and How Not To..

When you first start offering an employee bonus plan in your business, it can be a challenge to create a good system for you and your employees…

If you do it poorly it can be expensive and your business results won’t improve…

And like everything else in life there are many ways to handle the same situation. Some are better than others…

Following are a few of the worst things you can do with your employee bonus plan.

Don’t Offer an Employee Bonus Plan at All

No one ever said that you had to offer financial incentives. In fact if you don’t you may end up saving some money for a short time…

But what no one bothers to mention about this option is that you tend to lose your best employees by not paying them what they’re worth…

As the economy improves, your top performers are also the most likely people to move to greener pastures or strike out on their own…

If you don’t offer incentives there are plenty of other companies that do. And in an improving economy this can make recruiting and retention difficult…

Unfortunately far too many companies are guilty of the ultimate error of offering nothing or virtually nothing. The entire point of offering an employee bonus plan in the first place is to motivate your employees to do their best work and let them take part in the company’s success…

If you don’t offer incentives you tend to create robots who don’t think past keeping their jobs and maybe getting a raise…

Make Your Bonus Structure Confusing

This is the old keep-it-simple-stupid rule…

If your employees don’t understand how the incentives work, then they won’t work on the right things…

Without a doubt, someone won’t come and ask you to explain it and then when the time comes to pay it out they’ll be upset with the check they receive…

This is going to cost you time and frustration clearing up their misunderstanding in spite of the fact that you told everyone that your door was open if they ever had any questions about how it worked.

A word to the wise: difficult schemes and calculations are seen by confused staff as “ownership didn’t want to pay a bonus so they made it impossible to get one.”

It also won’t help if your employee bonus plan isn’t clear on what kind of behavior you’re rewarding. Done poorly, it can seem as if you’re picking favorites.

The takeaway here is to be very clear about your expectations and how the program works, and above all, keep it simple!.

Compensate People Unfairly

I’m perfectly willing to admit that the world isn’t fair. But your bonus and incentive program should reward people for what they actually contribute and not for who they are or how you feel about them…

While you may not like a particular person or may not even know them, they should still benefit just as much from your bonus and incentive program as someone who’s “on your good side”…

When employee incentive programs reward people for being popular with the boss, all you get is a bunch of kiss-ups who do just enough work to look good and be popular with you, and little else…

You need a team that brings you facts, both good and bad…

A system based on relationships and favors will keep problems or even business altering information from getting to you when it should. You’re creating your own blind spot…

Shifting from an opinion based system to a merit based system is a big cultural move…

Be prepared to have some employees who thought you loved them become upset and leave because they think you no longer value them. You likely won’t keep 100% of your employees when you make this change and that’s fine. The ones that opt out were never really concerned about helping you grow your business anyway…

Only Motivate With Money

Employee incentive programs that use only money as a reward are great — for some people…

For others, particularly those who have non-monetary priorities like wanting to work from home or having more time with their families, these types of employee incentive programs aren’t so great…

One of the best ways to know how well your program will work is to actually ask your employees what they want for bonuses…

If you can, offer different options that employees can choose from in your bonus plan…

I have enjoyed great success with programs that provided financial benefits that were convertible to time off benefits. This allowed me to meet a large percentage of my employees’ values…

Reward Employees Based on Longevity

When companies set up employee incentive plans they often forget that these programs aren’t about tenure, they’re about performance…

You get what you reward…

Your employee’s motivation shouldn’t hinge entirely on making sure that they’re liked or don’t rock the boat…

That attitude in an employee is the opposite of what you need from someone when you’re looking for new ideas and a little bit of risk taking…

You need people who aren’t afraid to fail. Employees often equate failure to short-term employment…

Systems that reward long-term employment also tend to discount the amazing contributions of any new staff you’ve added. When your employees aren’t rewarded for their performance they tend to start looking for work elsewhere. The result is increased turnover because your employees don’t feel appreciated…

One widespread example of rewarding employees based on tenure instead of performance shows up in executive incentive programs, commonly referred to as deferred compensation plans. Often there’s little pressure to remove poorly performing executives which allows mediocrity to stay in place…

If you’re going to establish a deferred compensation program or other employee incentive program make sure that the underlying premise is based on performance. The size of the bonus on the back end must be based on their performance while the plan is building.

Focus on Nothing but Profits

We all love profit…

But if you focus on nothing but profits with your bonus and incentive program you tend to create problems.

I have unfortunately seen employees sacrifice quality in the name of profits to receive a bonus…

I’ve also seen situations where client relationships are damaged in the name of profits. The employee takes home a bonus, leaves the business, and management is left to clean up the mess…

Ideally, you should be coupling revenue, profits, and quality when defining performance in your incentive plan.

Don’t Focus on Consistent Results

A key to building a lasting brand and large client base is good performance over a long period of time. You want clients to say to their peers “Lisa’s company has always delivered excellent service when we’ve used her. She’s never missed a beat.”

That’s consistency and it must be built into your bonus and incentive program. When you focus primarily on short-term needs, you actually hurt the company as a whole.

As an example, if you ran a small manufacturing company and rewarded employees based on end of line quality, you’d be missing some of your quality metric…

What about returned goods? You should take into account product that’s returned because it failed when your customer used it. By adding this into your calculus you’re rewarding long-term results as well as short-term results.

Another way you can promote consistent results that aren’t just about profits has to do with customer service…

While serving customers after the sale may not be immediately profitable, it’s a proven strategy for both customer retention and generating word of mouth advertising…

As you set up your employee bonus plan, make sure that you’re taking into account any lagging indicators to drive consistency.

Have No Strategy for Your Employee incentive program

There are two parts to strategy. First is how it connects your departments and motivates them to work together. And second is it’s evolution. How will you change and improve the plan as your team begins to have success? How will you continually raise your standards? And how will you communicate these changes to your team.

The first time I designed a merit-based bonus program I started designing it in August to be ready for a January 1st roll out. I didn’t work on it every day. In fact, it might sit untouched for a couple weeks so that I could come back to it with a fresh set of eyes. This allowed me to ask myself questions. It allowed me to be sure that it was going to have every employee pointing in the same direction.

When your teams work against itself you have a business that’s fighting itself and you won’t achieve your goals. Make sure that you aren’t accidentally encouraging back-stabbing or other political games.

Make sure that you thoroughly think through how your program is going to get you where you need to go. How does one department’s goal affect another? Do you have employees with competing interests? Don’t just slap it together on a Sunday afternoon for a Monday morning roll-out.

As your business grows, make sure that your plan can grow with your team. You don’t need to have every detail worked out but you do need to be able change the plan. No one has a crystal ball so don’t stress out about not knowing the future. But realize that you may need to replace or change goals each year.

Changes in the plan become necessary because your team becomes more efficient or you purchase new equipment that gives you an advantage. Your bonus plan should change as your company’s ability to execute changes.

Ignore Best Practices

I’ve seen a number of employee incentive programs designed in many different ways. Those that are the most successful include a profit sharing approach. Profit sharing has been validated by the countless companies that have tried other approaches as well as by the work of Professors Locke and Latham.

The fundamental principle that drives many companies to this approach is that as soon as employees realize they’re getting nothing from other plan approaches they “check out”.

When employee bonus plans are based on the idea of sharing profits when performance requirements are met, even if the pool to be shared is small, you get better business results and improved employee satisfaction.

Different industries have different models because of the factors in their industry. Make sure that if there’s a dominant approach, you understand why that approach is accepted by so many.

Your business doesn’t profit but your employee does (sometimes).

Promoting the wrong outcomes is a hallmark of poorly designed employee incentive programs and too many businesses make this mistake. This can happen when you reward an ill-conceived and unprofitable action.

For example, a couple years ago I was reviewing management performance goals for a company and I found one particular goal that created a lose-win situation for the company and managers.

The goal made up one-third of the manager’s performance requirements and required them to refer in a certain type of non-repeat business. Most of their managers would very rarely have the opportunity to do this…

If the manager succeeded there would be no lasting impact on the business. To make matters worse their bonus would equal the entire gross margin of the referred in business. The manager would win and the company would lose.

If the manager was unsuccessful they wouldn’t get a bonus of any kind regardless of how well they’d performed on their other two performance requirements. The manager would lose and the company would lose.

Be sure that the behavior you’re driving is profitable for your business as well as your employee. Always ask the question: Is this a good use of our resources and does everyone make money? And think about the answer.

Evaluate Performance Poorly

Far too many employee incentive programs allow highly subjective goals into their programs. The goals your company needs to accomplish to be successful aren’t written in warm jell-o and your employee bonus plan should be either.

Your bonus and incentive program should be used to tell to your employees the strategic goals of the business…

When your employees are working on these goals they should know that they’re doing their jobs well and be rewarded for it…

When your employee incentive programs focus on simply performing busy work employees start to feel like robots who are being rewarded for nothing important.

Phrasing targets in a subjective way like, “I’ll know it when I see it”, or “the manager will decide at the time of the review” is useless in performance requirements. It leaves everything up to interpretation and opinion. Good employee incentive programs leave nothing up to interpretation.

Change the Rules in the Middle of the Game

There are very few reasons to change a bonus plan after it’s published. Putting the thought in ahead of time will help you avoid this. Sometimes you may have something happen like losing a key client. When this happens, it’s visible and employees understand why you need to make the change.

Otherwise, your word is your bond. If you change the rules in the middle of the game you risk losing your credibility and your ability to lead.

lf you make a mistake, own it. Most people are understanding so you may have enough cache to make an error once. Otherwise it’s your responsibility to get this right the first time.

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