Unwrapping your annual bonus

By Wendy Burt

Think back to your first few years in the work force. Remember your annual bonus? Each year it was something different, but always right before the end-of-the-year break for the holidays. First it was the self-basting, 15-pound turkey. Then it was the calendar refill for your daytimer. Next came the holiday card with a crisp 100-dollar bill, complete with your boss's signature - in his secretary's handwriting.

Today, your annual bonus more closely resembles the annual salary at your first job. We're talking family vacation, total kitchen overhaul, down payment on your dream house. When it comes to annual bonuses, most executives can count on a hefty chunk of cash, but the exact amount varies as widely as the companies for which they work.

Can I expect a check in December?
Of executives receiving an annual bonus, not all get to cash a check at the end of the year. In fact, many companies are now tossing the idea of holiday bonuses, opting instead for variable pay that is timed more to performance - which means you could get a check at virtually any time of year.

At Milwaukee's Fleet Mortgage Group Inc., the holiday bonus has been replaced with performance-based pay plans. All employees up to the vice president are eligible for performance bonuses - on a quarterly basis.

According to Hewitt Associates, an Illinois management consultant firm, the trend to dump the holiday bonuses is catching on among employers. At the end of December, 1999, the firm conducted a study that found that 64 percent of 268 employers nationwide were not offering any type of holiday bonus, but would instead offer performance-related compensation during the year. Of the companies interviewed, 12 percent had already stopped offering traditional holiday bonuses.

Another survey given that month found similar results. According to the Washington, D.C.-based Bureau of National Affairs Inc., only 37 percent of 413 human resource executives planned to hand out year-end holiday bonuses.

The good news? Even if you're not getting a holiday bonus, your performance-based bonus may offer a profitable alternative.

Hewitt Associates' interviews with 1,133 U.S. employers found that companies will spend 9.6 percent of their 2000 payroll on variable compensation, while employers giving holiday bonuses budget less than one percent of payroll for gifts.

So how much can I expect?
With more companies using bonuses as a form of salary, it seems logical that the more profitable an organization, the larger the bonuses will be for senior management who help attain and maintain profits.

In one study done by Coopers & Lybrand, 32 percent of medical providers surveyed said incentive plans are part of their executive compensation packages. The study went on to say,

"The larger the system, the more likely it is to offer such a plan. Of those offering variable compensation, job title is the most common criterion for eligibility. The higher a manager is in the hierarchy, the more likely that person is to be eligible for incentives and bonus pay." (1)

According to the mean compensation per job classification in all organizations surveyed, a CEO/administrator's average total compensation was $189,400, of which 17.9 percent was bonus or incentive pay.

Not all bonuses are bases on a percentage of your salary, however. Some companies offer an amount based on your education, experience, hours worked or your "loyalty" to the company.

"At some companies, the percentage will be based on the amount of your salary," explains Kathleen Wells, a career counselor and owner of Coaches that Care "It may also be based on your tenure. Chances are, the longer you've been with the company, the greater your annual bonus."

What can I do to increase my annual bonus?
Because annual bonuses are often linked to your contribution to the company's success, it's important that your successes are well known. While this doesn't mean you have to roam the halls bragging about the big deal you closed over lunch, it's also no time to be shy.

"You should always keep track of your accomplishments, large or small," says Wells. "and be prepared to present information about your performance that might enhance your bonus. You need to sell yourself, just as you would for a promotion."

There is another way to increase the worth of your annual bonus: trade it in. Companies such as Dell, Medtronic, Computer Sciences, and Enrol Oil & Gas allow their executive employees to exchange cash compensation for stock options.

In Medtronic's plan, for example, each dollar of cash compensation receives four dollars fair market value in options. An executive who receives a $100,000 bonus would get $400,000 in stock options. So, if Medtronic is trading $40 per share, the option will be on 10,000 shares.

This plan offers two distinct advantages to the employee. First, the stock options are potentially lucrative, offering larger payouts if the company continues to do well. Secondly, the employee can defer the tax on their bonuses, controlling when they will be taxed according to when she chooses to exercise her options.

What should I do with the money?
"If your highest priority is to be debt free, pay off your credit cards," advises Don Hoeckle, a tax and financial services advisor. "If you don't have any credit cards with a balance, pay off your car. Your house should be third because it generally carries a lower interest rate. If you're debt free, invest the money."

Paying off credit cards is perhaps the best way to "make a profit" from your annual bonus. Most cards carry a higher interest rate than anything you'd earn on an investment, and you can always use the paid off cards in case of emergency.

"On the other hand, if your highest priority is to be balanced in what you do, first make sure you have an adequate emergency fund in a savings account," says Hoeckle. "This should be at least two to three months salary. Next, make sure you have adequate disability and life insurance, then split the balance of your funds between credit cards, automobile debt, and investing."

If you've got anything left over, treat yourself to something nice. Maybe that new bracelet you've been eyeing, or perhaps some new clothes from that really expensive catalog that's been gathering dust on your coffee table.

While you're at it, pick up something nice for your assistant - and be sure to sign the card yourself. She could be the next CEO.

Also see:
Negiotating for a raise
Understanding your signing bonus
Are you getting paid what you're worth?

Wendy Burt is a freelance writer based in Colorado. She is the Author of "Oh Solo Mia! The Hip Chick's Guide to Fun for One."