Bonus Plans that Work

June 2, 2015 — Leave a comment

By Bill Fotsch

Maybe because I’m an engineer by training, I like to understand how things work. And I find it frustrating when things don’t work the way they are supposed to. I suspect that’s how many business owners feel about their bonus plans.

The reason? Most bonus plans don’t work. They don’t encourage people to act in ways that help the business. They don’t get employees more engaged. Often they provoke recriminations and disappointment. (“How come she got a bonus and I didn’t?”)

Bonuses are like any tool. Used correctly, they perform well. Used incorrectly, they can backfire or fizzle out ineffectively.

The most common type of bonus plans, for example, are linked to individual performance. The company establishes some metric to gauge employee’s performance—sales figures, pieces per hour, customer-service levels, and so on. If individuals exceed the target, they generate a bonus for themselves. Everybody wins, right?

If only things were so simple. Consider these scenarios:

  • I’m a commissioned salesperson, and I need to hit my sales targets to get my bonus. Think I’m going to share leads with my coworkers? No way! Of course, I like to ignore the fact that my success really depends on the operations folks doing a great job delighting customers. If they screw up, I’ll try to blame them and argue that I should get my bonus anyway.
  • I’m in production. One day the sales team gets a unique, profitable order that means more work per piece. Oh, no! There goes my bonus. I better see if I can get assigned to an easier job.
  • I run customer service. I love our engineers—they just developed a product refinement that is wowing our customers and requires far fewer service calls. I know I’m going to get my bonus, because customer satisfaction will be way up. And I don’t have to do a thing differently.

Individual bonuses are fine if what you really want is individual performance. But most businesses are team sports, and individual performance is only one element of the equation. That’s why I almost always recommend team-based bonuses.

Many executives and company owners tell me they agree with that point, and that’s why their bonus consists of profit-sharing checks. They like the idea of an incentive that’s tied to company performance.

But is it really an incentive? Here are some questions I typically ask about profit sharing:

  • Do your teams understand how they contribute to profits?
  • Do you have a regular weekly update on forecast profits and therefore the forecast bonus?
  • Are variances to budget and forecast continually examined, so the team continues to learn more and more about profits?
  • Do you annually review performance and business issues with your entire team, and adjust the team performance metric for next year accordingly?

If you answer yes to all these questions, you already know everything I have learned about bonuses. Maybe we could trade notes about your experience and your current bonus plan. If your answer was no to one or more, perhaps you’d like to have a conversation to improve your plan.

After all, bonuses should work the way they are supposed to.

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