Are you getting Performance from your Performance Bonus Plan?

Posted on: February 8th, 2019
If you are like so many other CEOs, you have said this before: “I paid my employees bonuses one year. The following year, our performance was poor but they still wanted a bonus.” 

While your intentions were honorable, paying bonuses that are not tied directly to employee contributions does not provide team members with incentive to continue the behaviors that led to the good performance in the first place. In addition, bonuses paid without being tied to behaviors or measurable outcomes can create lack of appreciation for how an employee’s action directly impacts the company profits. 

With the pressure of year-end bonuses and pay raises behind us, now is the time of year to focus on an incentive-based compensation plan (ICP) for your team. A properly designed, communicated and executed plan can help ensure company profits are preserved and that employees are incentivized based on behaviors that they can control.

Here are five tips for a quality incentive-based compensation plan:

1. Start with the end in mind.

What outcomes are most meaningful to the company’s vision or strategic plan? What behaviors are needed to produce those outcomes? Which employees directly impact these outcomes and which employees only impact the outcomes slightly?

2. Protect the bottom line.

What is the corporate threshold that must be met before ANYONE can receive a bonus? Ensuring that you create a plan that is sustainable to the company in good years and bad ones is critical.

3. Model.

Once you have the bones of your ICP crafted, build a financial model to carefully analyze and perform “what if” scenarios to ensure the parameters of your plan work in a variety of scenarios and over the long term. While you can make adjustments to a plan in future years, taking something away is always challenging. We have seen sales incentive plans that are great in the first year; however, in subsequent years the company is grossly overpaying in commissions because factors were not considered properly from the onset.

4. Communicate and track progress.

Communication from the onset and along the way is critical to ensure employees understand the expectations and that they are reminded during the year that their behaviors have an impact on company goals.  Track progress or performance during the year and make sure to accrue this liability on your financial system to ensure cash is reserved for future payouts.

5. Make it fun.

From charts in the break room to email blasts or verbal acknowledgements, companies can have fun along the way with a properly designed ICP. Consider small gifts or fun perks periodically to help encourage participation and keep the team engaged.

CFOSP has helped our clients design hundreds of different plans in our 20 years in business. If you’d like to learn more about best practices and key performance indicators that will motivate employees and help your business grow, please reach out to us today at (407) 426-8288 or email Shannon@cfosp.com.