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Aaron N. Tubbs

Dragon chaser.

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A hypothetical situation has entered my thoughts lately. While this situation has happened at many places I have worked, it is entirely a synthetic construct, and does not reflect any real-world scenario.

Say you have an employee, named Jim. It’s comp season. Jim is an average to slightly above average employee (just like everybody else) with a moderate tenure at the company. Let’s give a current arbitrary salary X0, and say that Jim’s salary increase this year, based on his performance, would be X1 = 1.05 * X0, and he would also receive a bonus B valued at 0.10 * X0. For the sake of argument, we’ll say that an arbitrary firm has decided that the cost of living increase this year is 0.02, so Jim’s compensation figures would reflect a definite improvement over his current situation, attributed to the success of our hypothetical company and Jim’s performance.

Good work, Jim!

Now we stir up the situation. We know something else about Jim. Jim is going to terminate his employment with the company in one month’s time.

The question is, do we still award the salary increase (whose effect will not be seen in large due to the amortized nature of the expense)? Do we award the bonus, knowing that it’s just goodwill money down the drain?

To this point, I think my mind is made up. Because I tend to think of the idea of a bonus to be an award for exceptional work in the past that is above and beyond the norm, both compensation changes should be processed.

Unfortunately, I can’t yet quite wrap my mind around all of the following (and surely other) considerations:

  • Bonuses, even if they are stated as compensation for past work, are a form of incentive-based compensation, and to encourage above-average performance in the future (“you can have this again if you keep up the hard work!”). Even if this is not the official statement, there is an implicit future factor for incentive-based compensation. Does the perception of how a bonus is awarded or its intended purpose change things?
  • What’s the impact if Jim is an outstanding employee instead of an average one? What’s the impact if Jim is a below-average employee?
  • What if Jim is quitting because he is retiring? Going to another company? Going to a competitor? Entering the public sector? Becoming a teacher?
  • What if the company knows Jim is quitting not from Jim, but through alternative channels (gossip, blog, or intercepted electronic communications)? What if Jim has told his manager that he will be quitting straight up?

I don’t know if this is the sort of questions that can be answered by an MBA education, or some serious study in organizational behavior. Is this ultimately just a black and white decision, or do these things by their nature have to impact such decisions? Are there legal ramifications in play here?