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Bonus programs should benefit the employer and the employee

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By Ted Ginsburg

A 2014 survey from World at Work indicates that 86 percent of privately held companies offer annual bonuses to employees. Some companies do it across the board for their rank-and-file employees, and some only do it for executives and/or managers.

The survey indicated that 47 percent of companies award bonuses with no reason that the recipients understand — these are sometimes called discretionary bonuses. The problem with discretionary bonuses is that the employee often does not know what he or she did to earn the bonus, and a continued pattern of discretionary bonuses could be viewed as an entitlement.

Employers that use discretionary bonuses miss out on one of the key features of an effective compensation program — the fact that the bonus should be an employee motivator, both for company and personal performance.

Let’s look at some best practices for granting annual bonuses to the company’s employees aside from the sales force and the executive group, as those groups have different ways of providing bonuses. An effective annual bonus program should reward employees if goals are satisfied, and should pay a market rate of bonuses. Goals can be made on an individual basis, or on a group or companywide basis.

When setting goals for a companywide or divisionwide annual bonus program, consider these issues.

  • The employer should only make a bonus payment if the employee attains pre-established, measurable goals. The goal does not have to be company profitability; you can set different goals for different groups of employees.
  • To motivate employees, it is important that they play a role in the satisfaction of the goal. Reducing manufacturing waste will not be a meaningful goal for an accounts payable clerk.
  • Make the goals reasonable. Goals that are impossible to attain are demotivators.
  • Keep the goals simple. Make sure that the employees understand what the goals are and how they can help the company reach the goals.

When setting goals, consider overall company profitability, as many employers do not want to pay an annual bonus if the company is losing money. Some companies will add an overall profitability threshold before a bonus can be paid.

Employers are often hesitant to share financial data with employees. But if they share relevant data with the affected employee group (for example, if the goal is to reduce waste by 20, showing waste data), doing so will serve as a motivator to employees, as they can track their progress toward attaining the goal.

How does an employer determine the dollar amount of bonuses? A number of salary surveys show annual bonuses as a percentage of base pay, with breakdowns by position, industry and locality. Also, it is not uncommon to increase the overall bonus amount if exceptional results occur — for example, the annual bonus of $x will be doubled if the goal is surpassed by a certain amount.

All of the goal setting, however, is wasted if the program is not effectively communicated.. Communicating to employees early in the year that bonuses will be paid if the employee reaches a goal will set expectations and serve as a motivator. Communication of the bonus program should be written and clearly understandable, and the employer should provide progress updates during the year.

A properly designed annual bonus program can help motivate the nonexecutive/sales staff workforce, while increasing overall profits of the enterprise. The goals can vary on a groupwide basis and can be changed annually.

Ginsburg - headshot, formalTed Ginsburg is a principal at Skoda Minotti. Reach him at +1 (888) 201-4484 or tginsburg@skodaminotti.com.