Question: There are lingering questions and disagreements about what to tie our employees’ bonuses to. Historically, we’ve given out raises, not bonuses. A suggestion was made to give one-time bonuses tied to profits for this year. How do we figure out what to give our employees?
Thoughts of the day: There’s a huge difference between raises and bonuses. Compensation tied to profits is a great way to focus everyone on a common goal. It’s not just executives or salespeople who need to be rewarded for higher-level output. Figuring out how to divide up profits can get complicated.
Raises are something employees expect to keep year after year. Taking away a raise means a demotion to most people, or signals a business that’s fallen on hard times — neither of which might be the case. It may be that you’re simply tired of paying more than you have in the past for the same old results.
What this conversation is leading to is a discussion about compensation at risk, which is money paid, usually in the form of a bonus or commission, if something happens and not paid if something doesn’t happen. Basing bonuses on a common set of results, i.e. profit of the company, helps to focus employee attention on the company’s overall goals. Under these conditions, bonuses are above and beyond payments, given to some or all employees as a result of achieving some specific goal.
Employees may expect to see bonus payouts year after year if that’s been the historical precedent. The best bet is to teach employees that bonuses are not an entitlement but rather are awarded when good things such as profits happen to the company.
It is usually best if funds to go into bonuses are calculated based on some clearly measurable outcome. Give the bonus participants a way to track progress toward the outcome so they can see how their efforts are having an impact.
Think about what it is that you want your company to achieve. Increasing revenue and expanding profit are two of the most common objectives. Safety improvements, increased productivity, on-time delivery, keeping all positions fully staffed, managing within budget — these are all things that can be measured that ultimately should contribute to profit enhancement.
Decide how increased revenue or improved performance will translate into additional profit that the company can use for employee bonuses. Don’t plan to distribute all, or even most, of the increase in profits as bonuses. First you’ll need to pay taxes on profits, add money to reserve funds to keep the company safe, and pay down credit lines and loans.
Only a portion of additional profits should go to an employee bonus plan. The key word here is “additional.” Make sure your plan rewards increases in profit, output, performance, etc. Give people something to strive for. Don’t reward maintaining the status quo from previous years.
The next decision is who gets to participate in the bonus plan. It’s common to pay top executives a bonus for improved performance. The other people in your company who may be used to compensation at risk are salespeople. Why not get everyone in the company focused on the same set of goals and use a bonus pool to reward the results you’re hoping your company can achieve.
It’s important to let employees know how bonuses are calculated. For example, you can establish a single bonus pool and then divide it based on everyone’s portion of total salary. That rewards employees based on seniority and position within the company.
You can pay out of the bonus pool based on job performance — higher job performance ratings entitle people to a higher portion of the bonus pool. You can reward an entire department as a group or calculate rewards by individual. The permutations are endless.
Bonuses can come in the form of cash, gifts, travel, entertainment or any other reward. When considering what form bonuses should take, make sure it’s a form that employees will value. Generally the lower the income, the more likely employees will value cash. Keep in mind that any gifts or travel have to be included in the employee’s W-2 and they have to pay taxes on the benefit.
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Andi Gray is president of Strategy Leaders Inc., strategyleaders.com, a business-consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at 877-238-3535. Do you have a question for Andi? Send it via email to AskAndi@strategyleaders. Visit AskAndi.com for an entire library of Ask Andi articles.