Better Bonus Plan: Better Results

Joel Lazer, CPA, CA, CIRPHR, Leadership

Bonus plans are a subject we have talked about and written about many times.  I am passionate about them.  They must be effective.  If not, they are a waste of money.

The most common is a discretionary bonus plan.  You know the type.  It is where the owner looks at the operating results, sees they are good and decides to give out bonuses.  However, the recipients have no idea why they have received the bonus.  After a couple of years of “free” bonuses, an expectation arises.  The employees come to believe they are entitled to the bonus.  When a year yields poor results, to conserve resources the owner reduces or eliminates the bonus.  The result:  a negative work environment.  Employees wonder, when they have performed or expended the same effort as in the past and believe the poor results are not their fault, why they should suffer.  If you have a discretionary bonus plan, it is of no benefit to you and you may as well give the money away.

For a bonus plan to be effective it has to have certain components.

  • Employees must be able to impact their bonus.  The impact must be an improvement of company performance, an increase in profits.  If employees are going to impact the bottom line they must understand how the company makes money.
  • The employees must be able to see the results of their behavior throughout the year.  If their activity is producing results, they are encouraged to continue.  If their activity is not, they will understand the need to make adjustments.
  • A shared bonus is key.  All contribute, and all share in the success of the business.  The team’s actions are interdependent and so should the reward be for excellent results.  A salesman cannot be great without a delivered product.  A manufacturer needs great production along the entire line.  Inventory must be on the shelf at the right time.  Ensuring your team understands interdependence will also improve performance.

With these components, design your bonus plan to include the financial measurable, the amount of bonus, the thresholds that must be achieved, the method of distribution to employees, the timing and frequency of the distributions, and how the results will be published.

Designing an effective bonus plan involves more than just looking at last year’s results.  We know, from personal experience.  That’s why we are offering to assist any business in the development of one.  We will, without charge, design and facilitate the implementation of a plan for any company.  We want to do this for our clients since our role in the relationship is to help you to succeed.  This offer is also for non-clients; we would consider it a privilege to contribute to your success as well.

To take us up on this no-charge offer, call, write or email us prior to June 1, 2011.

We know an effective bonus plan leads to better results.  Let us prove it to you.