You have had an eventful past 12 months, filled with both challenges and success. The books have now closed and the year was a good one! So good, in fact, that there is a little money left over, and you want to take care of those who took care of you. Admirable thought, but what is the best way to do this?
You could give the same $500 bonus to everyone on the team. You could split up a percentage of the company’s net profit dollars, based on the years of service with the company. Maybe you could look at something based on gross margin and build in some production quotas to make sure everyone is doing their part. However, even with the very best of intentions, this is starting to feel complicated.
All you wanted to accomplish was to reward good performance, and now you feel like you may need to hire someone just to set up and administer the program. Overwhelmed and frustrated, it is tempting to start asking yourself if it’s even worth the trouble. Don’t lose faith. There is a path out of the confusion and it’s all in how you start.
To be clear, I like to think of these programs as a true BONUS … I want to pay more than just a fair and competitive salary. If an employee chooses to go above and beyond, I would like to develop a system that will reward their behavior. While the term “bonus” brings with it certain connotations, a good plan is one that with a concerted and purposeful work ethic your employees can qualify to receive something more than their base salary.
Let’s look at a few of the ways I have seen companies have success in developing a plan that works for both the employee and the organization.
Keep it simple – With a background in mathematics, this one is tough for me. I tend to overcomplicate the process from the get-go, wanting to develop the perfect algorithm, describe the perfect model to reward the perfect behavior… and then no one can understand it.
With a complex spreadsheet and too many numbers, the best intentions get lost in the details. As soon as your employees stop being able to follow the numbers (and more importantly, follow the money) they may feel like they are being cheated. Moreover, if they feel cheated, they start to question their faith in the direction of the organization. Even if the system works in their favor and they receive a bonus, trust in the process becomes broken and earning it back can prove difficult.
Instead, look for a few key metrics to build most of the plan around. Teach and train to these metrics extensively. This ensures that the staff are aware of exactly what they need to accomplish in order to qualify for a bonus and how their daily actions can affect the payout at the end of the reporting period. If they don’t qualify for a certain period, they will know exactly why.
Keep it in their control – It is important for the plan to be anchored around the areas of the business that are under the control of those receiving bonuses. In simpler terms, you need to develop a plan where the triggers to qualify for a bonus are completely within the jurisdiction of the employee’s role within the organization.
The behaviors that you are looking to reward need to be easily identifiable and the day-to-day actions lining up with those behaviors are ones that the employee can readily choose to make. For example, it would seem unfair to bonus a water mitigation technician on net profit percentage. Sure, their performance can and will certainly affect the bottom line, but do they understand how it does and how the choices they make today will influence whether the company is making money or not? Most times a technician has no influence over which new truck you buy or how much rent is on the building. The technician’s focus is on production and the quality of work performed at your customer’s property. Let’s leave the focus there and reward them for striving to be better at their job and at things within their influence.
Keep it achievable – A couple of common pitfalls I’ve seen in a starting a bonus plan begin with laying out a structure that is either too easy or too difficult to qualify for. As we have discussed, the intention is to reward performance that is above “good enough.” You don’t want your bonus plan to reward an employee for just showing up. That being said, you don’t want to make the hurdles so high that no one ever qualifies.
It’s easy to develop metrics that protect the company at the expense of the employee. If you work through a few periods and no one qualifies, your plan is set up incorrectly. Similarly, if you work through a few periods and everyone qualifies, your plan is still set up incorrectly. A plan that is a stretch can potentially demotivate employees, leading to a “Why even try?” attitude. A plan that pays out everyone, every time, can be viewed as less of a bonus and more a part of base compensation. You lose the push toward rewarding the exemplary, and employees learn to depend on the extra compensation as a part of their salary.
Keep it in rhythm: Should you pay a bonus if the company is not profitable- Too often, I hear business owners say, “I want to take care of my people” or “I want my employees to be the best compensated in the region.” I agree with both sentiments and do want to care for the employee but at what cost to the company? The plan you roll out needs to keep in rhythm with the overall health of the organization. Whether your employees qualify for a bonus or not should have no effect on the company’s bottom-line profit. Indeed, the two should walk hand in hand—when the company is making money, so are the employees.
Keep it on point – Any good plan should reinforce the behaviors you want to see within the company. This sounds easy enough, but the challenge comes when you start to look at the ripple effect that could be happening a few steps away from the outlines of the plan.
You need to ask yourself questions like, “Is the quality of the work product suffering on projects as employees chase revenue targets?” or “Am I penny-pinching my trusted trade partners in the pursuit of higher margins?” Worse yet, “Am I taking on projects that I shouldn’t because I need to drive more through the system?” The concern with your answers to these questions is not in the results themselves, but that the ends may not necessarily justify the means.
Take the time to look at how the plan is being worked and what behaviors it may be driving so you can ensure that the company is doing the right things for the rights reasons. You would never want to see that the reason behind a decision made on a project today was based solely on how it affects bonuses and not on what is right for the customer or your company.
No plan will ever be perfectly designed. There will always be an employee who doesn’t qualify but feels like they should have or the one who pushes the edge of the plan to qualify with as little effort as possible. However, I am confident that with a little time spent on the “how” and some diligence in exploring the “why,” you can develop a bonus structure that rewards high achievers for bringing their very best. Moreover, when you take care of these employees, they in turn will ensure success for your organization for the long term.