Effective bonus programs encourage top-notch
arch competitor just made your top producer a better offer.
One with a generous bonus program.
With sales goals you and she know she'll meet.
What do you do?
That's right: whisk her away to lunch and match their
bonus -- with a nudge.
During the past decade, companies of all sizes have
migrated away from the traditional model -- seniority pay and annual
raises -- and toward variations on performance-based pay and incentive
bonus programs. Many view the move as essential to reducing fixed
costs while still remaining flexible enough to attract top talent
in a tight job market.
The pay-for-performance trend is yet another acknowledgment
of the sea change under way in America's work force as the employee
surplus of the baby boom gives way to a tighter seller's market.
Demographics alone indicate that today's employees are likely to
enjoy their new free agency well into the future.
The precipitous swan dive of technology stocks over
the past year also finds workers looking less to stock options and
more to the bird-in-hand security of creative base-and-bonus pay
"You're going to start to see some pressure on base
compensation and cash bonuses as people become less enamored with
stock options," says Keith Kefgen, president of HVS
Executive Search in Mineola, N.Y. "If your comp program has
been in place for 10 years, maybe you need to rethink that you have
a whole different group of people with a whole different set of
priorities in life."
Once courted, now courting
Making the switch from being courted to playing the courtier hasn't
come easily for many small companies, according to Lisa Audi, compensation
consultant with Chicago-based Buck
Consulting. The lucky ones are financially able to simply add
an incentive component to their existing compensation plan -- what
worker would complain? Many, however, must reserve a small percentage
of employee base pay in order to fund a bonus program -- a far more
"If it's an add-on, that's one thing," says Audi.
"But sometimes companies go into it and say, 'We'll put 5 percent
of your pay at risk but if we meet the goal, you'll earn 15 percent.'
OK, that's a good deal. But if we say we're going to put 5 percent
of your pay at risk but you have the opportunity to earn 7 percent,
that's not a very good deal. I think employees are looking for at
least a two-times payout of what they put at risk."
Employers may find that workers balk at having their
base pay tampered with at all, even if the upside potential is significant.
"Sometimes it's hard to sell any kind of base-pay
decrease," Audi admits. "In that case, a company may just stop giving
base-pay increases and put that into the incentive plan."
Different folks, different strokes
Bonus programs are as varied as the companies that offer them, as
list of plan profiles illustrates. No one program fits all needs.
But most aim to encourage one of two basic corporate
objectives: teamwork or individual accomplishment.
- For companies with relatively flat organizational
charts where most employees do the same thing (manufacturing and
banking, for instance), team-building techniques such as group-incentive
and gain-sharing plans help everyone pull together toward
specific corporate goals.
- Companies that are more entrepreneurial or sales
oriented may get better results by rewarding individual performance
through a merit-based bonus program.
- Companies with high turnover or varied skill sets
may want to consider competency-based, skill-based
and small-group incentive approaches.
- If there are already too many rungs on your wage
ladder, you might consider broadbanding, which allows for
greater flexibility to reward top producers but still encourages
Regardless of which plans you use, it's important
to set realistic goals that your employees will view as fair and
achievable. A 20-percent projected increase in sales may delight
shareholders and pump up your sales team, but you'll need a more
conservative target to interest the rank and file.
Kefgen advises letting the nature of what you do help
guide how you choose to motivate your employees.
"I counsel most people to blend most of these in order
to add two to four counterbalances," he says. "If you only rewarded
attendance, for example, someone could come to work every day and
"Small companies need to be a little bit more creative
about all of the things that motivate people," he adds. "Many of
them can't afford to compete with the larger companies. The key
for them is, don't try to. Create an environment where people want
to work for you for a fair and good wage, treat people right, treat
people fairly, give them an opportunity for creativity and to make
an impact and give them a lot more contact with decision-making.
You're not going to compete in pay, but you can do it in lifestyle
When determining whether your company can afford
an incentive bonus plan, don't forget to consider overtime
laws. Under certain circumstances, the Fair
Labor Standards Act requires that you include bonus pay
in the base salary of employees when calculating overtime.
If your employees regularly work overtime, the increased cost
could break your bonus budget.
Inside the incentive curve
While bonus programs may vary widely, they all face the same tendency
to degenerate from incentive to entitlement if not properly managed.
Ideally, yours should be clearly linked to company
objectives and do what you promise it will do, in good years and
bad. The quickest way to get your employees to lose interest in
the program is to cave in and pay a bonus when none was earned.
"An incentive plan that works does not pay out when
performance is bad," says Audi. "That's when employees start thinking,
'Well, this is a rip-off.' It takes some work to keep it from being
Audi suggests renewing your bonus contract with your
employees every year, using last year's met goal as this year's
threshold for minimum payout, raising the bar slightly for the top
"You want to keep employees in what we call the incentive
curve, to where what they got last year for their performance should
at least pay out as a threshold of this year's plan," she explains.
"The goals they met last year should be at the minimum of this year's
plan, plus a little stretch. If they made 5 percent last year for
meeting three goals, if they meet those goals this year, they might
at least expect a 2-percent minimum payout, depending on circumstances."
If you're in a fast-moving industry or experience
considerable turnover, you may want to offer quarterly bonuses to
"If you do that, and it's based on annual goals, there
are two things you should do," Audi cautions. "First, you want to
hold some retainer so that each quarter, if your payout is at the
10 percent level, maybe you pay out only 8 percent for the quarter
and hold that 2 percent just in case the goals should really go
astray at the end of the year, to make sure you haven't overpaid.
You would usually pay out that retainer as an end-of-year kick.
"Also, as you pay out quarterly, look at the annual
goals and adjust them as needed. Either hold those fourth-quarter
bonuses against performance or possibly pay out a larger bonus if
goals are exceeded."
No more Santa Clauses
If you're one of those generous souls who take great pride in doling
out holiday cash to the troops, the shift to a performance-based
incentive program may seem cold and uncaring at first.
Kefgen says in reality, it's just the opposite.
"The bonus programs that tend to go wrong are the
ones that aren't grounded in quantitative measures, they're totally
qualitative. I call them the Santa Claus bonuses," he says. "They
breed expectations. People work hard, or at least they think they
work hard. It sets people up for disappointment."
By contrast, performance-based bonuses don't depend
on you -- they depend on them.
Ask yourself these questions after you've designed
- Are my objectives clear? Do my employees know exactly
what is expected of them and exactly what they will receive
if they meet those objectives?
- Is the plan based on quantifiable measures?
- Is the plan flexible? Does it compensate all employees
fairly and equitably?
- Are the plan's goals realistic and achievable?
- Is the plan simple to communicate?
- Will it elicit employee enthusiasm and buy-in?
If you answered "no" to any of the above, go back
to the drawing board.
Will everyone love you for your performance-based
incentive program the way they welcomed that envelope of cash in
the old days? Not likely.
But if it's designed correctly, they will work hard
to earn that extra income rather than spend the year wondering how
generous you'll be feeling come December.
"You can't have a goal of wanting to make everyone
happy because people just don't tend to be happy about their pay,"
admits Audi. "I think the key is to make sure you're doing it in
a fair and consistent way."
Jay MacDonald is a contributing
editor based in Florida.
-- Posted: April 27, 2001