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Bonuses – Management Inequalities

If you own a business, I believe that you have a right to make more money than the rest of your employees. You are taking on a risk, and greater risk should result in greater reward, at least that’s how capitalism is supposed to work.

But what about management? Often I see management (meaning directors, VPs, C-level) having different bonus plans than employees. They have different targets, which makes sense, but also different measures. As a result, management often gets bonuses when employees do not.

I think this is a huge mistake. It contributes to a lack of loyalty from employees, they don’t trust management, don’t see them as leaders, and don’t feel they have a reason to support the company.

In times past, in the military, in companies in the late 1800s, workers had much less power and management took advantage of that. Workers don’t have much more power today, but they have much greater mobility, especially in the technical world. That means that by not creating a more equitable distribution of incentive pay, or bonuses, you are destroying the goodwill you can build with employees.

If you are running a company that deals more with very unskilled labor, say a retail store, then perhaps it doesn’t matter as much. If you have high employee turnover, then perhaps you are not losing much, though I would argue that you could reduce training costs with better retention, and that’s what bonuses give.

I’m getting off track here, but I want to provide a basis for building a better bonus plan.

I think management should have different targets they need to achieve, but these targets much be tightly coupled to those targets for employees. In fact, one of the management bonus targets ought to be that employees get their bonuses. If this measure isn’t achieved, then how is management succeeding? They must be driving employees, who actually do the work, to do a better job, or at least get the best effort out of them.

Management bonuses should be larger, and you can’t do much about the anger there. They take on greater responsibility, arguably greater risk in their career, and should be rewarded, but in determining that reward, it ought to also depend on their subordinates achieving their goals as well.

The Voice of the DBA

Steve Jones is the editor of SQLServerCentral.com and visits a wide variety of data related topics in his daily editorial. Steve has spent years working as a DBA and general purpose Windows administrator, primarily working with SQL Server since it was ported from Sybase in 1990. You can follow Steve on Twitter at twitter.com/way0utwest


Posted by Brad Bowman on 28 April 2009

This is a great idea!! I agree that employees getting bonuses should be a management target!

Posted by Steve Jones on 28 April 2009

Thanks! Glad you liked this. Pass the idea along.

Posted by dmitra on 6 May 2009

Dear Steve, it is a time tested topic, and I am always in the favour of Class D working units. From the floor of the sweat shops to high rise white collar environment, there is only one management/operational technique that works, that is systematic bullying and threatning of sacking people.

As you mentioned, that management takes a lot of risk for the business they work for. Which / What sort of Risk? Their pay / bonus / pension scheme is all guaranteed and back by insurance even before they join the company. But on the other hand their blunders, costs a lot for the business, including jobs down the chain with not enough redundancy money to pay for those Class D working people. Whereas, even if they themselves get the kick (rare case), they manage to get big amount of exit bonus/pay offs etc. etc. to survive lavishly and then move to another company to take it down.

Will you find an insurance company guarantee a Class D worker's bonus pay? You won't find. But you will find a lot of insurance companies to guarantee the bonus/exit pay offs for CEOs, CTOs, CIOs, i.e. for top managers.

The whole culture of bonuses as it evolved from a good intension towards a deceitful and malicious incentive to lure managers from one company to another, and this is for only few, leading to a master-servant infrastructure.

Management, they don't care who gets a job or who loses a job. Each member of staff working under them is nothing but hot (live) bodies to fulfil their ridiculous targets. Sometimes, they don't even have any guts to say no to the ridiculous timeline that is set by the top bosses (who does not give a damn about working under a decent time schedule and/or work culture). As for top bosses / management it is all about targets and they will go to any length to meet that because at the end of the day the incentive/bonus is all that matters.

Posted by wlukasik on 6 May 2009

IT should be 100% union...

Posted by richard.rabe on 6 May 2009

After 33 years, 17 of which I was upper management in my own company(s), I thought I had seen it all in the way of management bonus compensation until my last job (not my current one).  There managers were granted a pool of bonus money based on contract values, costs, etc. and from that they paid their subordinate bonuses.  Anything left over was the manager's bonus!  Can you guess what happened? It never failed that about 45 days before bonuses were calculated there was a rash of terminations of lower level (read - developers) employees to reduce the amount the managers had to pay out (and therefore an increase in the amount they kept for themselves).  I have never seen such an unjust system.  Of course upper management wanted to keep it because they were the ones that got to keep their money too.

It made for a terrible work environment and high turnover of lower level employees but that did not seem to matter. They woudl just hire new employees, promise the bonus again and repeat the treatment next time around.  They lost a lot of intellectual property but I believe they felt it was OK since they valued managers more than lower level staff.

I have since moved on, but I have used that example more than once in several Masters courses much to the shock of the instructors.

When I had my business I made it clear to my staff that they were the most valuable asset we had and my compensation was capped at 2.5X their highest wage level.  I was taking more risk (my house was mortgaged at one point for the business) so I had the bigger potential.  It sat well with most everyone.  I have seen similar caps in other industries as well.

Posted by Mike Brockington on 6 May 2009

Not sure why you are picking on the Military as giving workers less power than management - I wish that promotion was as straightforward in business as it was in the Army; never had to go through a 'levelling exercise' until I joined the private sector!

Posted by sean.reece on 6 May 2009

Capitalism has failed us. I am not about to lecture on macro socio-economics however, I deeply resent any kind of Bonus structure or system.

I do believe that people should be paide a fair wage for the work that they do. But then again I believe that people should love the work they do and not love the money that they get for the work. Thus, If I love being a school teacher and that is a rare and highly desirable quality then I should be paid accordingly to do the job.

Similarly, If I love under-water welding and I thrive in an acquatic environment but almost every John, Peter and Henry can do that same job while smoking a cigarette then I should be be too bothered if the pay is a pitance because I love doing it.

It seems utterly ludricous that some people can get a guaranteed bonus. In my company, I pay my staff at above the high end of the market rate for their jobs but no Bonuses. If we turn a profit based on everyone's input then the next year they get a rate increase. If they stay and help increase said profit they get another above the market rate increase.

Five years on, they seem to love it and I have only turned over one employee.

Posted by Stephanie J Brown on 6 May 2009

Steve, you say managers take on greater responsibility and greater risk.  I would say they have a broader range of responsibility than the average worker-bee, since they typically manager a larger area.  But what are these "greater risks" you speak of?  Most companies/corporations have insurance that protects their management from any dumb mistakes they make - the corporate insurance policy will pay for any civil cases against a manager.  That's not risk.

Managers (if they are good!) have a different skill set from a clerk, developer, data entry clerk, etc.  Their salary reflects that.  Standing bonuses are bogus, in my opinion.

It used to be that a bonus was for going above and beyond the norm - like those 17 hours days, 7 days a week a lot of us worked for the Y2K debacle.  NO ONE should get a bonus just for doing their job.  A manager's job is to promote the success of the company; they should not get a bonus for that.  And if the company succeeds wildly, the manager wasn't the one who "caused" it, just hopefully they are the one who lead the employees in the proper direction - and that's why I believe no manager should get a bonus unless the employees who work for them also get a bonus.

Fire one manager, and the company keeps running just fine.  Fire all the manager's employees, and it's a different story.

I think a manager's pay (since I don't like bonuses) should be linked in part to staff turnover.  High turnover costs a lot; low turnover saves $$.  There are current industry norms for turnover rates in different types of business; wouldn't it be nice to see those change for the better?

Posted by Craig A. Silvis on 6 May 2009

I've read that in Japan the ratio of the lowest paid employee to the highest is 7.5:1 whereas in the US it can be as much as 100:1.

When you see someone getting paid 100 times more than you do you really think they are producing 100 times more value to the company?  It's not just bonuses that are out of whack with upper management.

Bonuses should be tied directly to performance so I really like the idea that if you are a manager then your performance should be measured by the people you manage.

If they (collectively - there may be a bad apple in there - but the whole bunch?!) don't deserve a bonus then you don't either.

Posted by Cris E on 6 May 2009

> ...I deeply resent any kind of Bonus structure or system.

Really? Any kind of bonuses? I personally don't like the idea of reducing the base pay and replacing it with bonus money. But when a company has a windfall or just cranks out tremendous sales through normal increases I've always been happy to see the workers get a cut. It sort of puts me in mind of Jim Bouton's quote about baseball salaries: "Players don't deserve all the money they're getting, but the owners don't deserve it even more."  If it's just laying there, sharing some with employees seems more equitable than treating it all as the due of management.

Posted by Steve Jones on 6 May 2009

On bonuses in general: It makes business sense to pay a bonus rather than a rate increase, because there's no guarantee that next year the business will do better than this year. It's a reward for work done this year.

It should not be guaranteed, and if the business doesn't do well, then it's not paid out. That's a problem in the US.

If you just raise people, what happens if you have 2 or 3 bad years? Reduce rates? Let the business wither somewhat?

I think bonuses make sense.

Posted by Steve Jones on 6 May 2009

On Risk:

I think management, while a more generic skill, is risking themselves more since they must lead, and take responsibility for others. Maybe I'm wrong and it's just greater responsibility, but I think they also take risk in making decisions and then (supposedly) having to deal with the consequences.

They also, at least in middle management, should be more susceptible to layoffs. Not sure that's true anymore.

I don't have a problem with management making more money, or being paid larger bonuses. I have some problem with the scale of some current bonuses, especially at the C-levels and with them being paid when workers aren't receiving bonuses.

Posted by tony.hayes on 6 May 2009

I agree with Steve on the risk factor - at least the way that I have managed people - one thing I learned in my brief brush with the military - You can delegate authority, but you can't delegate responsibility.  Meaning if I screw up I'm responsible - if you screw up and you're my employee - I'm responsible.

Posted by groffg on 6 May 2009

I'm fine w/ the idea that incentives should be focused on higher productivity. SteveJ, I agree with your "tight coupling" idea as well. As always though, the devil's in the details, esp when evaluations are subjective, as they frequently are.

In regards to non-sequiturs made by others, I'd say that:

* capitalism hasn't "failed us"; it's intrinsically a "creative-destructive" process, and that's not bad. Despite the occasional "market failure"--and they do happen--the system as a whole is pretty resilient in the long-term. (Sorry, too many people who say "capitalism has failed us" turn out to be marxists, a visionless ideology if there ever was one).

* unions aren't the answer for IT. Unions reduce wage disparity b/w workers & bosses but also reduce flexibility in the market. Hence, the advantage afforded by unions lies in contexts typically associated w/ undeveloped or developing markets, not in the developed world. Unionism becomes a liability as economies develop. While the emotional response might be to cling to protectionist constructs, the "union alternative" is contrary to our long-term prosperity.

Posted by SprocKing on 6 May 2009

A strong union movement would be quite helpful as a counter-balance to the greed and stupidity of management. Unfortunately, the business community has spent a lot of time, money, and effort over the past hundred years fighting unions in congress as well as in the national psyche. Unions "reduce flexibility in the market" -- utter nonsense. Europe is competing with us just fine with a lot of help from of all those evil social safety nets and unions and such, thank you very much.

Other nice-to-haves: defined benefit plans (rather than skimpy 401-Ks), bidirectional evaluations, on-site childcare, 100 year plans rather than short-term manipulation to get the stock price up one quarter at a time, faeries, and rainbows.

Posted by dma on 6 May 2009

Steve, very thoughtful idea, i will pass it on if i get to work somewhere where employees get bonuses :)) I have worked in different work cultures - in Europe, India and 17 years in America. I must confess the work culture here sucks more than anywhere else I have seen, there are individual work places which are better than others but some generalities that have ticked me off hugely -

Lack of job security or the fact that anyone can be fired any time, lack of leisure time or somehow the tying of security to leisure so that people are scared to use vacation time  even though they have it, lack of team spirit or join goals among people - everyone is in it for himself or herself and all problems are nailed down to fault of individuals. I'd rank the money factor much after all this - we do make more in america than most other countries but we are far from happy or satisfied in work places. That said one cannot change basic philosophies what I would really like is as someone said bidirectional feedback or in other words holding managers accountable to something, well defined benefit plans, severance packages defined clearly upfront and not on situational basis, team goals in addition to individual goals. And i'd like to hear less of the phrase 'it is just a job' and for us americans to take things less for granted. The average working human spends 70% of their time at work before retirement. (Even more for us DBAs!!) How would we feel if someone called it 'just a life:))

Posted by groffg on 7 May 2009

Unions - they DO tend to promote greater parity b/w workers & managers (unionized companies strictly separate those two groups, interestingly), at expense of long-term sustainability and growth. They tend to limit individual freedom (it is often required to join the union), replacing it with a collectivist construct. Whether this is "good" or "bad" depends on one's political views primarily (meaning this is primarily *not* an economic discussion).

Regarding sprocking's nice-to-have benefits, why not just work for a company that offers those benefits? Perhaps there are no companies that will satisfy all of your criteria, but plenty that come close, I'd imagine.

Posted by kerry_hood on 8 May 2009

Bonuses - I'd like to have worked for a company (in 10 years) that's paid them! I also love the idea of a manager only being paid one if his employees have met their objectives and receive theirs.  

Managers and Risks - This is a fine theory, but I've rarely seen managers actually paying any price for incompetence, and if they do (it's got to be a big balls up), they might lose their job. But then that's usually followed by a cascade of other, innocent parties because of the problems they've caused.

Unions and social security safety nets - being British I feel it is a socially resposible thing for our society to provide these, but the tax!! I don't know about you guys, but I can write off a third of what I'm paid to contribute for this (and that's with 15% VAT and before we pay our "local" or "council" tax for stuff like schools, rubbish collection).  It also leads to a certain amount of xenophobia when you see EEC immigrant workers being eligible too.  

Personally I have had to sacrifice my salary to work locally (mum to 3 kids) and change from C++ to VB (I'm a developer and DBA) for the same reason, but it's worth it because I do love this work.  I think it is important to spend most of your week doing something you enjoy; and especially for working mothers as it's hell of a hassle.

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