Bonuses and incentive programs are some of the best ways to motivate employees. However, in order for them to work, they must be equitable, realistic, achievable, and concise. Therefore, a successful bonus program must be thoughtfully designed.
Boiled down, a bonus is simply extra money, paid to employees, in addition to their wages or salary. Also called “incentive pay” or “variable pay”, bonuses are a tactic that managers and business owners can use to motivate current employees to achieve organizational goals, or entice prospective employees to join their team. The prospect of additional pay can be an extremely effective tool for recruiting, engagement and retention. In fact, according to a 2021 report by PayScale, “the majority of organizations (69.6 percent) offer some kind of variable pay as part of a total rewards package (e.g., bonuses).”
Ready to start designing a successful bonus program? Here are the three steps you need to take to be sure it works!
1. Design It for Your Business
Businesses come in a number of forms, so bonus programs do too. Every company has growth goals and sales needs that vary widely. You must tailor your bonus program to your business strategy and compensation philosophy – while keeping in mind the desires and needs of your employees. Speak to each department (or employee, if possible) that you want to incentivize to see what will motivate them the most.
For reference, here are the bonuses that rank as the most popular among employers:
- Individual incentives (53.1%).
- Employee referrals (34.2%).
- Companywide incentives (33.4%).
- Spot bonuses or other discretionary ad hoc bonuses (30.8%).
- End-of-year bonus (25.9%).
- Hiring bonus (21.8%).
- Profit sharing/stock options/equity (18%).
- Team-based incentives (16.9%).
- Retention bonus (15.2%).
Most employers offer a combination of the above. However, what works for your company may be different, or may be dictated by your financial position and outlook (more on that below). Additionally, some businesses pay bonuses proportionately to how long an employee has worked for the company. Others provide a predefined, flat amount per transaction or milestone. Some bonuses are linked to overall company performance. What’s important is to consider what your company hopes to gain from a successful bonus program. Once you have that sorted out, it’s time to crunch the numbers.
2. Make It Realistic – For Your Company & Your Employees
Your bonus program has to be within financial and economic realities. In other words, you can only pay out in bonuses what you can afford – so you need to tie your incentive program to the amount of income it generates. Additionally, when bonuses are tied to performance goals, you should assume that each and every person will hit their marks, or you run the risk of a bonus program actually costing your company money… or worse, an employee not getting the bonus they earned.
On the other side of the equation, you must make your bonus conditions realistically attainable for your employees. Setting unreachable goals for bonus disbursement can actually demotivate your employees – which is worse than offering no bonus at all. Work with available historical metrics and cross reference your business goals to create a motivating and achievable bonus structure.
3. Make it Clear and Concise
Employees MUST know exactly how to earn their bonus, or you risk running afoul of labor laws. Explain to them who is eligible to receive bonuses, why they are eligible, when they will receive those bonuses, and how it will be handled if an employee leaves/is terminated. If your bonus program is linked to performance, let employees know exactly what performance level they need to achieve to earn their bonus. This way, there will be no confusion when employees do not receive a bonus if they fail to reach established goals.
A successful bonus policy will be equitable, well-documented and organized, and consistently applied.
We Can Help Create a Successful Bonus Program
Creating a successful bonus or incentivization program can be difficult. If you find yourself in over your head, we would love the opportunity to speak with you about how we can help. At Capital Payroll Partners, we specialize in payroll and HR services for small and medium size businesses. You can reach us at (804) 364-7220 or via the form below.
We look forward to working with you!