Are Employee Bonuses Worth It?
 By Jackson W. Feldman

Many different factors figure into employees’ job satisfaction and loyalty. But there’s no denying that compensation is near the top of the list.

And employee bonuses are like the cherry on top of the compensation package.

Here’s what you need to know before you decide whether to hand out those year-end bonuses.

Benefits Of Bonuses
One big benefit of paying bonuses is the extra motivation it will give your employees to work hard and stay with your company, rather than jumping ship to a competitor.

Bonuses are also a great way to get employees to focus on key business goals and objectives. When structured properly, a bonus plan will encourage your employees to have a stake in your company. Bonuses can fire up workers to think and act like owners, not just employees.

Even your business finances can benefit from bonuses. You can tie bonus payments directly to your company’s profits (like a profit-sharing plan), which gives you more financial flexibility.

But bonuses tied to profits can have a downside. If profits fell for the year, you may not pay any bonus to employees. This obviously doesn’t sit well with employees, especially if profits tanked because of reasons beyond the control of employees.

When To Pay Bonuses
The frequency of bonus payouts depends on your goals for the plan.

If the bonus is based on the completion of a specific project, for example, the payout should be made as soon as the project is complete.

If a bonus is based on the quarterly or annual financial performance of the business, make the payout at the end of the quarter or year.

To make the most effective use of bonuses, the payout should quickly follow the accomplishment.

For instance, if a bonus is based on meeting a sales goal, pay the money as soon as the goal is met. If a bonus is based on getting a project completed by a certain deadline, hand over the money as soon as the deadline is met.

Creating A Bonus Plan
You can be creative when developing your bonus program. But here are five important factors that should be considered when structuring any plan.

1. Details of the plan should be formalized in writing and clearly communicated to the employees who are participating.
2. The rewards should be tied to specific and measurable performance standards that your employees’ activities can directly influence.
3. Employees’ activities should be geared toward helping meet short-term (usually annual) company goals that will ultimately increase the value of your company.
4. The financial reward should be large enough to give employees a strong incentive. One rule of thumb is that employees should have the opportunity to earn at least 10 percent of their regular salary or wage in an additional bonus.
5. The plan should give your key employees a strong incentive to remain with your company for the long term – a concept sometimes referred to as “golden handcuffs.”

Here’s one example of how a bonus plan might be structured to meet specific and measurable company goals.

Let’s say that keeping clients will be your company’s primary focus in the coming year, with the goal of a client attrition rate of 10 percent or lower.

You could structure your plan so that if client attrition is between 5 percent and 10 percent, an additional 10 percent would be added to the bonus pool to be divided among your employees. If customer attrition is below 5 percent, an additional 20 percent would be added.

Still not clear what type of bonus plan would best benefit your small business and appeal to your employees? Put several potential plans on the table and ask your employees for feedback. Getting buy-in from workers will make your bonus plan even stronger.

(Posted November 2007)

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