The benefits of a new year

There is a peculiar tradition in the business community that dictates that when the new calendar year rolls around, as it does every year, human-resource metrics have to start all over again.

If employees are granted an absenteeism with full-pay benefit of 20 days per annum, for example, and employee A used five of those days last year, their benefit allocation goes back to 20 days on January 1. An employee used up 20 of the 20-day allocation last year (as he does every year) and on January 1, he, too goes back to a 20-day allocation.

Does that not strike you as strange? Or if not strange, at least illogical? Does time itself stop at midnight on December 31? Do organisations cease? And begin again on the first of January? Are all weaknesses, sins and illnesses wiped clean at midnight so that we can start afresh each January? I wish. But reality doesn’t work that way. Habitual latecomers, poor performers, alcoholics and medical fraudsters remain poor performers and latecomers and claim “covid-like symptoms” over and over, but take advantage of the fiction of rebirth every January 1.

Organisations in other, less permissive countries grant sick-benefit days on a roll-over basis. Like budgeted income. The allocation that you didn’t use last year rolls over to use this year. The generous employer of public servants uses that system for vacation leave. Some people over a period of years end up with a year's paid “pre-retirement lave” at final salary, not at the salary they earned each vacation month at. It’s a funny old world, isn’t it?

But it is January, and for many employed people, even some public servants that do not earn income for the organisation they work for, that means bonus time.

Originally and theoretically bonus payments are connected to performance. Companies that have been profitable over the previous year once the accounts have been finalised (hence the January or February calculation of bonuses) check the final accounts against the targeted achievements and look to see what the surplus over target comes to. That amount goes into bonus payments from a grateful employer to performing employees. To each, his bonus is in accordance to his (or her) performance level. Bonus payments are intended to act as incentives for future performance,

That is the theory anyway. There are several ways it works.

The most common one is if the company has made a profit, the board or the management will decide how much of that should be allocated to staff bonuses, how much to contingent liabilities like severance payments (demanded by law), to pensions, how much to upgrading technology, ongoing organisational developments etc. Employees complaining of the need for upgrading equipment and facilities will understand that money to pay for needed upgrades, training etc has to come from somewhere.

Out of that surplus allocation, a specific amount should be allocated to each department according to its contribution to company goals. So it becomes as much a team allocation as an individual one. If it is only an executive bonus system, something else is calculated for lower levels of staff, if this applies.

Out of each department's allocation, the contribution from each staff member to the department's key result areas (KRAs), or established goals, should be fairly determined and paid. A staff member will normally have to have worked for at least a year to have earned a bonus. Some organisations will prorate for those who have worked six months or more.

A second system is to simply pay a fixed sum, often a month's or two months' salary as bonus. This is a simpler and less complex system but is not related to overall company financial performance and often not to individual contribution to overall KRAs.

External factors such as a war in the Ukraine may be the reason for a company’s “windfall” profit, not the knowledge, experience, judgment or performance of any one executive, group of executives or ministerial direction, although they may claim kudos they have not actually earned by any effort of their own.

One well-known company that produces mainly for export paid a year's salary as bonus to senior executives at one time. In other years, and, as far as I know now, it prorates bonus amounts in accordance with how much it makes in profits for the year as outlined above, and departmental KRAs achieved or surpassed. Not all these KRAs are expressed in money terms, obviously.

It is very important how the bonus benefit is worded as part of each person’s contract, however. In one famous local case, a company which had been losing money over the previous few years terminated the contract of the managing director for his failure. That happens to the captain of a losing team.

It hired a new GM, a younger, more unconventional creative entrepreneurial man. In order to capture him the board, headed by a lawyer, negotiated a contract stating that if he could return the company to its previous level of profitability (the amount stated in writing) he would be paid anything earned above that amount.

It was a very steep order. The amount he had to reach was to take the company out of several millions in loss into breakeven and then into another $2 million in profit. In that one year, the company made $8 million in profit.

I have a copy of the contract, signed by the chairman, who, being a lawyer, knew the power of a signed contract in law.

He refused to honour the contract and fired the man who had turned the company around. I have often wondered if that case is still before the courts.