The primary purpose of an annual incentive or bonus plan is to drive and reward behaviors that have an impact on the operating success of the company. When designing your incentive plan you need to have a clear measurement system for what success is in your company and then make sure the measurements are meaningful to the employees who are doing the work. For any incentive plan to be effective it needs to be meaningful and have clarity relating both to the plan provisions, and to the results needed to earn and maximize an award and the award should be attainable. Employees need to see a link between how their job performance affects results, and the award amount needs to be sufficient enough to motivate.
Generally two to four performance metrics are included in a bonus plan design. The metrics are primarily financial, though quantifiable business objectives can also be used. Corporate or business unit financial metrics are used to fund the incentive pool, and individual performance measures may also be used to determine final individual payouts. Results that are measured can be quantitative and qualitative, such as customer service quality, number of customers served, effectiveness of programs, etc. Often a balanced scorecard approach is used.
Employers should give careful attention not only to the design, but also to the implementation and communication of incentive programs. The most common pitfall when creating a bonus program is inadequate communication. Bonus plan communications should be both clear and timely. Make sure the plan is communicated prior to the beginning of the bonus period and this initial bonus communication should address the structure of the plan, decision making criteria, fairness, measurability and target. Equally important are follow-up communications regarding the progress toward attainment of the goals that should happen at frequent and regular intervals throughout the bonus plan period. You want your employees to have an on-going understanding of where they are and what they need to do to meet and/or exceed their bonus target.
When bonuses are paid or awarded, clear communications again are very important. Managers should have individual meetings with each bonus plan recipient and clearly communicate the outcome for the incentive period. Whatever the amount, be sure to let the recipient know that he/she is valued. Be sure to discuss specific accomplishments and strengths that went into the bonus award. If the employee was expecting more, be sure to emphasize the broader context of the company’s approach to bonuses. Let each person know how the bonus was calculated. No matter what the award is, the conversation regarding the award amount is an opportunity not only for clarity and understanding, but to thank the individual for their hard work and to hopefully improve morale and motivate for future performance.
Employees want to know they are being fairly compensated for their work and their job performance. Bonus plans that are meaningful to your employees and aligned with the bottom line of your company can help build moral and drive behaviors that are critical to the success of the company.
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