Employee bonus structures can be fraught with problems – but for the right person (ie a hungry and motivated high achiever) they can sometimes be an effective way to drive performance. The problems I have seem with bonus structures fall into four main categories:
1. Expectations are unrealistic. Bonus structures should of course reflect payment for a stretch beyond a reasonable expectation – but they should also be realistically achievable, or the result will be a person who doesn’t feel good about their achievement and who will ultimately become demotivated. It’s a delicate balance, and more often than not one of the parties ends up feeling aggrieved.
2. Where employees are rewarded for a particular KPI (for example, say net profit), it can be demotivating for that person if they don’t have control over what drives that KPI (for example – costs incurred in the business). A demotivated team member is certainly not what you’re looking for when setting up a bonus structure!
3. Where employees are rewarded for a specific KPI, they will be motivated to focus on that KPI perhaps at the expense of the big picture. For example profit for a given year may be maximised – but at the expense of marketing efforts in the last quarter. Potential result: A good bonus for the manager – but a problem for the business in the following year.
4. A person may make a great bonus in a particular month or quarter – but achieve below expectation in the month or quarter either side of that. If there is cash at stake, performance can usually be maximised in a given period – perhaps at the expense of the previous or following periods.
Here’s my advice if you are considering bonus schemes for some members of your team:
1. Think carefully about whether a bonus will genuinely motivate this person to up the ante in excess of what you already expect of them.
2. If the answer is yes, think about the drivers of profit in your particular business. Keep it very specific – such as “gross profit on sales made by that manager for the year” or if staff turnover is an issue you wish the manager to focus on, maybe “annual staff turnover under x%” – or perhaps “acquisition of new clients of at least $x per annum” is more appropriate in your case. Consider rewarding on these drivers rather than the likes of “net profit” – which may be a bit of a blunt instrument.
3. Ensure the KPIs are entirely within the manager’s control.
4. Make sure the KPIs you’re paying bonus on are annualised and cumulative so your managers aren’t rewarded for a great result followed by a poor one.
5. Ensure bonuses are conditional on achieving minimum expectations in all other aspects of their job – not just the ones they are rewarded on. Nothing will bug you more than paying a bonus to someone who cherry-picks the areas to put their efforts into depending on the cash bonus it will earn them.
In a nutshell, tread carefully – and remember that typically “you get what you reward”, so be very careful about quantifying what you reward. If you decide to head down this path, be sure to give us a call to help you fine tune your KPIs and incentive structures before you roll them out. Rebecca Brennan is our guru in this area.