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Passion, People and Principles

An Employeer’s New Bonus Scheme

post # 334 — March 20, 2007 — a Careers post

Here’s another reader question, from “D”:

For the last nine years I have worked for a sales and marketing firm. Almost every year I have received “Incentives” and “Bonuses” (of varying amounts) for the work I do. The “Bonus” is from a pool of funds paid to my company by my client. The “Incentive” is paid directly from my employer.

This year the company is taking a 12% “administration fee” (pre-tax) from the bonus and incentive monies. I’ve been in this business for over 20 years and have never heard of such a thing, let alone experience it first hand.

The oddity of this—to my thinking—is that someone who receives a $1,000 bonus pays $120 for the cost of being paid. Someone who receives $3,000 pays $360 and so on up the scale. Another way to look at it: My client paid the company almost $1,000,000 in bonus. My company is taking almost $120,000 in “fees” from its employees (and the employees are paying the tax as well).

So, my questions are (a) Have you ever heard of such a thing in any business? And (b) Isn’t it odd that the employee would pay a federal and state income tax on what the company is taking out as an administration fee? (In other words, we are paying the company’s income tax before them; at least, that’s the way it seems to me.)


D, I never expect to be surprised at the complex payment schemes that firms devise, and I’m rarely shocked that firms would put in place self-serving systems that adversely affect their employees (or independent subcontractors, in other instances.) If it’s the deal they offered at the beginning, and employees voluntarily accepted that deal when they came in, then so be it.

However, it’s the overnight change in the mutual understanding that would trouble me if I worked where you work. As you point out, a 12% administration fee burden on employees is a sizable sum, and if it were to be “imposed” without explanation and consultation, I’d expect a revolt. (Unless it’s the same in every competitive firm.)

I’m enough of a capitalist to say employers are allowed to structure their pay offer any way they want to. But I’m also enough of an idealist that I, personally, wouldn’t continue to work at a place where the mutual trust was broken in this way.

What think the rest of you?


Louise Berto said:

Without knowing the specific industry practices of the writer, this smells really fishy to me (and that’s an insult to fish). I don’t know what the compensation split is for D, the writer, but if, like many sales people, the his/her compensation is a mix of base, bonus and incentive, with the bulk of it in bonus and incentive, then their firm has cut their compensation by 12%. Do they have a signed employment agreement? If so, a unilateral cut like this is probably illegal, as well as unethical, and could merit a challenge to the labor board. As a long time executive recruiter, I have heard of hundreds of bonus incentive plans, and I’ve never heard of a 12% admin fee.

posted on March 20, 2007

Ed Kless said:


Run, don’t walk!

Peter Drucker once said, “In a knowledge society the most probable assumptions for an organization is that they need knowledge worker far more than knowledge workers need them.”

This is clearly a case where your firm does not even begin to understand this profound statement.

Seriously, I would be planning my escape.

posted on March 20, 2007

Lance Dunkin said:


I can’t comment on the real issue, but I did want to put you at ease on the lesser issue of tax.

Pretax is actually in your favor. What this means is that the fees are taken out before taxes are assessed.

For simplicity say that the whole $1,000,000 went to you and also assume the 12% fee. Your company would take the 12% or $120,000 out before they paid you the bonus. You would then receive and only be taxed on the remaining $880,000.

To carry out the example, someone in the 35% income tax bracket would then save $42,000 in taxes because the fee is taken out pretax. That is, $350,000 (or 1,000,000 * 35%) minus $308,000 (or $880,000 * 35%). For this person, taking the 12% fee pretax would actually make the effective rate of the fee about 7.8% due to the tax savings.

I do, of course, disclaim every word said above—I am currently a student and would not want to mislead you in anyway with incorrect information—nothing I said was meant to be relied on and could all be false. If you have questions on this issue, please contact your paid tax preparer.

posted on March 20, 2007

Shelley said:

If the admin fee is pre-tax, then the employees are not paying the tax. To be sure which it is, (since D indicated that it was both ways), calculate the fica tax, at 7.65%

It is a double-whammy to the employee if social security on the $1,000 bonus is $76.50.

I hope that, instead, the bonus is reported as $880 taxable earnings, with social security of $67.32. Otherwise, not only is the employee paying more social security, but also income tax on earnings he/she never received.

The overall issue doesn’t change, but at least make sure that the employee is not paying tax on the admin fee. There are better ways to balance the federal budget.

posted on March 20, 2007

Stephanie Lunn said:

Sounds to me like they are taking funds for a very good reason! No really!

Actually if it were me, I’d do one of three things.

1.Stay and ask no questions. Be grateful for the small amount of something because it’s better than nothing… blah blah blah.

2. Be the Whistleblower because it sounds like someone is creaming off the top off the company’s profits. So who just bought a Porsche and a house in the Maldives?

3. Start interviewing at competitor companies. The grass is always greener particularly when you have experience!

Good luck!

posted on March 20, 2007

Jason Alba said:

Its always hard to speculate why an employer does something like this – and it doesn’t help that the morale of each employee is affected. Its great fodder for the gossip mill too.

I don’t think this is uncommon – I think its more common than you’d expect. Aside from what you KNOW about, what about things you don’t know about? I think its fairly common to have mistakes in accounting that actually change/affect your personal compensation. I’ve seen it.

Also, I’ve seen people game the system (charge things to the wrong cost center) in ways that lower your bonus.

But I think many people don’t watch their financials enough… it goes unnoticed, and the gamers continue.

Bottom line, if it is common practice for your employer to change the rules midstream without a really good reason… I’d be looking somewhere else. Or you can just wait until you get laid off – but its more fun to look for a job when you don’t need to than to have to look after you get let go :p

Jason Alba

CEO – JibberJobber.com

posted on March 20, 2007

Greg Krauska said:

This is a short-sighted disaster. Beyond any question of legality, this is a pure breach of trust and a scar on the employer’s relationship with its associates.

I have worked with clients who (against my advice, when I knew about it in advance) manipulated their employees’ compensation in similar ways:

  • Although % commission on all business was clearly defined, a company paid 1/3 of what was promised. When challenged, the reply was, “Oh, well the commission rate applies to everything but THAT kind of business. Sorry.”
  • After failing to publish a new compensation plan at the start of the new fiscal year as promised, the plan was issued in the third quarter and called for significant cuts in commission percentage – long after the salespeople could make up for the difference.
  • While not relating performance bonuses to profit when published, the company found that profits were lower than expected (though still high margin) and arbitrarily cut commissions under the label of “shared sacrifice.”

The results were predictable – lower trust and morale, resignations and negative talk among the teams. Leaders who decide to “mess with” comp plans of goal-oriented employees, especially salespeople, put their reputations, their credibility and their ability to lead at grave risk.

posted on March 20, 2007

Chris McLaughlin said:

I worked at an accounting firm where they had no bonuses when I started then changed the system to lower base salary individual bonus for meeting productivity (which was easily attainable with minimal extra hours). This was to combat some employees constantly missing targets. As we could reach their targets it was never considered a bonus, more of a “market pay for market work”.

Then a year later they changed the system to lower base pay bonus dependant upon all staff performance (bonuses were to be paid out of a “pool” relative to income). For the initial year the managers weren’t under the same structure and they never hit their targets, usually by a long way.

The staff tried to communicate this was in essence a pay decrease as their pay was conditional on managers hitting their targets which never happened. After two months the managers were down on target so much that they would have had to get target 20% for the rest of the year.

Needless to say the staff were not happy.

Luckily some sense prevailed and the system was changed mid year to two levels of bonuses, being individual and from the “pool”,

Half way through the year I left the company (this wasn’t the only/main reason). During the exit interview I discussed the issue with the managing partner who said (paraphrasing):

1. It was a good idea but the employees were lazy.

2. Even if the “pool” target wasn’t met the good employees would still receive extra bonuses (which was never previously discussed or implied).

From what I hear no one got any “pool” bonus, and no one was surprised.

Morals of the story for me:

1. Employees are good at determining what a pay cut looks like, no matter how you dress it up.

2. All bonus system need to be transparent and everyone told upfront exactly what’s happening. Communication , communication, communication.

posted on March 21, 2007

Liz Zitzow said:

If they’re withholding tax from the gross, you should run. It is unfair, as (a) many people don’t itemize on their personal tax returns and (b) it exposes employees who do itemize to greater AMT tax; all to try and hide the fact that they’re giving you a paycut. It’s not worth it to you; you should vote with your feet.

If they’re withholidng tax from the net bonus, it’s up to you whether it’s worth staying or not.

posted on March 22, 2007

worm said:

I can’t comment on the real issue, but I did want to put you at ease on the lesser issue of tax.

This is a short-sighted disaster. Beyond any question of legality, this is a pure breach of trust and a scar on the employer’s relationship with its associates.

posted on May 4, 2007