Of course you do.  I’d like one too.  But is it a good idea?  Is it money well spent, or a needless expense providing little benefit?

Clients and colleagues often ask, should we?  How much?  For who?

I’m talking about a one-time cash payment granted as part of the employment offer,  often considered a bonus for accepting the company’s offer.

How it is used

A sign-on bonus is like wallpaper; it can cover a lot of ugly cracks in the employment offer, and is sometimes used to avoid back-and-forth negotiations by cutting a check to call things “square.”

A company offers a sign-on bonus as a replacement for some element of the overall package that the candidate finds lacking, or as an inducement to pump up the candidate’s first year earnings.   It is usually because the candidate is walking away from some element that the hiring manager wishes to replace in-kind.

A sign-on is not common practice, or required as part of an employment offer.   Candidates may routinely ask for one (why not?), but at most levels companies are reluctant to agree.   It is simply one of the negotiating tools used, generally in concert with others, when negotiating complex or challenging employment offers – most commonly with the senior staff.  That is because those candidates are more likely to be leaving something on the table with their former employer.

Some common scenarios:

• When the offered salary is lower than the candidate wants

• When the candidate is not eligible for this year’s annual incentive

• When some benefit or perk with the present employer is not part of the offered package

• When  some portion of either current bonus payment eligibility or stock option vesting is lost to the candidate

• When there are no viable alternate candidates and an acceptance is critical

Below the Executive level the award is less common because of less complex package offerings, though a salary gap (offered vs. requested) often raises the issue.

A good idea?

Offering a one-time check to allay a candidate’s concerns can be an effective strategy to smooth over the bumps of a less-than-perfect employment offer, but like any additive cost it should be used with care and with a view toward a ROI.   Offering extra money when not necessary or not targeted to achieve a specific aim is a waste of that money.

If considering a sign-on bonus for a candidate, you should know why.  Hopefully it is to resolve a perceived gap within your offer package, not simply because the candidate asked for one – and certainly not because “at this level we always provide a sign-on.”

How much?  Awards are usually in discrete amounts like $10,000 or $15,000, versus a percentage of base salary, as in-between amounts suggest a formulaic approach and may create the illusion of precision.  The offer letter should also state “gross” after the amount, as payroll taxes should remain the candidate’s responsibility.

Caution:  remember that sign-on bonuses only address 1^st year earnings.   If the offered reward package has significant downsides for the candidate, the issues will resurface again after the first anniversary – but then it will be an employee problem.

Points to ponder

Like most effective company policies / practices, it is best to write things down, to establish standards of uniform practice.   Managers need guidance to keep from making expensive mistakes.  Here are a few Sign-On Bonus considerations:

• Eligibility: Is every position eligible to receive an offer, or does the practice begin at certain hierarchical levels?  Can circumstances allow for exceptions?

• Amount of award: Do you use discrete amounts (i.e., $5,000, $10,000, $15,000 etc.) or a percentage of base salary?  Or is it completely discretionary?

• Administration: Is the award a net amount, or grossed up for taxes?   Is a portion of the award recoverable in case of early resignation?  Senior management approval should be required.

Extending a sign-on award as a negotiating tactic to improve an otherwise flawed employment offer can be a sound strategy, but have a care that you’re doing it for the right reasons – and under the right circumstances.

Anybody raise their hand?  Of course not; no one wants to be paid at the minimum rate of anything.

It’s one thing to hold down a minimum wage job, paid the government mandated rate, but it’s another to be higher placed in the organization but only paid the lowest available rate for your job.

How would it make you feel?  Not a warm, fuzzy moment, is it?

Minimum Value[

When you pay employees the minimum rate for a position you’re telling them that their value to you is just that, the least payable for the position – which is not exactly a strong statement of recognition or encouragement.  Quite the opposite.

Of course, there may be several legitimate reasons to pay at the bottom:

• A candidate only meets the minimum qualifications for the position
• The employee being promoted has a salary low in their current salary range, and it would take too large an increase to raise them into the new range
• Other, more experienced employees in the same or similar job are presently paid low in the same salary range.  In other words, internal equity is an inhibitor of higher pay.

Hopefully the company will keep an eye on this employee, so that their status as “minimum paid” will be as brief as possible.

Given the above, what must it mean to an employee when you pay them less than the minimum; less than the announced lowest value for the job?  It lets everyone know that to you (the employer) their value is even less than what you’ve told other employees you would pay for minimally qualified employees.

Studies have shown that low paid employees tend to perform as you reward / treat them.   If you keep someone low paid relative to their internal / external worth, you will receive a similar value from them (performance) in return.

Paying less than the minimum

So why would they do this?  What reasons would compel companies to pay employees at a rate below the minimum of the salary range?

• The employee is newly hired, with minimal qualifications for the position, so the company uses a temporary training rate.  When performance indicates the employee can do the job at the basic level they are raised to the minimum rate – usually in 3 to six months
• For an internal promotion, where the employee is minimally qualified and the company is giving them “a chance”.  Again, a quick increase to the minimum is warranted when performance indicates.
• If a large increase is necessary to move an employee from one salary range to another, some Managers resist granting so much money at once, preferring instead to grant installments that will eventually gain the minimum rate
• Some managers want to see a “stretch” employee actually perform before the pay them the minimum rate.  In this case the manger puts the employee into the position, with full responsibilities – but without paying for it.

The question you’re all asking is, do companies actually follow through and quickly raise such affected employees to the salary range minimum?  I’m afraid the track record is spotty, at best.

A Bitter Harvest

Without off-cycle intervention an employee at the minimum almost never reaches the midpoint of the salary range.  Consider this:  an average performing employee paid at 80% of the midpoint (a standard minimum rate for a 50% salary range spread) will receive a series of 3% – 4% annual merit increases, while the salary range will likely raise @2% or more each year.  Under such circumstances how long will it take for the employee to move a net 20% to reach the midpoint?  8 Years or more.  How long will it take an average performing employee to gain enough knowledge / experience in the job to warrant being paid the market rate?  A lot less time than 8 years.

Low paid but satisfactorily performing employees will see their market value increase faster than most employers raise their pay – thus making this group more susceptible to being lured away by competitors, or any employer willing to pay them what they are worth.

When you promote an employee whose resultant pay is near the bottom of their salary range, be careful to avoid creating problems for yourself in the new salary range; it will be very difficult to move a low compa-ratio employee to a higher ratio in the new range – without providing an eyebrow-raising increase.  Who has the budget for that, even during good times?

So look to the bottom quartile of your salary ranges and find out who is there.  Marginal performers likely deserve no better, but you had better ensure that higher caliber employees are moved along and further into the salary range before soured morale and disengagement set in – or they simply quit.

When you first look to purchase compensation surveys for your international population, it’s going to be a real wake-up call.  For those accustomed to only US surveys you will find that the available data in many countries is more limited than what you’re accustomed to seeing, as are the number of companies involved.  What won’t be reduced though is the expense.  Quite the opposite.  If you have multiple countries to deal with, your budget for credible compensation data will likely become a multiple of your US experience.

When I worked overseas my budget for compensation surveys was 3-4 times my previous US budget – and I only had to worry about Europe.  What a shock that was – spending much more and arguably receiving less.

Think on it, though: each country is a separate USA, a unique national entity having country-specific labor laws, employment regulations, tax structure, competitiveness challenges and variations of economic strength.  For each you will need a country-specific survey to assess the local competitiveness of your employees.

International HR practitioners will need to adjust their thinking to react effectively in smaller countries, where the working population is limited and so is the number of survey participants.  It will be difficult to slice surveys by geography, industry or employee segment, as the data points grow smaller and smaller with each criteria.  For example, a well-regarded Mercer survey for Sweden showed 202 participating companies, while the Netherlands counted 81.  Meanwhile the US survey totaled 500 companies.

To compound this dilemma of accessing credible data you will typically be required to pay “list” costs for each survey, as compared to the US where I was able to gain lower 2^nd copy costs and often times managed to wheedle discounts or “anticipated” participation rates.  Such tactics are not as readily available overseas.

Availability of locally-grown survey data is another challenge.  I have tried to locate such sources, even those provided in the local language, in order to create a greater “buy-in” sense from management, but with very limited success.   Even global companies with non-US headquarters tend to use the multi-national consulting firms.

Accessing International Resources

Should you require information for international compensation practices, below are a number of useful sources, each of which can be tapped via a Google search.  Note: many of the non-US sources focus on limited employee segments or functional areas, which may limit their usefulness during a general search.

Should you only have a few positions (2-3) in a given country you can reduce costs through individual job pricing, vs. the purchase of an entire survey.  More than a few positions though, would render this tactic economically unfeasible.  A few notable sources (though others from the above list may also be able to help):

• ER Limited
• ORC
• Birches Group

Note that I have not included sources from the current vogue of online surveys, like PayScale and Salary.com.  To my mind these sources still have credibility problems to overcome before they would be accepted by senior management as a viable resource.

Another effective strategy for reducing costs is to age current data forward, coupled with the use of biennial purchasing.  However, if utilizing this strategy have a care to limit its use to countries with stable economies.  Using such standard growth figures would miss the mark in countries showing greater volatility.

The Cost of International Operations

Too many HR practitioners and their Managers fail to take into account the expenses involved in keeping their international compensation programs competitive, especially where the organization has a small footprint in a given country.  For companies new to the international scene, and for those with small populations in several countries, the shock of survey costs could be daunting.  Many times the result is a reluctance to purchase the data, in some cases letting matters on the ground continue to fester – potentially overspending and / or creating debilitating equity problems for themselves.

Call it the cost of doing business, but if you’re going to maintain effective operations overseas, and you want to provide a competitive reward package (of course you do!), it would be unwise to shortchange the process by guesstimating or otherwise trying to make-do without credible information.

The cost of surveys is a fraction of the possible financial impact that could result from retaining non-competitive reward programs.