How to make bonus incentives work in your business

Bonus Plans Should Be Universal

To get your entire staff pulling in the same direction devise your bonus plan to include all employees at some level. Many plans include part timers as well as full timers but at a somewhat lesser share of the proceeds.

Bonus Must Be Significant and of Perceived Value to the Recipient

To create an incentive, the employee must perceive the bonus potential as a significant addition to income. Otherwise the bonus is looked as a top up to their income. There should be company recognition of the employees' performance that resulted in the bonus to add to the perceived value.

Bonuses Should Relate to Individual Performance

One factor when deciding how much an individual employee receives should be their rating as determined by their last formal performance appraisal. All other things being equal, a better job performance should get a higher share of the bonus proceeds.

Bonuses Should Include a Factor for Employee's Job Responsibility

It is reasonable to relate an employee's rating for bonus purposes to their overall responsibility in the company as determined by the number of employees supervised or budget for which they have control. General categories can have different ratings in the bonus distribution process.

Bonuses Should Include a Factor for Employee Loyalty

You should associate the employees’ time with the company as "loyalty". An employee that has been with the company for 25 years should have a somewhat higher rating for bonus proposes than someone having only 1 year. A factor can and should be included in the bonus program for employee time served.

Bonus Plans should be Based On and Pay a Predictable Share of "Excess Profits"

Set a trigger level that must be achieved before bonuses are paid and communicate this clearly to all employees’. The trigger level should provide a base for company growth and replacement of capital. Many small businesses find that this occurs at the 8-10% net profit level but each company is different. It is to be understood that a portion of the profits above the trigger level will be shared. The % shared may be determined by company owners but should not be so low as to give little employee incentive or so large as to give away the bank. Typically, this share is 25-50%. Disclosing the trigger level and distribution share percentage is at the discretion of the owner but the more open the system is the more trust, rapport and enthusiasm will be developed with the staff.

Devise a Distribution Method

Devise a rating system that accumulates the value of the criteria mentioned above (responsibility, loyalty, performance). Determine the amount of money to be distributed as a percentage of "excess profits" and divide that amount by the aggregate points for all employees to determine the £ value per point. Individual bonuses can then be determined by multiplying the individual's score by the average value per point. A spreadsheet can be easily set up to automate this task with only a little maintenance required to update employees and employee performance ratings.

Distribute Bonus Payments Frequently

Pay bonuses as frequently as practical but no less than once quarterly, otherwise the incentive is not kept in front of the employee. Annual bonus plans are not looked upon as "incentives"; they often are viewed as an additional income or a "Christmas Bonus". Bonus payments should be viewed much like salespeople's commissions, if not; the incentive loses its motivation for the average employee.