What is a Bonus Plan?

Many exceptional companies have bonus plans to reward employees.

Why would you consider a bonus plan?

Advantages include:

  • Staff retention, attraction and motivation.
  • Added incentives to complete jobs on time and achieve agreed milestones.
  • Assists cash flow in the company by minimising annual salary increases.

What should a bonus plan include?

Any bonus plan should ensure that team members are rewarded when corporate targets are met. There should also be safeguards in place to ensure that team members who contribute the most to the result have the ability to obtain a greater share of the bonus pool. Conversely, those who are dragged along should receive less or no reward at all.
The bonus system is a two-step process. The second step only occurs if the first step is triggered.

Step 1 – Company Results

The bonus plan is triggered if a pre-set company target is met for a defined period which is communicated to the team. If the target is met, then a bonus pool is established. The value of the bonus pool is a fixed amount for hitting the target with additional incentive for exceeding the benchmark. The variable component has the ability to increase the size quite rapidly so there is real incentive to exceed, not just hit, the stretch target.

Step 2 – Individual Results

Once the value of the bonus pool is established, a proportion is allocated to each participating staff member; this is the base amount. The proportion may be based on the employee grade. Seniors/management and those who generate revenue or drive results obtain a greater share of the pool.
Individuals are then given a score based on quantitative and qualitative personal KPIs. The role of the staff member will determine what their KPIs are; the higher the grade, the more likely there will be quantitative KPIs and are not subjective i.e drawn straight from statistical results. Qualitative results are entirely subjective and assessed by the employee’s direct report. The KPIs are weighted so that the more important it is, the more it contributes to the individual’s score.

Measures

Examples of Quantitative measures include:

  • Individual Productivity
  • Team write-offs
  • Cost Recovery

Examples of Qualitative measures include:

  • Contribution to internal policies and procedures
  • Contribution to staff training
  • Attendance and punctuality to meetings
  • Identification of value add work
  • Reduced debtor days
  • Initiatives to reduce burden on senior staff and directors

Our experience is that the bonus plan provides good incentives for staff. The bonus plan has the ability to not only allow team members to influence their own remuneration both in terms of generating revenue but also to be rewarded for individual out performance on their personal KPIs.
The implementation of the bonus plan also allows management to continually monitor performance, while also minimising the number and level of pay adjustments that may be considered during reviews.

It works well when team members recognise they are more likely to generate additional salary from hitting bonus targets than waiting for a pay rise. This message needs to be communicated to the team. Of course, it is only useful if it benefits the company overall and this is guaranteed by virtue of the pool only being triggered when stretch revenue budgets are met.

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