Justify Your Bonus

There are lots of threads about comp/bonus numbers but I want to ask a slightly different question:

Why do you deserve your year end bonus?

It would be helpful to know specific role/type of real estate and % of comp but not absolutely necessary. I’d start but currently struggling to answer that question.

 

You don't "deserve" a bonus--that's just how much of the industry structures its comp. It's an evolved process that doesn't necessarily have a continuing logical justification. For example, the idea that employers handle health insurance isn't particularly logical. During WW2 there were price/wage freezes enacted by the federal government, so health insurance/care became a benefit added on to increase compensation to employees. That has remained--illogically--as part of many comp structures for 70+ years because "that's the way it is."

A lot of bonus structures are so liberal that they are essentially guaranteed (mine is like that)--like, the company would have to collapse for you to not get paid a bonus (we saw this in 2008 at places like Lehman). Some are tied to the overall performance of the company, which you likely have nominal--likely no--direct impact on. Unless your bonus is directly tied to your specific performance (e.g. your sourced deals) then the bonus structure is there largely because that's how it's done.

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Not really; modern social welfare policies began in Germany during the 1880s under Otto Von Bismarck. Pension plans, along with disability and health insurance plans, were introduced by the conversative Bismarck to ease pressure from the Social Democrats and other leftist parties. The justification - besides the humanitarian perspective - is it makes employees more productive by providing security that keeps them focused and less distracted.

I agree that bonuses aren't deserved, but in no way are they illogical. They're a natural incentive structure to keep the employee focused. Even if part of it is assumed beforehand, there's still a nagging doubt and "what if" in the employee's paychology that forces them to at least look like they're working hard. If I'm ambivalent to my job and company, I'd stay more diligent knowing that part of my pay is discretionary... keeps you focused on a carrot

 
Best Response
Mg33:
Not really; modern social welfare policies began in Germany during the 1880s under Otto Von Bismarck. Pension plans, along with disability and health insurance plans, were introduced by the conversative Bismarck to ease pressure from the Social Democrats and other leftist parties. The justification - besides the humanitarian perspective - is it makes employees more productive by providing security that keeps them focused and less distracted.

Huh? Not sure what you're arguing. I'm completely confused. Did you respond to the wrong person?

Mg33:
I agree that bonuses aren't deserved, but in no way are they illogical. They're a natural incentive structure to keep the employee focused. Even if part of it is assumed beforehand, there's still a nagging doubt and "what if" in the employee's paychology that forces them to at least look like they're working hard. If I'm ambivalent to my job and company, I'd stay more diligent knowing that part of my pay is discretionary... keeps you focused on a carrot

You completely missed the point. It's not that bonuses are illogical, it's that the bonus structure is illogical IF the bonus is not directly connected to employee performance. We have an evolved culture now where your pay is, say, $100,000 per year, but it's structured as $85,000 + $15,000 bonus, regardless of your performance (so long as you aren't grossly incompetent, at which point you'll be fired anyway). It's no different than a salary of $100,000--it's just called $85 + $15. That's the point. The $15,000 isn't "earned"--it's just part of your salary, structured in a way that really doesn't make logical sense.

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Troll - Aged 18 Years:
For example, the idea that employers handle health insurance isn't particularly logical. During WW2 there were price/wage freezes enacted by the federal government, so health insurance/care became a benefit added on to increase compensation to employees. That has remained--illogically--as part of many comp structures for 70+ years because "that's the way it is."

Well, that and the fact that companies that are required to provide health care are generally large enough to have HR departments which are capable of devoting themselves in large part to navigating the extremely byzantine world of health care insurance. Individuals don't have that expertise, and often don't have the time, skills, or occasionally intelligence to gain it, so it makes plenty of sense that a deeper pocketed group diffuse the cost of gaining said expertise in order to provide it a wider group. Who, in turn, can focus on specializing in whatever it is their employer pays them to do.

 

Depends where you work. If you are at a brokerage, or a PE shop, then having your bonus be tied to performance seems logical. Of course, on the acquisitions side of it, it means you are being paid well in advance of when the deal actually comes through, so in my experience, the smarter way to structure bonuses (from an employer perspective) is by allowing your team to participate in the carry. This way no one gets paid six figures for a deal that is wayyyy too aggressively underwritten ad which falls apart five years down the road, after said employee has left.

On the development side it's trickier. Very long lead times on deals means you could be busting your ass and doing an amazing job, but it might take three or four years to bring a deal through and entitlement process, finance its construction, and then stabilize it; doesn't seem right that that employee won't be compensated for their work while someone underwriting aggressively and irresponsibly on the acquisitions side gets paid bank.

Long story short, the justification should be that you, as the person getting the bonus, are doing work which is not easily replaceable. Which is why I think the industry values development skills over acquisitions; underwriting a deal is easy, but it's not easy at all to find someone to take over a running a new development project a quarter of the way through construction.

 

I am on the development side, this is a big gripe with the acquisition folks. One guy just a check for whatever his split is with our firm on a $400k commission for a deal that was done and I am sure he spent about 1 - 2 months of calls/emails triangulating the RFP/LOI and PSA (not full time obv). We will generate about $400k in CM/dev fees which is technically the pot my bonus will come from at the end of the year at which point there will be a lot of blood sweat and tears before we bill that out on this project. But I'll for sure drop the 'Hey I generated xxx hundred thousand or million dollars in CM fees this year' to make whatever bonus I get a drop in the bucket in perspective.

 

Agree with the participation/carry. I've seen in most cases where if it's a REPE/closed ended fund that is focused on the returns/fund performance over the time horizon, this is the structure, and if you're working for a shop that is more concerned with placement and going in yield, the acquisition fee structure is featured more often.

"Who am I? I'm the guy that does his job. You must be the other guy."
 

struggling to answer why you deserve a bonus? are you having an existential crisis.... it's what you agreed to. Why do you pay your landlord the rent you do, why do they deserve it? Could they justify it? you pay it because it's market, they had something you found valuable and it was at a pricepoint you both found agreeable. Take a look at the P and L and tell me why you don't deserve more.

 

For employees who will get their bonus regardless of different performance metrics, it is essentially part of their salary. The only difference I see is that company's use this extra bonus amount as leverage. They don't have to pay out bonuses if the employee leaves before the end of the year. It is either an incentive for employees to stay at the company and not miss out on a decent chunk of their salary or the company saves the money if employees leave mid-year. It is a win-win situation for the company.

 

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