Peer-to-Peer: Are bonuses a good motivator?

Peer advice on how extra cash can fire up staff

Written by ProfitGuide Staff

The Question:

“We provide market-rate salaries, full benefits and paid RRSPs, but we are increasingly asked by our 20- to 30-year-old staff members about bonuses. Are bonuses a good motivator in the long run, or do they just become an expected component of employee compensation? Also, how do you differentiate the contributions of staff who have different roles in the business?”

Reader responses:

Sabine Schleese, Schleese Saddlery Service Ltd.

You want to reward performance, rather than attendance, so yes, you do have to determine the proper mix for the various departments. For instance, since our staff has little influence on G&A, we bonused them on improved gross margins after COGS. We knew what we needed as a basic “break-even”; a percentage of every point increase was divided equally among all staff (and the operative word is equally, not weighted based on base salary or the like). I don’t mind sharing a large profit, because it is due to the efforts of my staff that I have been able to enjoy it!

You are right in saying that (Christmas) bonuses soon become an expected part of the salary. You need to get away from that, and only pay out a bonus when it is warranted and earned. A portion of the bonus payment can be paid out for “above and beyond” service to recognize certain employees.

There are a lot of different ways of determining bonus rates; you have to find one which works for your mix of employees. But yes, bonuses are great if they are set up properly.

Mike Salveta, HROI

We communicate to all HROI clients that bonuses are an excellent motivator if they achieve the following purposes:

  • They do not become part of an entitlement culture. For this not to occur, the company’s compensation system must be communicated and well understood. Also, in years when the bonus is not earned, the employee should still earn 90% to 95% of market rates (90% for highly paid positions and 95% for lower). On the flip side, when bonuses are earned, total compensation should rise by a good 10%.
  • Employees must understand that you are paid to perform your job, so bonuses must be designed to reward either measurable overachievement, whether personal or corporate.
  • The employee must believe s/he has the control to “earn” the bonus.

On the point of differentiation, the major mistake companies make when designing and implementing a bonus is the one-size-fits-all bonus. Successful bonuses are paid [to deserving staff] even if others miss their goal. For example, if sales miss their goals, but finance meets all the cash-flow, investing and collections goals, then finance gets a bonus, and sales doesn’t.

Ian Lloyd

My experience is that annual bonuses, such as a Christmas bonus, quickly become expected and bad feelings are generated if the company is not in a position to match or increase the payment the next year.

I believe items such as corporate clothing or engraved promotional items are more appreciated and meaningful.

Harvey Forester

To me, playing the bonus game is a losing battle. Some other company will always find a way to offer better bonuses and steal away your talent. Also, internal problems arise when different people with different talents get different bonuses.

Your situation reminds me of a business I built and ran successfully for almost nine years. I never had a sale. I didn’t enter the price war. I just offered great service, an excellent product and a great atmosphere. My customers came back because they liked my business.

Avoid the price war with your business! Treat your staff like customers. Create a great atmosphere for your staff and offer benefits other companies don’t. Give them gym memberships, offer training to help their careers, host events for them and offer flexible work hours. In addition, offer an equal bonus plan across the board to all staff, as a percentage of salaries, based on the profitability or performance of the business. Offer a slightly better percentage for those with higher seniority. This will help foster a team spirit within your organization and encourage long term employment. And, best of all, your own staff will weed out the slackers because anyone not doing their part will drag down bonuses of all others.

If you implement the above changes, your productivity will improve, turnover will drop and you will have a great environment for you and your staff to enjoy. I guarantee it!

Lucas A. Skoczkowski, Redknee Inc.

I would like to send some comments / notes on bonus plans. Bonuses are effective way to maintain competitive wages, while ensuring that the upside is provided upon successful execution on business targets / objectives. We have found that bonuses are excellent way to recognize individual performance (program has been in place for 4.5 years). Our bonus program is in addition to our Employee Share Option Plan (ESOP) and Employee Profit Sharing Plan (EPSP).

Some comments/notes to consider in your plan:

  • Ensure that the structure of bonus is defined and expectations set
  • Assessment payout more often than once per year … otherwise people lose sense of how the bonus is related to their results
  • Ensure that you provide timely feedback to all members of the team of how they are achieving (set objectives, and then check to ensure that they have environment to execute and importantly whether they have achieved those objectives)
  • On-going review and reminder that bonus is not to be expected without achieving objectives – personal vs corporate
  • Consider including Attitudes & Behaviors (AB) and Results (R) as part of the evaluation criteria
  • AB: creates environment to ensure long term success of any organization (if adequately identified and qualified: team work, fast learning, can-do attitude, etc)
  • R: ensure that the company can sustain itself long-term (revenues, product delivery, profitability targets, etc)
  • We have found that 360 feedback provides a good method to asses and support positive AB (caution: many HCM primes consider e360 not to be adequate for bonus evaluation)
  • Each role is differentiated through its objectives in the organization — R can be clearly assessed for each of the set out objectives
  • Ensure that you do not create skewed bonus structure — i.e. One works hard (tons of “free” overtime) because 100% bonus, whereas their internal support or customer (another department employee) has not incentive to support this person in over time work as they are not bonuses at all …

We have found that many employees with some previous experience have been abused on bonus plan with respect to the psychological contract between the employer and employee — 10% bonus plan becomes 0 – 1% for 3 – 5 years … We have averaged 22 – 25% bonus across the organization. This is a significant commitment, and a proper execution of any bonus program is critical to success.

Originally appeared on PROFITguide.com