The Downside of Sign-Up Bonuses

Sign-on bonuses often do make the difference between acceptance and rejection of an offer, says consultant Chuck Csizmar, CCP, but there are a few caveats. Csizmar, who is founder and principal of CMC Compensation Group, offered his tips at a recent BLR-sponsored webinar.

Some Csizmar’s negatives to using bonuses:

• Using them may establish an unwanted precedent. You’re got to be careful that you don’t create a larger problem than the one you’re trying to fix. Once you offer a sign-on bonus to someone, word will get out, says Csizmar, and the “What about me” calls will come in.
• Bonuses can be a waste of money if they are given when they are not necessary. In each case, be sure that the candidate under consideration is likely to be influenced by the bonus.
• The effect is only good for one year. You have to hope that the candidate doesn’t look too far ahead—he or she will realize that after a year, the dissatisfier is still there, but the bonus has worn off. The hiring manager may now have a disgruntled staff member on hand.

Athough bonuses are typically offered only once for the first year, you can, of course, go for two years if you want to, Csizmar says.

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Points To Ponder

To set your policies, consider the following, says Csizmar:

• Eligibility criteria. Who will be eligible? The CEO obviously is eligible, and the file clerk not. You need to clarify in between. For example, you might say director level and above, or any offer above $100,000 eligible, or any job in grade x or above. It’s important to draw the line in the sand somewhere, says Csizmar; otherwise, more and more people will be getting rewards.
• Tax status. Typically sign-on bonuses are provided in before-tax money, so the new employee will only receive what remains after taxes are taken out. Make sure that candidate knows this, says Csizmar. If the new employee is expecting to be able to spend $10,000, and gets $8,000 you’ve got a problem. The employee will view this as a breach of trust.
• Payback. What if the candidate takes check and then quits in a month later—would you want the bonus back? Many companies include a standard document with the bonus offer that controls this. Usually the payback clause would extend for 1 year, but for a big amount, it could go 2 years
• Delivery Date. The most common practice is to deliver the check on the first day of employment; however, it’s not ususual for the new employee to wait until the first payday or some arbitrary time such as 3 weeks.
• Multiple payments. Usually the payment is delivered in one lump sum—no partial payments.
• Amount of award. How much? Some employers use a flat fee, or percentages of base. Surveys suggest that the flat dollar amount is by far the predominant strategy. Percentages suggest that there’s a formula in place, and that makes it seem that you’re not responding to the person.
• For upper management, it’s unusual to see anything less than $15,000, says Csizmar.
• Directors and senior managers, $10,000
• Below director level,$5,000-$9,000
• For lower level personnel, $1,000-$4,000

These are very general guidelines, to be modified on basis of the individual circumstances of a particular candidate, Csizmar says.

When to Make the Offer

The sign-on bonus tactic should be used as the end game of your negotiations. If put it into initial employment offer, you’re stuck with it—cost can only go up from there.

Cast of Characters

The cast of characters involved includes the hiring manager, the recruiter, and someone from compensation/HR. It’s important to recognize that the three participants don’t all have the same objectives, says Csizmar.

The recruiter and hiring manager generally just want to get the person to say yes—they are often not concerned with the appropriateness of the offer or its necessity. The compensation/HR person will be concerned about setting precedents, company policy, and whether the bonus is truly necessary.

Bottom line? Sign-on bonuses can be a great tool for recruiting, but they can also cause some problems of their own, so use them wisely, Csizmar says.

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