I think employee bonus programs are fantastic and every business should have one. I also think poorly designed bonus programs are bad for business. What I see, more often than not, are discretionary bonuses that are paid annually, usually around Christmas.
Here’s the main thing I cannot stand about the traditional Christmas bonus program: Employees who EXPECT a bonus. To me, a bonus is, well, a bonus. Bonuses are given to those who deserve them. But, the problem is not with the employees. Most of the time, they’ve just been conditioned (like Pavlov’s dog) to receive a bonus once a year whether they deserve it or not.
How do you set up a program that works for your business? It depends on your business, of course, but here are some things to consider:
- The budget: The bonus pool should be budgeted at the beginning of the period. This way, you can separate cash funds to pay the bonuses throughout the year.
- The profit goals of the company: I believe if the company doesn’t achieve profitability, NO ONE gets a bonus. Each person in the business has an impact on the bottom line. Don’t believe me? I’ve spent YEARS tying every employee’s salary back to the bottom line. Trust me, everyone can impact the success of the company. (If you don’t think it’s true, I’d love to chat with you.) You should determine what, if any, bonus gets paid when you don’t reach your profitability target. On the flip side, will there will be additional money in the bonus pool if you exceed the target?
- Individual goals: At the beginning of the bonus period, each employee should have goals in place. These need to be clear, measurable, achievable goals. Achieve the goals, get the bonus.
- Teamwork: Bonus programs should promote teamwork. The goal of a profitable company means everyone needs to work together. Even employees who don’t work in a team should have a teamwork component in their goals (they are on the company team!). For employees who work in teams, you may want to have team bonuses or have a portion of the bonus based on team performance.
- Timing: Pay bonuses frequently or at least provide feedback, so they know how much has been earned.
- It’s really hard to stay motivated and on task if you only receive feedback once a year. Paying more frequently helps keep the troops motivated and let’s the underachievers feel the pain of not doing their part. I think it’s best to let employees know regularly how much is in the bonus pool (I think a monthly chart updated as financials are completed would be excellent). That way, they can determine what their piece of the pie is if they meet their goals. Ideally, payments would be made quarterly.
- Frequent payments also help solve the “what have you done for me lately?” problem. Managers will have a difficult time assessing the work of employees if they only take inventory once a year. If someone is having an off month in December, their whole year of good performance could be overlooked due to current perceptions. The opposite is true as well, a poor performer who suddenly has a great month can be unjustly overcompensated. Either of these situations will cause morale problems amongst your employees.
- The formula: Care should be taken with the formula. You’ll want to create a formula that pays for performance, but also keeps the bonus in line with salaries. Entry level employees with less impact on the results should not receive the same level of bonus compensation as a top manager. You’ll likely want to establish bonus targets for each class of employee. If they achieve all goals and the company achieves the profitability goal, they get the target bonus.
There are many things to think about when designing your employee bonus program. It’s critical to make sure the program not only motivates employees, but also keeps the company objectives and culture in mind.