themselves. That way, Charlie will know where he stands, and if he isn’t happy, he knows what to do to get where he wants to be before next year’s bonuses are decided.

I think there’s plenty that could be done to improve the state of bonuses across the country. How about you?

Do bonuses need a makeover? What would you do to change the bonus system at U.S. companies?

Image credit, Yoric, via iStock