How to develop a fair bonus program
Incentive compensation is a frequent topic for business owners. It seems so logical – pay people for what they accomplish, not just for showing up.
 
That may seem logical, but it isn’t as easy to practice as you might hope. Here are a few things to consider when trying to develop a fair bonus program.
 
First, think about the behaviors you are trying to incent. Make sure the bonus program encourages those behaviors without compromising other behaviors you want in place. For instance, if you give rewards based on individual performance alone, but you still want employees to help one another in a pinch, you may be sending mixed signals.
 

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The employee may think, “If I stop my work to help Joe, my bonus will go down.” If the measurement and reward systems don’t account for these activities, they won’t likely happen.
 
Second, think about control. Offering bonuses for outcomes the employee does not sufficiently control is a disincentive. For instance, if the employee is rewarded for how many widgets he packages in a day, but the assembly line stops and starts frequently, leaving him with nothing to package, he’ll be de-motivated by the reward system.
 
Every job has some uncontrollable factors. Just be sure the incentive program recognizes and accounts for those issues. The measurement systems may need to be multi-layered to be fair.
 
Third, when setting targets, it is important to make them ambitious but reasonable. How can you know how many widgets one person should be able to produce in a certain time period? Your production records can offer some guidance, as can industry statistics. Think about the “bell curve” that most groups fall into.
 
You’ll have a few very aggressive performers, a few who significantly underperform and the majority will fall somewhere in the middle. If you set the target too high, most workers won’t be able to make it and they will be unmotivated. If you set the target too low, you lose many of the benefits of incentive compensation. Getting it “just right” takes some study and deliberation.
 
Finally, it is important to understand that not everyone responds to incentives the same way. Some people are motivated by knowing exactly what is expected and what they will be paid for doing it. They like the security and simplicity of the hourly wage or salary. Others get a thrill from trying to beat the clock. Think about your workforce as you evaluate how an incentive bonus system might work for your company.

Incentive compensation is a frequent topic for business owners. It seems so logical – pay people for what they accomplish, not just for showing up.

That may seem logical, but it isn’t as easy to practice as you might hope. Here are a few things to consider when trying to develop a fair bonus program.

First, think about the behaviors you are trying to incent. Make sure the bonus program encourages those behaviors without compromising other behaviors you want in place. For instance, if you give rewards based on individual performance alone, but you still want employees to help one another in a pinch, you may be sending mixed signals.

The employee may think, “If I stop my work to help Joe, my bonus will go down.” If the measurement and reward systems don’t account for these activities, they won’t likely happen.

Second, think about control. Offering bonuses for outcomes the employee does not sufficiently control is a disincentive. For instance, if the employee is rewarded for how many widgets he packages in a day, but the assembly line stops and starts frequently, leaving him with nothing to package, he’ll be de-motivated by the reward system.

Every job has some uncontrollable factors. Just be sure the incentive program recognizes and accounts for those issues. The measurement systems may need to be multi-layered to be fair.

Third, when setting targets, it is important to make them ambitious but reasonable. How can you know how many widgets one person should be able to produce in a certain time period? Your production records can offer some guidance, as can industry statistics. Think about the “bell curve” that most groups fall into.

You’ll have a few very aggressive performers, a few who significantly underperform and the majority will fall somewhere in the middle. If you set the target too high, most workers won’t be able to make it and they will be unmotivated. If you set the target too low, you lose many of the benefits of incentive compensation. Getting it “just right” takes some study and deliberation.

Finally, it is important to understand that not everyone responds to incentives the same way. Some people are motivated by knowing exactly what is expected and what they will be paid for doing it. They like the security and simplicity of the hourly wage or salary. Others get a thrill from trying to beat the clock. Think about your workforce as you evaluate how an incentive bonus system might work for your company.

 
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