It is one of the more time-honored traditions in the world of business. The holiday season rolls around, and bonuses get paid out. In new companies, this is an exciting moment for ownership and management, as they get to revel in playing the role of Santa Claus, passing out gifts. Frequently they are just a flat amount pulled out of seemingly thin air, with no obvious tie in to actual job performance. The first-year bonuses are paid out, the people receiving them are truly happy and excited. There is even documentation of a short lived, but measurable, spike in productivity. The second year a company does a traditional holiday bonus, people are happy, but there isn’t quite the same spark. By the third year, employees have come to expect the bonus as part of their regular compensation. In what may be my only chance to refer to B. B. King in an HR blog, “the thrill is gone.” And if a company decides to not give the bonus out one year after it has happened previously, look out. Employees will be either angry, fearful for the future of the company, or both. This is not good.
I won’t go so far as to say that the Christmas bonus is totally useless. It is appreciated in a sense, but I will say there are better ways to allocate your resources when it comes to rewarding and retaining employees. And since it is the New Year and people are in a goal setting frame of mind, it is a great time to talk about adopting a performance based bonus system.
Performance based bonuses are actually pretty easy to set up. You set goals for your employees (goal setting will be the topic for a future blog), ones that are measurable. You rate their performance in reaching those goals. Based on their performance, they receive their bonus. It can be a simple “you hit X number, you get Y in bonus.” Or you can make it a mix of company performance, or department performance, and individual performance. If you are so inclined, you can get really complicated and have percentage scales of achievement with all sorts of bells and whistles (sales managers seem to love these). Do what makes sense for your business and employees.
A few caveats. If you aren’t in a financial position to be pretty darn certain you will in fact be able to pay out a bonus at the end of the year, don’t put in a system like this (or if you do, make sure it is very, very clear that the company has to hit certain financial goals in order for the bonus program to kick in). Make the goals measurable with actual data whenever possible. This is easier in some settings than others, and can sometimes take a little creativity, but the employee needs to be able to see and understand where they are in achieving the target. Along the same lines, make sure employees know exactly what the targets are and communicate frequently on where they are as individuals in reaching them (or if it is a company-wide performance indicator, where the company is).
Finally, the most important reason for this, is that you want your bonus system to be tied into employees working toward the things that make the company successful. If you need your sales people to generate a certain revenue number, set that as a goal. If having error free work is important to keeping happy customers and reducing rework costs, set quality goals for employees. If repeat business is critical, measure customer retention. The point here is that you want the entire company focused year-round on doing the things that make the organization successful. A performance based bonus system can be a great tool in helping align the needs of the company with the needs of the employees.
Need help with motivating and retaining your employees? Give Tinker HR a call!