When it comes to giving a bonus or raise, historically, we’ve given out raises. But we have lingering questions. About what to tie employee bonuses to. A suggestion was made to give one-time bonuses tied to profits for this year. How do we figure out what to give our employees?
Thoughts of the day: A bonus or raise strategy is important. There’s a huge difference between raises and bonuses. Compensation tied to profits is a great way to focus everyone on a common goal. It’s not just executives or salespeople who need to be rewarded. Especially for higher-level output. Figuring out how to divide up profits can get complicated.
Difference between bonus or raise
Raises are something employees expect to keep year after year. Taking away a raise means a demotion. Or signals a business that’s fallen on hard times. Neither of which might be the case. Maybe you’re simply tired of paying more than you have in the past. For the same results.
What this conversation is leading to is a discussion about compensation at risk. To clarify, that’s money paid if something happens, i.e. a bonus or commission. And not paid if something doesn’t happen. Base bonuses on a common set of results, i.e. profit of the company. Focus employee attention on the company’s overall goals. Under these conditions, bonuses are above and beyond payments. Earned by some or all employees as a result of achieving a specific goal.
Subsequently, employees may expect to see bonus payouts year after year. Especially if that’s been the historical precedent. It’s best to present bonuses as an ‘above and beyond’ recognition reward. In short, not an entitlement. But awarded when good things (profits) happen to the company.
Work improvement deserves reward and recognition
It’s usually best to calculate bonus funds based on a clearly measurable outcome. Give participants a way to track progress toward the outcome. So they can see how their efforts are having an impact.
Think about what it is that you want your company to achieve. Increasing revenue and expanding profit are the two most common objectives. Safety improvements increased productivity and on-time delivery. Keeping all positions fully staffed, managing within budget. These are all things that will be measured. And ultimately should contribute to profit enhancement.
Decide how increased revenue or improve performance. This will translate into additional profit that the company can use for employee bonuses. Don’t plan to distribute all, or even most, of the increase in profits as bonuses. First, you’ll need to pay taxes on profits. Additionally, add money to reserve funds to keep the company safe. And finally, pay down credit lines and loans.
Only a portion of additional profits should go to an employee bonus plan. The keyword here is “additional.” Make sure your plan rewards increases in profit, output, performance, etc. Give people something to strive for. Don’t reward maintaining the status quo from previous years.
What’s right for your company
The next decision is who gets to participate in the bonus plan. It’s common to pay top executives a bonus for improved performance. Use your salespeople to compensate at risk. Focus everyone in the company on the same set of goals. Then use a bonus pool to reward the results the company achieves.
Let employees know how you will calculate bonuses. For example, establish a single bonus pool. Then divide it based on everyone’s portion of the total salary. That rewards employees based on seniority and position within the company.
Payout the bonus pool based on job performance. Higher job performance ratings earn people a higher portion of the bonus pool. Likewise, reward an entire department as a group or calculate rewards by an individual. The permutations are endless.
Bonuses can come in the form of cash, gifts, travel, entertainment, or any other reward. Above all, consider what form bonuses take. Make sure employees will value it. Generally, the lower the income, the more likely employees will value cash. Keep in mind to include any gifts or travel in the employee’s W-2. And they have to pay taxes on the benefit.
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