Paying staff a bonus or other incentive is a well tested method of improving their commitment to the business’ management goals. The secrets of the Staff Bonus Plans are revealed below.

Read this if: you want to know more about how bonuses should be constructed to drive the goals of the business.  Many bonus systems are not well thought out and don’t help to improve the things the owner/ operator really wants while costing money and raising the expectation of the staff.  Learn about a whole range of techniques you can use to to construct a workable set of goals for your business that focus on achieving what you want.

Related to: part of the human resources materials in 12Faces so you may find other topics of interest in that category in the 12Faces  ‘Contents” menu 

Degree of Difficulty:  this is a yellow belt (introductory) article that should be useful to all levels of management experience. Yellow Belt

Staff Bonus Scheme

There seems to be ample evidence that a well designed bonus scheme can incentivize staff to be more productive, more innovative or improve other aspects of the business operation the owner wants to focus attention upon.

The bonus goal is a statement that these company goals are so important, we will pay you to focus on them,.

It is a mantra in business that people will focus on whatever is measured which is why having the right metrics is so important. In this instance, the point is made even clearer by paying staff to head down that path.
Go to the article: Importance of Metrics for Profit

What’s the Bonus Scheme for?

A bonus scheme can be used to (for example):

In fact, if you don’t have some sort of goal like one of the above in mind when you are designing a bonus scheme, you are quite likely just pouring money down the drain.  Staff might be motivated but, in the absence of a goal, just what are they motivated to do?

Decide on Desirable Outcomes

So, the first step in a bonus framework most likely should be to decide what you want the staff to be doing.

Remember, staff will do whatever they think the boss has his/her eye on.  What stronger indication of what the boss is looking at than where you are prepared to pay for results?

These are the Goals for your bonus scheme.

Like any good set of goals, they should follow the SMART formula
Go to the article: How to do Goal Setting for Business

Design a Successful Bonus Scheme

The business may have problems when:

The characteristics of a successful bonus scheme include:

Money is Not the Only Bonus Available

Money is probably the most common bonus but it is certainly not the only one available.

If people are on a good salary and therefore in a high tax bracket, much of the bonus can go straight to the tax office so the incentivising impact is less than you would hope.

Some people are older and are past the day to day expenses of raising kids and paying for the house. 

These two groups might be far more interested in a so-called “junket” of overseas travel, conferences, home office equipment and other similar non-cash incentives.

Properly chosen, these “junkets” might improve their professional knowledge and therefore make a contribution back to the business.

Younger people raising children or with higher household expenses and low tax, might be quite happy with cash.

The moral of the story is that one size does not necessarily fit all so you could offer choice in the bonus payout without costing you anything more. 

Keep a Watchful Eye

Points to look out for once the bonus scheme is running:

An Example

Let’s say that increasing profit is a goal.  For a business owner, this has two payoffs; they get more income and the value of their business (which is usually a 3-5 times multiple of their operating profit before tax and interest) also goes up.

The plan chosen is:

Jack Stack Approach

In his book The Great Game of Business: the only sensible way to run a business, Stack has developed a bonus scheme as part of a wider “open book” management approach that shares accounting and other management data very widely throughout the staff owned company.  The bonus discussion begins in Chapter 7.

If you are thinking of an all inclusive approach to your business this is a very good text to get you started.  If you had invested $1,000 in his open book business named SRC in 1983, it would be worth $3.4 million today (2013).  By way of comparison, the same amount invested in Warren Buffet’s Berkshire Hathaway would be worth $113,000.  Stack clearly has some serious street creds!

See further book details under the Great Business Books Menu

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