WorkPlace: Designing an Effective Bonus Program

Tight labor market…lower productivity...increasing customer demands. Staying in business today demands the best you have in terms of wisdom, creativity and good judgment. Paying your people properly is no different. Today, employees are unforgiving. One mistake in pay, i.e., a newcomer earning more than a tenured employee or a faulty bonus program, can lead to motivation problems or, worse yet, turnover.

All too often, pay decisions are made in haste, out of desperation or inexperience and without careful consideration for the outcome or the potential pitfalls. This is especially true when it comes to designing bonus programs. Why is it that many bonus programs fail to achieve their intended potential? The answer lies in the developmental phase of the process. Many times critical fundamental components are overlooked during the design phase of the program.

TWELVE STEPS. To ensure your next bonus program (or update to an existing plan) doesn’t miss the mark, consider these important ingredients:

1. Define exactly what you wish to accomplish with the program. For example, is the overall goal to increase sales of a particular product or in a specific area? Is the goal to reduce costs? To improve quality? To curtail turnover? To increase profit margins? To build long-term buy-in from employees or to achieve a short-term goal? Whichever it is, specifically and clearly define it.

2. Do your homework. Ensure that your total compensation package (base pay, bonuses, commissions and benefits) is competitive with benchmark positions in your area and industry. Consider all components of a compensation package. For example, if your benefits program is generous compared to the market, your bonus program may be more conservative.

3. Ensure that employees have the ability to impact bottom-line bonus dollars. For example, if a manager’s bonus is tied to reducing costs, does he or she actually have the authority to make decisions that lead to lower costs?

4. One size does not fit all. Don’t assume that your colleague’s bonus program will work at your company. Businesses measure work, customer satisfaction, quality, productivity, expenses and sales differently. Plus, pay and opportunities for sales differs among organizations. These all impact the program’s design.

5. Consider a tiered bonus program. Tiered bonus programs are effective and can encourage long-term employment or greater productivity. For example, increase the bonus potential as length of service increases or as sales increase.

6. Ensure your program actually works. Some programs can actually reduce risk-taking, creativity and innovation. Be certain that your bonus program can be translated into tangible actions that improve the business and make sure the goals are realistic. Take the concept for a test drive. Listen to your employees. If the program doesn’t work, fix it.

7. Consider state and federal wage and hour regulations. Bonuses that are classified as "non-discretionary" must include overtime if they are earned by employees who are nonexempt from overtime. There are ways to structure bonuses to avoid overtime liability. This must be considered in the design phase.

8. Define and document the parameters of your program. Include which positions are eligible, the length of service required before participation, what will happen if an employee separates from the company before the bonus is paid but after it is earned, when the bonus will be paid, any disqualification factors, etc.

9. Don’t forget important disclaimers! Your written bonus program should always include an "at will" disclaimer reminding employees that compensation and employment are not guaranteed, promised or contracted for any length of time and is subject to change, with or without notice, at the sole discretion of the owners.

10. Communicate, communicate, communicate. Explain how the program works. Train managers on how to administer the program and how to affect the results. Provide employees with information and reports showing the progress toward the goals. Define the targets. Show employees the financial results to eliminate questions about results. Enthusiastically sell your program!

11. Update your program periodically. There’s nothing worse than an antiquated, meaningless bonus program. If your business conditions change, reevaluate your program and make changes if necessary. Be sure to communicate any changes to employees well in advance of the effective date.

12. Remember, pay is only one piece of the puzzle. If you want to impact the bottom line, you must invest in people and not just with money, but also with recognition and rewards. People work for more than just a paycheck!

The author is president of the Winter Park, Fla., consulting firm, Seawright & Associates Inc. She can be reached at 407/645-2433 or jseawright@pctonline.com.