The Risks and Rewards of Employee Bonus Plans.

Updated: Oct 27, 2020

Human Resources employee bonus plans
Are Employee Bonus Plans a Good Idea?

Human Resources

You’ve no doubt heard a lot about Employee Bonus Plans or Employee Incentive Plans. Maybe you are considering implementing one in your business. Or maybe you know of business owners or other managers that use them in their organization. You’ve likely heard some rave reviews of how the business owner down the street, and it solved all of his employee performance issues. Just as likely, you’ve heard some horror stories from a colleague who implemented an Employee Bonus Plan only to pay out a ton of cash for no tangible improvement.

So if this is where you find yourself, where do you go from here? Do you bite the bullet and implement an Employee Bonus Plan and hope that it will do what it’s supposed to? Of do you soldier on as is and hope that your employees just do a good job? There are pro’s and con’s to either approach. It may help you if you know some of the risks and rewards before you finalize your decision.

Before I provide a list of the risk and rewards, it’s important to note one major detail. A well-thought out and well-executed plan will most often work (at least to a large degree). But a poorly designed, and inconsistently delivered plan will almost always fail, no matter how many good intentions are attached. So my list below is targeted at the Bonus Plans that fall into the lower 70%.

The Risks:

1. Ruin Team Work – If Employee Bonus Plans are designed for the individual only, your chances of building or maintaining a strong team environment in your business is unlikely.

2. Playing the Game – Employees may spend more time on how they can ‘play’ or manipulate the plan for their benefit and less time focusing on positive habits and behaviours.

3. Rewarding the Un-Rewardable – Plans can be so generic and unfocused that employees get rewarded when their behaviour or their performance simply do not merit a reward. This only breeds continued sub-standard behaviour.

4. Decision Making – An employee’s ability to make sound or moral decisions may be hampered by the fact that they are pursuing a reward, and not what is right, or what is in the best interest of the company.

5. Wrong Focus – Employees may become so focused on the reward, that they only focus on the results and not on the process. If the results don’t come, they give up and they never develop a sustainable process.

6. Crush Creativity and Risk-Taking – There may be better ways to do something, but if the Bonus Plan doesn’t allow the employee the time to implement creative methods or take a chance, it is unlikely that the employee or the business will experience those ‘a-ha’ moments that lead to breakthroughs.

7. Short-term and Micro Thinking – If the Employee Bonus Plan is not aligned with larger corporate and strategic goals, those long-term goals may be sacrificed for short-term success just because the employee wants to maximize their reward, and thinking longer term doesn’t support short-term gains

The Rewards:

1. Reward for Hard Work – Employees that work hard and deliver results can be rewarded more than employees that don’t work as hard or don’t deliver the same type of results.

I’d like to list some more rewards here, but remember, I’m talking about Employee Bonus Plans that fall into the lower 70th percentile. Additional rewards can and will be realized when your Employee Bonus Plan is in the top 30th percentile. That is, it is well-conceived, well-designed and well-executed.

This list of the Risks and Rewards of any Employee Bonus Plan should underscore the importance of investing some effort as you design the appropriate Employee Bonus Plan for your business. Investing at the front end, gives you a much better chance of seeing the improvements you hoped for on the back end.

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

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