Creating an Effective Bonus Plan for your Business

However, if not optimally designed, bonuses can backfire — feeding worker frustration and wasting resources. That is why the right approach is critical.

What are the goals?
The first step in creating an effective employee bonus plan is to set specific and reasonable strategic goals that inspire employees and improve your business’s financial performance. They should be tied to metrics that describe intended operational improvements, such as:

Increased sales or profits,
Enhanced customer retention, or
Reduced waste.

Structure the bonus plan so that staff members’ priorities and performance goals align with the company’s strategic goals, as well as the purpose of their respective positions. Employee goals must also be specific and measurable. You may allow some workers to set “stretch” goals that require them to exceed normally expected performance levels. But do not permit anything so difficult that an employee will likely get discouraged and give up.

It often makes sense to also set departmental goals. This way, team members can better see how their work, both individually and as a group, propels progress toward company goals. For example, the bonuses of assembly line workers at a manufacturing plant could be tied to limiting unit rejects to no more than 1%. This, in turn, would directly relate to the business’s strategic goal of reducing overall waste by 5%.

How can you do it right?
A well-structured bonus plan should do more than set employees on a “side quest” to earn more money. Ideally, it needs to educate and inspire them to think more like business owners seeking to grow the company rather than workers earning a paycheck.

For starters, keep it simple. Sometimes, bonus plans get so complicated that employees struggle to understand what they must do to receive their awards. Design a straightforward plan that clearly explains all the details. Write it in plain language so both leadership and staff have something to refer to if confusion arises.

Also, seek balance when calculating bonus amounts. This can be tricky: A bonus that is too small will not provide adequate motivation, while an amount that is too large could cause cash flow issues or even jeopardize the bottom line. Many businesses structure their incentive arrangements as profit-sharing plans, so payouts are based directly on the company’s profitability.

Make the plan flexible, too, by adjusting it as business conditions change. For instance, you might tweak your bonus plan when you update your company’s strategic goals at year end. But do not set goals that are too open-ended. Measure both strategic and individual goals on a consistent schedule with firm starting and ending dates. Companies generally track goals quarterly or annually.

Finally, consider allowing the highest achievers to reap the biggest rewards. In many businesses, salespeople have the biggest impact on the company’s overall performance. If that is the case for your business, perhaps your sales team should be able to earn the highest amounts.

Who can help?
A well-crafted bonus plan can align employee performance with your company’s strategic plan while driving sustainable growth. Let your Rudler, PSC advisor help you design a plan that motivates employees, protects your bottom line, and keeps your business in full compliance with the tax and accounting rules.

SafeSend Client Portal

Creating an Effective Bonus Plan for your Business

In today’s information-rich world, employees have a wealth of knowledge at their fingertips and face an ongoing challenge – staying focused and productive amid endless distractions. One effective way to boost engagement is a performance-based bonus plan.

RUDLER, PSC CPAs and Business Advisors