8 Tips to Help You Build a Great Employee Bonus Plan
Updated: Oct 27
8 Tips to Building an Employee Bonus Plan That Actually Works!
In my last article regarding Employee Bonus Plans, I listed 8 things in most Employee Bonus Plan’s that make them ineffective. Today, I would like to share 8 Tips that you can use to create an Employee Bonus Plan that actually works for you and your employees.
But first, you should know that many Employee Benefit Plans do not work because they only encourage temporary compliance, and do not create a lasting commitment that will continue when the reward is discontinued or forgotten about. So it is important for the success of your Employee Bonus Plan that you give careful consideration to its construction. If you don’t, an ill-conceived plan will do your business more harm than good.
Here we go:
1. Start with the End in Mind
Otherwise known as ‘Reverse Engineering.’ You need to know exactly what you are trying to achieve and what the end goals is. A Bonus Plan without a clearly defined goal or a set of goals is really just weak strategic planning. To get focus and everyone pulling in the same direction, everyone needs to know exactly what they are working towards. Once the main end goal is clearly defined, your team, business unit or employees can begin working backwards by creating actions and tactics that they can use to achieve the goal. Regular updates should be provided to everyone involved, and it’s always helpful to celebrate the small victories that your team achieves along the way to achieving the big goal.
2. It Must Make Financial Sense for the Business
Essentially, Employee Bonus Plans are a form of profit sharing. But instead of just sharing profits with an employee because they are an employee, you are sharing profits because of their contribution to earning the profits. But the plan needs to be built on the foundation that a base level of profit has to be earned by the company before any profits are shared under the Employee Bonus Plan. As the owner or manager, you are responsible to ensure the financial viability of the business. You need to ensure that there is enough cash in the company to operate and retained earnings are held to cover cash short-falls or allow for expansion. Therefore, you need to set minimum benchmarks on how much profit the company needs to keep to be sustainable, before any profit is shared. After all, having a job because the company is viable is a lot better than having no job because the company couldn’t afford to share its profits.
3. Crystal Clear
Anything that isn’t clear or transparent breeds distrust and eventually disdain. If your employees can’t see through the bonus plan, and clearly understand it, the plan is doomed to fail. The plan must be understood at all levels of your organization. This means that everything must be clearly stated and communicated. How the bonus is calculated, who is entitled to participate and why, will the formula be the same for all employees or will some receive more due to years of service or other contributions? These and other details must be clearly defined. It’s got to be crystal clear. It can’t be subjective or open to conditions or “what if’s.” The more clear the plan, the more trust and engagement it will create.
4. Get Your People Involved
So often, as owners, we sit in our office and work up a Bonus Plan, or we call our accountant to get some ideas. All the while, ignoring (unintentionally) the wants, needs or preferences of our employees. Sort of ironic how we approach this. It’s like ordering something off the menu for your employee and hoping they like what you’ve ordered for them. You have good intentions, but your employee prefers steak to seafood. Who knew?! We should have asked. Especially when you consider that if employees prefer gifts over cash, you could save up to 50% on your incentive plan, since you can get good buys on a watch or a cruise, but there are never any sales on ‘cash.’
5. Rewards must be Independent of Salary
We need to take care that we clearly structure the incentive or bonus plan so that it is viewed by your staff as completely separate from their compensation package. It is an extra, and must be presented that way. If it is blended into their overall compensation plan, then the ‘bonus’ will be expected and there will be little feeling of a reward when it is given. This is especially true for employees on a commission based compensation package like sales people. Commission is completely different than a bonus and care should be taken not to confuse the two. In all cases, a bonus should never be mentioned in the same conversation as wage, salary or other standard compensation methods.
Bonus and incentive programs must align with your company’s or organizations mission, vision, values and strategy. If your plan does not align with your stated corporate objectives, it’s like having two people in a canoe each paddling in the opposite direction. For instance, if one of your corporate values is to produce the highest quality widget on the market, but your bonus plan rewards your manufacturing team on the amount of widgets they make in a month, your values and your bonus plan are at odds and either one , or both will suffer. So take care to review your core beliefs and goals and ensure that your Bonus Plan aligns with the big picture.
7. Reward Behaviors
This is a tough one because what we are after is results. And results are tangible, whereas doing the right things are less tangible. So ultimately, we need to focus on the results which are achieving the stated goal(s). But here is where bonus and incentive plans turn into more of an art than a science. What about this scenario. You have two outside sales people. The first sales person, does all the right things like cold calls, cultivating leads, networking etc. but struggles to land the big contract. The other sales person spends more time in the office, and isn’t very proactive. However, this sales person received a call that came to him through no efforts of his own and landed a $250,000 contract. Who should get a bonus, the hard-working sales person, or the one that waits for the phone to ring? Bottom line, the Bonus Plan can’t be based on luck.
8. Bigger Than Ones-self
Individual bonus plans can be good, but if they are not crafted carefully, they can create inter-office competition and rupture the ‘team’ or ‘family’ culture that you have worked hard to create. It works well to build a team, group or business unit bonus. Or a company-wide bonus. Or both. Bonus Plans that are bigger than one individual encourage co-workers to work together for mutual benefit. An added bonus in these type of plans is that it creates internal, and inter-office accountability. If one person on the team, or in the business unit isn’t pulling their weight, the other members of the team will let that person know, since they depend on one another to be successful. This makes life easier for the manager or owner because team members are holding each other accountable and supporting one another to achieve team success.
So there are the 8 Tips that you can think through if you are considering an Employee Bonus Plan for your business. Following these tips will get you started in the right direction.
All the Best!
About the Author
Chris Hall is a Senior Business Management Consultant that has helped business owners, leaders and managers across most industry sectors achieve more profitable and productive businesses. You can PM or follow Chris on LinkedIn or log onto www.abbusinessbuilders.ca