It is important to remember that if every employee follows these three criteria, they deserve a stake in the outcome. The three criteria are as follows:
- Employees are given the measures of business success and taught to understand them.
- Employees are expected and enabled to act on their knowledge to improve performance.
- Employees have a direct stake in the company’s success.
Owners need their employees to think about ownership. Not many people will share equity with their employees, and they do not need to. The important thing for employers must do is teach their people about business–to think and act like a business person.
Rewards and Recognition: Bonus Programs
Bonus programs fall under the rewards and recognition category. The reason bonuses do not typically work is because employees believe they should have bigger bonuses and employers are thinking about how they will cover the bonuses.
Why Bonus Plans Fail:
- “The Santa Bonus”: Most often bonuses are discretionary.
- “The Rocket Science Bonus”: Bonuses are too complex and people are unable to calculate them.
- “The Dog Fight Bonus”: Bonuses can create silos when only certain people are given them for their performances.
- “Lotto Bonus”: There is no buy in.
- “What Bonus?”: There is no communication and employees will often be wondering “What bonus?”
The secret to creating a great bonus plan is remembering that people support what they help create. Now, this does not mean one should ask people how much they want for a bonus–that would be total anarchy.
Here are some tools that can be used to create an effective bonus plan.
It is very important that the bonus plan is designed in this order of steps:
- Determine Threshold
- Determine the Bonus Pool
- Determine the Payout Schedule
The very first thing a company needs to do is ensure long-term financial security.
How does a company switch from profit sharing to gain sharing? The answer is simple: the company will share anything over the threshold–otherwise known as the gain share. It is important to teach employees what an owner’s return really is by showing them where the profits go.
Another thing that must be completed when determining a company’s threshold is establishing the minimum performance or the baseline. The baseline is the cash needed for continued growth and sustainability .
The third step is providing employees with a significant portion of the gain.
The final step that must be completed when determining threshold is to rally people around a common goal. It is important to ensure that everyone remains focused on the same goals and to emphasize that the company wins or loses as a team. Also, one should stick to one or two critically important goals that can be profitability- or strategy-based.
Determining the Bonus Pool
The bonus plan can be the most effective educational tool a company has to teach people about business. It is also important to do the following:
- Create line of sight. If they understand, people can not only predict and forecast company numbers, but their bonus numbers as well.
- Learn to check the entitlement attitude at the door.
- Put the “what’s in it for me?” in the right perspective. Remind employees that bonuses are not part of their salaries.
Determining the Payout Schedule
What gets people motivated? Winning! Therefore, it is imperative to give people a chance to win early and win often. Start with small, frequent bonus payouts and let them grow as the business’s performance continues to improve. Here’s a model for an effective payout schedule:
- Employees can earn a bonus every three months
- Potential payout increases each quarter
- Incremental payout levels range from 1-20% of salary