Employee Bonuses: Give or not Give? How Much is too Much?
Bonuses are one of the responsibilities that many business owners learn to really dislike, and the reason for the dislike is that setting correct and fair metrics are very difficult to do. If there are no metrics for judging whether or not a bonus is due and how much is due, then the bonus can become a disincentive! Instead of a good leader, the leader will be viewed, at best, as a benevolent dictator.
Let me set up some basic thoughts as to some different potential levels of employee performance compensation:
When deciding on whether or not to give bonuses – or how much to give – it’s important not just to take the employee’s hourly pay or salary into consideration, but additional benefits such as:
- Medical insurance
- Vehicle usage
- Paid time off (i.e. vacation, holidays, jury duty, etc.)
- Professional development opportunities
- Retirement plan
In any job market, it is difficult to determine what the pay is for each category in your marketplace. One good way to get a number is to ask each interviewee the next time you’re hiring what they are currently being paid to do their job elsewhere. Ask a lot of questions and you will get some very valuable information on which to make your future business decisions with. The information you gather then needs to be shared with your employees so that they realize what the local marketplace is paying for their job and whether or not they are being paid competitively for their market area.
More important things to determine and identify include:
- What you expect and need from each employee, in writing.
- Teaching each employee how to do what you want and need them to do with metrics that they can read.
- Meeting with the employees regularly and confirm with them that they are doing what you want and need done.
One difficult thing to determine is the metrics that any employee bonus will be judged by. These metrics need to be agreed upon and accepted by all that will be affected prior to the bonus program starting. The last sentence of any bonus program should read along the lines of, “Any action that management deems necessary regarding the bonus program…” This way, if the bonus program needs to change, it is done in the open, with everyone understanding why the change needs to be made. It also must be made as a written change to the existing bonus program.
Most companies award their people based on completed jobs on either a monthly, quarterly or annual basis. The more jobs that are averaged for bonuses, the more solid the averages will become and the higher the trust process will become between all of the participants in the bonus plan.
One of the considerations to think about is to split your bonus system into two parts. One part is the bonus plan that all have agreed upon in a democratic process. The second part would be to have a plan that is completely at the discretion of the owner. An example would be the owner giving some type of reward that is strictly decided on and funded by the owner. This could be a turkey at a holiday time, a cash spiff for a notable personal effort of an individual going above and beyond normal job requirements or even something as simple as a public expression of gratitude to a specific individual.
One of the most challenging aspects of any bonus program is getting employees to live by the idea that the company must make a profit before any bonus amount is paid to anyone. For many businesses, a portion – if not all – of any remaining profit is divided out among employees according to an agreed upon written bonus plan.
Regardless of how hard someone works, if a profit is not made by the company, there should be no incentive-based bonuses paid to anyone for anything. My clients have had the most success with a written program where all members of a program buy in. The concept is simple – it’s either a win-win or a no-win for all participants.
If a company and its team members trust each other, the company can become highly successful. In order to achieve this level of success, the company must be transparent at all levels. The accountability that results from everyone knowing what is going on within their company will accelerate the success of the company. In order to build the trust on all sides, it is necessary to job cost every job and then review it with all members that participated in the job on a regular basis, preferably weekly.
The best bonus program is one that pays the planned bonus amount. Conversely, the worst bonus program is one that does not pay the planned bonus amount. But it’s important to not create a bonus plan until everyone understands that a company does not always make a profit. If that is not made clear and in writing, you will rue the day you ever even considered such a plan.