Thursday, 4 August 2016

What I do with my performance bonus

This topic surfaces at the end of each financial year (30 Jun in my case) when firms start doing performance bonus and salary reviews. We wait for the letter that shows us the monetary value of the additional time & effort we have put into work for the past financial year and our worth for the next financial year.

This is the time where you get a higher than normal movement of staff due to employees resigning and/or changing jobs only after receiving the performance bonus. When I was working in an accounting firm in Australia, we did not receive any performance bonuses. However, my wife did receive annual performance incentive awards while working at a bank.

Upon our return to Singapore, I was pleasantly surprised to find that the accounting firm I was working at pays performance bonuses. Although it was nothing new to my wife, we found it fascinating how much of a phenomenon it is here. Where this topic is not mentioned much among staff and friends in Australia, it is discussed a lot more in Singapore.

At first, I was just happy to receive a monetary incentive at the end of each financial year. Now, it is something I anticipate & plan for and I have no idea whether this is a good or bad thing. It's not so much that I expect to receive a performance bonus but more to have planning structures around it in place. I will leave the topic of salary increases & negotiations for another day and just focus on performances bonuses for this post.

For the past few years of working in Singapore and Australia, our performance bonuses have averaged at about 1 to 2 months of pay. I'm sure there are many people out there with higher performance bonuses but these are decent amounts to us and sufficient for us to work with. Anyway, here are some of the things we have observed over the years.
1. Don't do anything stupid that can screw up the entitlement

When you are close to the end of the financial year, don't do anything stupid. This is not the time to pick fights and have conflicts with senior management. You have the rest of the year to do that.

You will be surprised at how easy it is for them to remove your entitlement to the performance bonus by giving you a bad grade for your performance review. One year of hard work & effort can amount to nothing if a bad incident happens during the last month of the financial year.

2. Don't resign before receiving your performance bonus

If you resign before or too soon after the end of the financial year, you lose your entitlement to the performance bonus. Even if you hate your job and bosses, hang in there if you are already so close to the end of the financial year. Don't quit in a fit of anger without thinking ahead.

As a personal anecdote, my brother has made both of the above mistakes before. He was passionate about his job and loved what he did but had tunnel vision and a hot temper at times. The problem is that these issues flared up at the worst times and have cost him financially.

3. Financial planning upon entitlement to performance bonus

Once I know the amount of performance bonus I am entitled to, I start doing my financial planning even before I receive it in my bank account. The reason is simple. I am more clear-headed before receiving the additional sum of money.

Firstly, I allocate a portion of it to cover all of my discretionary and non-discretionary expenses for the next month. This intentionally allows me to save my entire salary for the month, which is how much I would have been getting normally. It's a reminder that the performance bonus is abnormal income.

Secondly, I allocate a portion of it to my savings & investments. This depends on how my savings & investments have been doing for the past year. I allocate more in a bad year and less in a good year. As long as it is showing an increase, I try not to over allocate since I make regular contributions from my monthly salary.

Thirdly, I top up the emergency fund if we had to tap into it for any reason. The amount allocated is usually small if there had been no significant drain and we still have jobs since the monthly salary can cover for such emergencies.

Fourthly, the remaining portion is for travel spending, especially the long overseas holiday trips that we take after receiving the performance bonus. We dip less into our savings that way and fund a greater portion of the trips using it.

4. Execute financial plan upon receiving performance bonus

I make time for and execute the financial plan the day I receive the performance bonus. It doesn't linger for a day longer than it has to because I have already made plans to use it all up. I don't usually celebrate this because it means I had to work hard for the past year to achieve it.

If we reach financial independence and I can work part-time (three-day work week anyone?) just to keep myself engaged but at the loss of the performance bonus, I will take this any day. As grateful and happy as I am to receive it, I will never forget why and what I have sacrificed for my job.  

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