Picking a bonus plan for your company
During the past decade, companies of all sizes have
migrated away from the traditional compensation model of seniority
pay and annual raises. Instead, they now depend more on variations
of 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.
Here are some of the common structures for effective
incentive bonus programs:
Organizations where a lot of people do similar things use broadbanding
to break down the intricate hierarchical structure in narrow bands
Advantages: Pays the person, not
the job; flexibility to bring high performers up rapidly without
breaking the broadband; flexibility on merit raises.
Disadvantages: May hinder motivation
(no rungs to the ladder); allows for disparity in compensation;
could stretch compensation levels to uncomfortable levels; possible
discrimination actions if not closely documented.
- Small-group incentive:
Rewards performance of a specific group, department, division,
Advantages: Reinforces group objectives;
encourages teamwork and collaboration.
rewards; doesn't reward top performers.
- Blended-group incentive:
and corporate goals.
Advantages: Promotes teamwork;
prompts interest in corporate performance.
Disadvantages: Employees may feel
penalized for underperformance of other divisions, no individual
- Merit-based pay:
Links individual directly to performance. Very clear objectives,
often a matrix of goals and corresponding rewards.
Advantage: High performers love
Average or poor performers loathe it; may promote competition
within ranks instead of teamwork; may contribute to turnover.
- Competency-based pay:
Compensation based on reaching levels of reliability and
predictability on the job.
Advantages: Promotes cross-training;
can help build management skills.
Disadvantages: May reward the wrong
competencies; employees may not see value in it; can be hard to
- Skill-based pay:
Employees are paid a higher wage for possessing certain skills.
Primarily for line-level employees and defined-skill industries.
Advantages: Helps build staff core
competencies; meet production schedules.
Disadvantage: Not particularly
useful at management level.
sharing: Employees are
paid a percentage of corporate profit.
Advantages: Engenders employees
to the company, ties their fate to the fate of the company.
Disadvantages: Dramatic fluctuations;
can involve complex measurements as company accountants are trained
to minimize profit.
- Gain sharing:
Rewards nonfinancial performance, such as faster turnarounds,
Advantages: Pride in work; better
customer service; improved quality control.
does not reward top employees.
- Recognition awards:
Employee of the month, special awards, etc.
Advantages: Can motivate employees,
promote overall performance.
Disadvantage: Creates ill will
if not sincere.
If you're in a fast-moving industry or experience
considerable turnover, you may want to offer quarterly bonuses to
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.
Jay MacDonald is a contributing
editor based in Mississippi.
-- Updated: Aug. 14, 2003