Bonus Plan Best Practices

Well, it’s year-end bonus season again.

If you have a good year and want to share some of the fruits of your labor with your team, great. But to simply do so without a well planned and executed bonus plan is a wasted opportunity.

So, here’s a list of best bonus and incentive practices so you get the most bang for your bonus buck.

Plan Ahead

Get an early start on next year’s incentive program by creating it before the year starts. Then, share the numbers and generate excitement. Pick out the main numbers that drive your plan, and make them known. Create scoreboards. Encourage folks to pay attention to the progress. Talk about the plan at every opportunity. Start and finish strong.

Make the bonus “self-funding.”

This means it comes out of profits over and above your target. For instance, if you’d be tickled pink with $90,000 profit before tax, then make your bonus kick in for profit dollars above $90K. So, in this example you might consider putting 25-50% of all profits above $90k in the bonus pool.

Make the bonuses large enough to modify behavior.

The potential bonus needs to be significant enough to generate excitement, and actually get your people to help generate the profits that lead to bonuses.

Divvy up the bonuses in an equitable way.

Many companies divide the bonus pool according to base salary, so higher-paid people get a bigger percentage. You might use “shares”, just like the stock market. Make each $5,000 of base pay equal to one “share” in the pool. So, someone making $25K has 5 shares, and another making $30K has 6. If these are the only two employees in the bonus plan and the pool has $10,000 in it, there are now 11 shares total and each share is worth $909.09 ($10K/11 shares.) So employee #1 gets $4545.45 and #2 gets $5454.54. However you do this, keep it simple.

Make the first year an easy win.

Nothing will discourage your people more than starting a new bonus plan and then not earning a bonus. Set a fairly easy target in year one to show folks you are serious and to give them a taste of winning.

Consider paying the bonuses 30 days after the end of the quarter to help cash flow.

After all, your customers don’t pay you until after 30-45 days. Maybe more. So why not cut the bonus checks after that same amount of time? It’s a great real-life business lesson for your team.

Keep the bonus separate from regular pay.

I strongly recommend bonuses NOT be put on a regular paycheck (but of course you must take out payroll taxes.) Do a separate check run, so it isn’t perceived as pay. Make it clear that this is an additional reward for achieving a goal and is NOT an entitlement.

Your incentive plan can be a business drain or a business gain. Take the time to get it right.

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