Semiannual Bonuses? Really?

Ever since Wall Street pay became a hot topic of conversation for Americans everywhere, there has been a debate of how to make incentive pay work best. I've even offered my own thoughts on the subject. As it becomes increasingly difficult to devise a way to best motive employees based on their pay structure, the Wall Street Journal reports that a new strategy is gaining popularity: semiannual bonuses. I'm rather skeptical.

So what's the point of semiannual bonuses anyway? To make employees happy by getting them their bonuses more quickly. According to the article:

In addition to boosting morale at a time of salary freezes and pay cuts, semiannual bonuses help companies retain key players by dangling the carrot of two targets a year, while giving boards a chance to raise those goals quickly if economic conditions improve.

Really? I wasn't aware companies needed tactics to retain employees at a time when U.S. unemployment is at around 10% -- or that firms were flush with cash used to lure new talent. I'm sure that getting bonuses more quickly will help morale, but it's a rare breed of employee who a company really needs to worry about retaining at a time when there is already something like six unemployed Americans for every job opening. Besides, if an employee only has to wait for six months, instead of a year, to get her next bonus, then she could leave even sooner.

Incentive compensation is a good idea, in theory. There are few ways to better encourage your employees to work their hardest other than making their pay directly dependent on their product. But in doing so, it's important to ensure that the profit they earn the firm is real, and not temporary or just short-term. Otherwise, the incentive pay scheme can become counterproductive.

And that's the fear I would have with more frequent bonuses. To me, that would imply that the time frame being evaluated would be even shorter and the performance more closely aligned to short-term profits. Now you don't even need to care about what happens a year out -- just in the next six months.

Obama administration pay czar Kenneth Feinberg picks up on this criticism in the Journal article:

Rewarding managers for brief bursts of performance strikes certain compensation critics as a bad idea. "Earning a bonus every six months is an awful short-term vindication of worth," says Kenneth Feinberg, the U.S. pay czar. People will "cut corners to get the quick fix," he warns.

To be fair, the article doesn't cite any financial firms championing semiannual bonuses -- yet. It says that the trend is mainly being seen in retail and tech industries. It might be less likely that management's actions could result in short-term profit and long term losses in those industries than in finance, but it certainly isn't impossible.

And there's also little doubt that banks could raise their eyebrows at this idea and begin to consider it. One nice benefit would be less headline risk for big bonuses. If a bank used to have 100 employees get a $1 million bonus, it sure sounds a lot better to say that 100 employees got bonuses of $500,000 -- and then say the same thing six months later. Even though the result is the same, semiannual bonuses could obscure how much people are really getting paid to avoid the bad publicity associated with big numbers.

Let's hope that's not a motivating factor for any firms considering a semiannual bonus structure. I'm not sure I really see the point, other than it making personal budgetary planning a little bit easier for employees. Ultimately, semi-annual bonuses could be okay -- so long as some additional rules are in place. If an employee's performance could go bad in the future, then the pay should be deferred to guard against potential loss. For that reason, company stock that doesn't vest until some later date is generally ideal.