A reader (Myron) just wrote in to say that he’s looking to create a bonus program that ties bonuses to company profitability, performance, tenure, etc. and was wondering how to structure a program.
Creating a bonus program can be tricky. There are so many ways to approach this, you have to figure out what’s right for your business.
One of the most used bonus structures involves a three-tiered program where one goal must be achieved before payout on the others kicks in:
1. Achieve company profitability
2. Achieve departmental goals
3. Achieve individual goals
Myron is thinking right in that the first part of a bonus program should be based on company profitability. That’s fine so long as you give employees the ability to help achieve profit goals. Most departments can help achieve company profitability through attaining sales goals or effectively managing expenses. This is where department heads can really get on the same page as part of the management team to hold each other accountable.
Achieving departmental goals are where you can really tailor a bonus program to specific departmental achievements. From reducing mistakes to improving efficiency, from attaining an expense reduction goal and more, this is where departments can dig in to help the company. Again, there isn’t a department head who doesn’t want to live up to the goals they committed to in front of their peers.
Finally, individual goals help each person in the company become better. These most often are personal development goals and can be tied to a bonus program and also can be used as part of an employee review and merit increase. These goals can be everything from becoming a better manager to communicating more effectively.
So take 100% and split it up on the three areas above based on priorities and importance and that’s the percent of the bonus that should be allocated to each of the three categories.
The difficulty with this type of program is that if the company isn’t doing so well halfway through the year, employees may give up as they know the corporate profit goal isn’t achievable and therefore they won’t receive any bonus on the other two areas as well. You have to figure out what works for you and your company and your employees.
In terms of bonus amounts per employee, you have to run some numbers. Do you want every employee to be eligible for 5% of their salary in bonus or 25%? Running the numbers will help you understand how that might impact your business financially if you pay full bonuses to everyone.
THE REAL WORLD RETAILING TAKEAWAY
Bonus programs are only as their relevance to the business and how they’re communicated.
Here are a few things to ensure your program is successful:
- Goals must be able to be objectively measured.
- The program must be in writing and the goals and bonus payout terms clearly communicated
- A bonus program needs to be able to be discontinued or changed at the company’s discretion and the payout timing should be clearly spelled out
- A lawyer should look over the program to make sure the company is fully protected (employees taking legal action bonus programs is skyrocketing)
Bonus programs can be a great incentive for employees. Just make sure you’re doing the right thing for them and for your business.