A well-considered bonus system can be a powerful tool for optimizing performance for everyone involved – employees, management and the organization as a whole. Poorly constructed systems can create a lot of havoc by rewarding a few and causing unintended consequences that actually divert the organization from reaching its goals.
Many years ago, I worked with a company that had won the right to construct a cable television system in the Northwest suburbs of Chicago. To win this contract, the company had to make aggressive promises with respect to the construction schedule which involved laying hundreds of miles of underground cable. In order to meet these targets, the company provided an incentive to the head of engineering by promising him a new car if the schedule was met. You can probably guess the outcome. Yes, the schedule was met, and the executive got his car. However, a great amount of chaos was created in the form of shoddy work – both in terms of the initial technical performance of the system but more importantly, the delayed restoration of property owners’ lawns and driveways, streets and other public infrastructure. The uproar from citizens, directed at local politicians, created a public relations disaster for the company and resulted in significant damage to its reputation and extra costs to make the necessary reparations.
As an executive search firm, we regularly recruit individuals for all different levels in organizations from CEO’s to first line management. The offers of employment to candidates that we help to facilitate on behalf of employers often contain not only a salary component but also a potential bonus component. Generally speaking, the bonus component is viewed by candidates as much less important or valuable than the salary component. This is understandable because candidates typically have only modest confidence in the likelihood that a bonus will actually materialize.
Most of the time, the bonus component contained in offers of employment is vague at best. It may be classified as a “discretionary” bonus (i.e., based totally on the judgment of management, with no specification of the criteria on which the bonus is to be determined) or as a percentage of salary, based on unstated criteria. Even if the criteria were set out in detail as part of the offer (which is almost never the case), being new to the organization, candidates will have little ability to assess how likely it will be that they will be able to achieve the target levels of performance to, in fact, earn the bonus. As a result, the attitude of most candidates is that the salary is the main component of compensation to be considered when deciding whether or not to accept an offer of employment. If the possibility of a bonus is involved, that is a plus, but very little weight is ascribed to it because it is basically an unknown quantity.
While it is difficult to overcome skepticism about the value of the bonus component of an offer of employment for the reasons stated above, the usefulness of a bonus element can be improved by stating it in terms that are as clear as possible or, if the criteria have not yet been established, then as an intended percentage of salary for normal and reasonable achievement of targets (On Target Bonus – “OTB”) be negotiated within the first 90 days of employment. For example, an offer might state that the intended bonus for meeting agreed targets will be 20% of salary. The candidate is taking a leap of faith in agreeing to an offer of employment where the bonus component is not clearly spelled out so, in order to build a relationship based on trust, it is important that management follow through on its commitment to implement the bonus system as promised.
The cautionary cable television tale above can be avoided by developing bonus systems more carefully than they were in that example.
1. Bonus Systems Must Be in Sync with Overall Organizational Goals
There must be a requirement that achievement of the bonus program targets do not cause damage to the organization in other ways. For example, a sales objective might be stated in terms of gross margin rather than gross revenue to ensure that the sales that are achieved are, in fact, profitable sales.
2. Bonus Systems Should Allow for Significant Payoff (Be Generous and Greedy at the Same Time)
To be meaningful, the possible payoff for achievement of the bonus program targets must be substantial. The targets need to be constructed in a manner such that if they are achieved, the benefit to the organization will be multiples of the payoff to the employees who are earning the bonus. Constructed properly, the organization will benefit equally or to a much greater extent than the employees earning the bonus, so why not be generous?
3. Bonus Systems Should Cause Increased Teamwork (or at Least Not Harm It)
The best incentives encourage some form of teamwork, resulting in shared success and a unified culture. These can be combined with other criteria that also incent individual effort and success.
4. Criteria Must be Measurable
Don’t even think about creating criteria that can’t be measured or you aren’t prepared to build a system to measure accurately and on a timely basis. At the end of the measurement period (weekly, monthly, quarterly, annually), the numbers must be available promptly and presented to those people affected. Failing to do so will encourage cynicism and ultimately destroy faith in the bonus system.
5. Payouts Must be Timely
You have to be serious if you want the bonus system to have its intended effect of motivating improved performance by tying the reward directly and immediately to the reporting of the performance result and by making it very clear what the payoff amount was, rather than just burying it as part of regular pay. The bonus amount might be included as part of the regular payroll deposit but there must be clear reporting to the employee of what, in fact, the bonus reward was.
6. Celebrate Success
When goals are met, acknowledge the team or individuals involved publicly. Providing recognition and a feeling of accomplishment can often be just as powerful as financial rewards. I have seen many people become very motivated just by the opportunity to be “number one” or to win a trivial prize.
Implementation of a well-considered bonus system can be a powerful tool that works to the benefit of all involved. To do so requires careful planning and consideration of what might go wrong. Time spent in the planning stage will pay off in the form of outstanding results, a unified performance culture and the absence of unintended consequences that are caused by sloppy design and implementation.
Kathbern Management is an executive search consultancy based in Toronto, helping companies find the executives and senior managers who not only have the experience and credentials to fulfill their responsibilities, but also have the emotional and “fit” requirements that will enable them to be successful in a particular environment. We simplify the process and, through our deep research, are able to bring more and better candidates forward than would ever be possible through a do-it-yourself passive advertising campaign.
Contact us today for a free consultation about your key person search.