Employee compensation: Make bonuses motivational

Q. Are bonus programs effective?
Thursday, May 24, 2012

A. Bonus programs reflect a company’s definition of success, how that definition is measured, and the extent to which that measurement is met.

Bonuses are typically tied to two primary measures: How well an employee is performing in his/her position; and how well the company is doing with respect to its expectations i.e. revenue, profit, customer satisfaction, etc.

Individual and group performance goals can be challenging to set—they should be neither too ambitious nor too easy to achieve. In successful programs, goals are set on a prior year’s actual performance. Goals can be set to be paid out annually or quarterly, which can motivate lower salaried employees. 

Bonuses are meant to reward employees and should be motivational. Establishing clear goals, timing of payout and the ability for an employee to impact the goal is critical for success.

Some companies have seniority-based programs; however, in my experience, bonuses should never be awarded based on seniority. For example, you might have one employee who has worked for a company for eight years but is always late and performs at a minimal level, while another employee who has only worked for the company for three years always strives to do more work and improve quality.

Effective bonus programs include individual performance goals as well as the performance of a team, division or company. Under these types of bonus programs, a portion, typically half of the bonus, is tied to an individual performance or goal and the other half is tied to a larger corporate goal.

Ana McGary is president of PeopleFirst Enterprises. Reach her at ana.mcgary@people1sthr.com.