Why Your 'Performance' Bonus Is Anything But

Cronyism, bias, grade inflation, systemic gaming. A metric begins to degrade as soon as it is announced because managers and employees begin to adapt their behavior to reflect its incentives - intentionally or not. JL

Rebecca Greenfield reports in Bloomberg:

Over a quarter of the 120 employers surveyed said they give performance-based bonuses to employees who "fail to meet expectations." Only 20 percent of employers in the survey said that merit pay resulted higher levels of individual performance.
Congratulations sub-par workers, even you can expect a bonus for a mediocre year of work.
Over a quarter of the 120 employers surveyed by the human relations consulting firm Willis Towers Watson said they give performance-based bonuses to employees who "fail to meet expectations." The survey also uncovered rampant grade inflation for performance reviews. Most managers rate underperforming workers as either meeting or exceeding expectations, said Laura Sejen, a managing director at Willis Towers Watson. That means a lot of undeserving workers are getting merit-based bonuses, which kind of defeats the purpose of rewarding people with money for a year of good work.
For many salaried employees, bonuses have turned into an expected addition to your income rather than a reward for performance. "There is this whole sort of entitlement mentality that's built up around merit increase," said Sejen. That mentality makes bonuses kind of useless as a motivational tool.

"Everybody is rated the same; there is no bell curve," said Bettina Deynes, a vice president of HR at the Society for Human Resource Management. "Your top performers are being rewarded at the same level as the ones that are not performing. There has to be a correlation between performance and rewards." It's no surprise that only 20 percent of employers in the Willis Towers Watson survey said that merit pay resulted higher levels of individual performance. "Eventually you're going to disengage the top performers," added Deynes.
Bonuses make up a bigger chunk of compensation than ever. An Aon Hewitt survey last year found variable pay made up a record 12.7 percent of compensation. Many employers use the annual payout as a way to increase wages without giving people salary increases. Companies would rather dole out one-time, cash lump sums than add to fixed expenses because it gives organizations more flexibility. If a company has a bad year, forgoing bonuses is a lot less painful than slashing salaries.
Performance reviews don't work, in part, because the process is unpleasant for everyone involved. Requiring employees and managers to fill out forms consumes time and disrupts the normal flow of work. The questions are often subjective and not tied to meaningful goals or work. Managers rush through reviews just to get them done, and employees don't like feedback. Sejen didn't hesitate to use the word "dismal" to describe the experience.
Given the sad state of the annual performance review, many companies are again rethinking the process. Fluffier reviews followed as more aggressive "stack ranking" processes fell out of favor. Numerical rankings and bell curves are too simple and strict. Although such companies as Yahoo! still use a curve to rank and reward (or punish) employees, the ideal performance review is now a dialogue that includes clear metrics for measuring success and attaining goals. The trend is to conduct more reviews, more often. SHRM recommends that managers meet with employees at least four times a year.

These best practices should make everyone hate the process a little bit less—and in theory, motivate workers. Everyone wins, except for those who don't. "Not everybody is going to get a merit [raise] every year," said Sejen.