MLR

Structuring for Success: Employee Bonus Plans

Money

Many companies today are creating bonus and incentive compensation plans to reward hard-working employees for jobs well done. Such plans can be a win-win: Employees receive a tangible reward for exceptional performance, and businesses reap the benefits of high achievements.

However, creating an employee bonus plan without carefully thinking through what you want to accomplish can end up doing more harm than good. The result is wasted time, money and opportunity — on the part of the company and the employees.

Start with Your Goals

The first step in creating an effective employee bonus plan is to set specific corporate goals to inspire employees. These are often tied to key performance indicators (KPIs) that your company wants to improve, such as boosting sales or profits, improving customer retention, or reducing waste.

Once you have set corporate goals, the next step is to structure the plan so that each staff member’s priorities and goals align with his or her position and career path. Like the corporate goals, employee goals must be specific and measurable. Some should be “stretch” goals that require workers to go beyond average performance levels, but not so difficult that they become discouraged and give up.

It often makes sense to set departmental goals so employees can better see how the work they’re doing individually, and as a group, propels progress toward the overall company goals. For example, manufacturing assembly line employees’ bonuses could be tied to limiting unit rejects to no more than 1%. This, in turn, would relate directly to the corporate goal of reducing overall company waste by a total of 5%.

Nurture an Entrepreneurial Mindset

Ultimately, a well-structured bonus or incentive plan should inspire a more entrepreneurial mindset among your staff, who will start thinking more like owners than employees. Here are some tips to keep in mind as you structure and implement your plan:

Keep it simple. Sometimes, bonus and incentive plans get so complicated that no one can understand what they have to do to receive their awards. Keep your plan as simple as possible, and clearly explain all the details. Also put the plan in writing so both you and your staff have something to refer back to if there’s ever confusion.

Find the right balance in the bonus or incentive amount. This can be tricky: A bonus amount that’s too small won’t provide adequate motivation, while an amount that’s too large could jeopardize your bottom line. Structuring your arrangement as a profit-sharing plan will enable you to make incentive payments based directly on the company’s profitability.

Make the plan flexible. Your company’s circumstances will change over time, so your plan should be flexible enough to change as well. Corporate goals, for example, will likely evolve from year to year, so you should adjust your incentive plan along with them.

Allow the highest achievers to reap the biggest rewards. In many businesses, salespeople have the biggest impact on the company’s overall performance. If so, they should have the opportunity to earn the highest awards.

Don’t set goals that are open-ended. The criteria for meeting corporate and individual goals should be measured on a consistent schedule with a firm starting and ending date. Usually, goals are measured on a quarterly or annual basis.

Think Strategically

There are clear potential benefits to creating a bonus or incentive plan – for both your company and your employees. But you should approach your plan from a strategic perspective to give it the best chance of succeeding.