Why do you choose to pay bonuses—and what do your employees understand the reasons you pay them? Many employers pay bonuses at the end of the year because: (a) everyone else does, (b) they’ve always done it, (c) they had a “good year” or, (d) it’s a reasonable away to reflect good employee performance. While these criteria are typical, they are not compelling.
Having designed many plans I’ve come to learn that, while there may be legitimate secondary reasons, there should only be one primary reason for paying bonuses: employees created value and, therefore, they deserve to participate in that value.
Thus, the first question a company should ask before implementing a bonus plan is, “How does our business define value creation?” The answer to this fundamental question will reveal a lot about how the business model supports the strategic goals of the owners. Do we value sales (new business development)? Do we value new product development? Do we value customer service? What is important to us? What will lead to sustainable profitability? What will give us a true competitive advantage?
Once identified, these value creation principles can be easily explained to employees. Employees can be taught that the company produces profits when specific goals related to these objectives within their roles are achieved. And these results, in turn, produce an increase in value for shareholders. Finally, shareholders are committed to sharing some of that increase with employees in a meaningful way.
This doesn’t mean that the incentive plan has to be explained as a pure profit sharing arrangement. But employees need to understand that bonuses don’t grow on trees. Profits (value creation) are the foundation upon which meaningful bonus programs can be built and benefits paid.
No matter how you formally structure your bonus plan, be sure to explain to employees that those who learn to contribute to true value sharing (however you define it) will be entitled to receive the highest awards.
Refining this process will lead to more engaged and productive employees.