7 Critical Things to Consider When Designing Your Bonus Plan
Bonus plans that are properly designed and executed promote retention, reward employees for contributions to the organization, and drive behaviors that impact an organization’s bottom line. From the budgeting and finance aspects, bonus plans allow the organization to pay less in fixed payroll costs (lower salaries) and shift some of those payroll dollars to variable expenses based on overall company performance. Too many times, however, we see bonus plans that are poorly designed from the beginning and therefore they create more chaos in the culture or drive behaviors that are not positive for the company. Here are 7 things to consider when designing your bonus plan.
- Make certain the employees that you intend to include in the bonus plan are actually motivated by money. Knowing what truly motivates your employees will help determine if these dollars are just being wasted. Some employees, as an example, may prefer additional paid time off or an educational reimbursement.
- Create a structure. CEO’s are often reluctant to create structure in the beginning preferring flexibility. They often forget that the bonus plan can be changed annually to accommodate a growing company or to motivate different behaviors. Bonus plans that pay out at year end based on subjective decisions by management are not effective in replicating behaviors that drive sustainable success in an organization and can create divisiveness among employees. Instead, create a clear structure, design, and communicate a clear path for employees to achieve those goals.
- Determine, for each employee or employee class, what behaviors you want to encourage with the bonus plan. In what ways can their job duties or strengths contribute to the company achieving its financial plan or goals for the year? Begin by listing these behaviors for each employee so that these can be factored into the calculations.
- Determine, for each employee or employee class, what behaviors you want to discourage. What are your biggest gaps or leaks in the organization? What do employees need to do less of or stop doing in order to ensure these gaps are closed? Too many times, companies inadvertently drive the wrong behaviors with their bonus plans. Make sure that your bonus plan does NOT encourage ANY of these behaviors or that employees cannot conduct these behaviors and still meet their bonus goals.
- Consider whether or not you want to implement an overall company goal that must be met as a minimum for anyone to receive a bonus. This can help protect the company from having to pay disproportionately large bonuses to a division that has great success while another division drained the organization of all its profits.
- Consider whether or not the employee will be paid all of the bonus in the current year OR if you plan to promote retention and improve cash flow by making a portion of it paid in the current year and a portion of it paid in a subsequent year. A bonus plan that is cumulative and pays out over time creates a larger pool of dollars that an employee would have to walk away from if he/she decides to leave the company.
How often will you track and communicate the employee’s actual performance vs. budget? More frequent reporting to them is more effective in promoting behaviors you want; however, if the plan is too complex in design or reporting it may become cumbersome on your team to produce reports timely and too complex for employees to really understand where they stand.
CFO Strategic Partners has helped design hundreds of bonus plans for companies at various stages and across industry lines. A little careful thought and planning in the initial design, and then a disciplined structure of assessing the plan and making changes as warranted can help ensure that the bonus plan increases the bottom line of the organization while promoting retention and making employees feel valued for their contribution. Reach out or See How We Can Help.
Shannon Carbone, CEO of CFO Strategic Partners
Shannon Carbone is the Founder and CEO of CFO Strategic Partners, a financial consulting firm headquartered in Central Florida offering CFO on demand, outsourced CFO, virtual CFO, and comprehensive accounting services for clients with either short-term or long-term needs since 1999.