To Pay or Not Pay? ... That is the Question
The Corona Virus raises a number of essential, but delicate Total Rewards Topics around how companies can best respond. Let’s discuss whether your 2019 Nondiscretionary Bonus Target will be paid out in 2020: and whether you will even have a 2020 Bonus Target to be paid out in 2021.
During this COVID-19 pandemic you are all facing two fundamental questions regarding your Annual Nondiscretionary Bonuses.
- 2019 Annual Nondiscretionary Bonus Paid in 2020: Do you pay, or do you not pay?
- 2020 Annual Nondiscretionary Bonus Paid in 2021: Do you keep, and pay?
First a definition is helpful: A Nondiscretionary Bonus is a variable pay component of an employee’s total cash that is based on the definition of targets which are either a blend of individual and collective targets; or exclusively individual; or exclusively collective targets, depending on the company’s bonus design.
Before answering the two uniquely different questions, tied to this current crisis or any other future challenge, our answer would rest on a foundational premise requiring two codependent factors:
- Economic survival
- Human care
Economic Survival – That which ensures the ongoing economic viability of a business:
If a solution is overly attentive to human care in the short term, it can cause greater economic harm leading to the potential loss of all jobs (bankruptcy).
Economic survival in the short term has priority over human care in the long term. No business = No care. A business that collapses in the short term has no ability to even care for employees in the long term. If, however, economic viability is there, further human care can well benefit both the company and employees. Discretionary bonuses being given by many companies to help employees work safely during the COVID-19 pandemic is a great example of this.
Human Care – That which ensures human viability, engagement and fairness for individuals working in the business:
If an economic solution is overly greedy in the short term, it runs the risk of threatening human care in the long term.
Human Care in the short term has priority over economic survival in the long term. Meaning: No care = no business. This presumes that economic viability in the short term is there, but that companies in spite of this disregard human care for further profits. Everyone, if these circumstances continue, will eventually discover a business’s callous behaviour, leading to disconnected/disengaged customers and employees celebrating its demise and their competitor’s success.
2019 Annual Nondiscretionary Bonus Paid in 2020: Do you Pay, or do you not pay?
Answer: If you have no money or cash flow and are in threat of going out of business, you do not pay (economical survival). At least initially. But you should, if you can survive the economic downturn, give a promise to pay what you owe, once business improves (human care). Bottom line:
You should pay if you can.
Why? An employee’s nondiscretionary bonus paid in 2020, is based on 2019 targets and achievements. This means that all targets and achievements of those targets already occurred prior to the COVID-19 outbreak. Any bonus paid in 2020, therefore, is a delayed payment for targets already achieved in 2019 but paid in 2020. To not pay would be like asking employees to give back salaries made in 2019 because you have run out of cash. Not possible.
In this sense the author believes that companies who have decided not to pay their employees their bonus in 2020 are potentially wrong, especially if such a payment is economically viable. If a company’s economic viability in the short term is robust enough to protect its reputation of human care in the long term, the company should pay.
However, as stated in the initial answer, there are many companies whose economic survival is in the balance. In this case such companies could give an "I owe you" or negotiate the value of unpaid bonuses equal to paid leave (human care). Employees are reasonable. They will listen if you treat them fairly and honestly.
2020 Annual Nondiscretionary Bonus Paid in 2021: Do you keep and pay?
Answer: Yes, but you would need to adjust it based on the two premised factors of Economic Survival and Human Care.
On the principle of Economic Survival, targets that were based on pre COVID-19 expectations should and must be restated based on realistic business probabilities**.
Here, the business can be as transparently tough as needed through realistic stretch targets and objectives before any money is agreed to be paid out. But it is suggested that businesses should not renege and eliminate a key motivational lever of allowing their employees to ‘be believed in’ via their real capacity of ‘getting it done’. They should keep the 2020 target bonus but modify it as is appropriate to drive economic success. Here, the factors of Human Care (via appropriate engagement with pay), along with Economic Survival (realistic target achievement with realistic pay) is the perfect execution of Strategic Pay Cost Management to drive business results. What we love to achieve at BDA.
So, wishing that you all stay well. And, hoping to hear from all of you with feedback or other inputs on this topic.
**Some other process specifics would also be worth your read in a good post by Mercer on Managing Incentives in Uncertain Times.
Senior Partner at BD Advisory
Michael is a senior Total Rewards leader with 26+ years in the field. His expertise includes Strategic HR Management, Strategic Pay Costs Management, Executive Compensation and many more.
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