In a two year span, how is it possible to maintain the same base salary, bonus target and performance, yet havethe bonus payouts of each year be significantly different? It could be that the company changed how they leveraged your bonus plan. Leverage doesn’t so much focus on how the bonus pays out at the target point, but rather how it changes at the extremes.
Look at how this fictitious company changes how it leverages the bonus.
The next year, the company changes targets and payouts as follows:
Notice the goal and payout at target do not change. During both years, the company can say, “your target payout is $10,000”. Where the difference becomes noticeable is when you start moving away from the target. For instance, let’s say that you hit the $550,000 mark in both years. Year one, your bonus is $20,000 but only $15,000 in year two. In this instance, the company has made the decision to reel back how much money the higher performers will earn (they have reduced how much they leverage the plan). I would not typically endorse this, unless the bonus plan is considered too rich.
Also of note is that this company lowered how much they pay people that are just qualifying for bonus. The person that is just barely qualifying for the bonus in year one would get half the bonus payout, or $5,000. However, the same performance in year two now only earns $2,500. This is an example of the company reducing how much they pay for those not achieving their targets.
These examples demonstrate why it is important to not only focus on what your job’s target payout is, but also focus on how the payout changes at both the low and high ends.