Bonus schemes can be a mixed blessing. Handled well they can incentivise good performance and improve profitability. Handled badly and they can become a focus for unhappy employees.
I’ve helped set up many schemes. Most have worked well and rewarded people for performance which has improved profits. Others, not so much.
What separates the good from the bad? Here are some basic principles.
- Reward people only on what they can control. If the bonus is for the CEO then company net profit performance is a pretty good target but can a Business Director control overheads? You want them concentrating on maximising profitable revenue. Likewise a department head can’t usually bring in revenue so for them it’s about performance and efficiency.
- Communicate clearly and communicate early. People take an interest in bonus schemes so get them out before the year starts and get all the awkward questions sorted in advance.
- Tell people how they are performing against their targets regularly. Bonuses should be about improving performance, finding out about performance and discussing how to improve it is the main reason for bonus schemes.
- Balanced approach. Incentivise purely against revenue and you could motivate people to discount quotes to buy business. Make it about margin as well and you’ll guard against the risk of bringing in unprofitable business.
- Align to company performance. Ideally you should build your bonus schemes into your budget planning so that revenue and margin targets are in sync with company targets.
- Allow a discretionary element. Life is complicated and can take unexpected turns. Through no fault of the employee circumstances could dramatically change and you might want to reward an exceptional performer who was just in the wrong place at the wrong time.
Done well bonus schemes will more than pay for themselves. Done badly they can be counterproductive. If you need help incentivising your employees please contact firstname.lastname@example.org. The author has over 20 years’ experience of devising bonus plans.