Ten simple steps for obtaining value from a bonus

I often find that new clients award a significant bonus to an employee but without significant communication. It is not uncommon for a busy CEO or manager to telephone a staff member and say something like “Hi Joe, I’m calling about your bonus. You are getting $X.  Well done.  You did a great job last year.  Thanks.”  Often the employee is not sure what it is that he did well, or what among the many things that he thinks that he did well, he is actually being compensated for. Very rarely does the CEO communicate what the employee could do to achieve a bigger bonus the next year, beyond setting revised benchmarks for bonuses that are based on achieving measurable results.

My message is equally relevant to CEOs or department managers. To enhance the value that you get back from staff awarded a bonus, here are ten steps to incorporate in your program:

1.    “KISS” – Yes, the old mantra of “keep it simple stupid” is critical here.  If there are too many variables in the calculation and the employee does not know where his efforts have been rewarded, you lose the essential ingredient of a bonus, which is to focus the employee’s efforts;

2.    Ensure that your method of measuring successes is effective and that you reward critical efforts accordingly.  The most common example of the misguided choice of a success metric is to focus exclusively on sales. If the employee has discretion over pricing, costs or the ability to guide a customer to buy a product from a range of products with different gross or net profit profiles, it is often much too simplistic to focus on sales exclusively. Many employees will then maximize sales, even if they know profit will not be maximized.

3.    Balance the conflicting goals in the previous two points by carefully selecting two to four factors that will drive the profitability of your business.  More than four factors will likely contravene the KISS objective.

4.    There is no reason why one of the factors cannot be pure discretion.  There are many reasons why one would want to award part of a bonus to someone who has not met specified metrics or to withhold it from the employee who has met their targets but is not doing everything to your expectations. A top performer may not be a team player or an excellent team player may not be a top performer. Of course, the courage to not award the discretionary component where it is not deserved is essential.  Open communication in this regard helps employees understand the bonus process.  On the other hand, a bonus based entirely on the discretion of a supervising manager is usually one that shows a lack of effort by the executive team to discern the Key Performance Indicators of the business, and/or to design effective measurement systems. This could also lead to perceptions of favouritism.

5.    Remember that the whole idea of a bonus is to motivate the employee.  An employee certainly sees a bonus as a reward for past achievements, but to get value for the business it must serve the purpose of motivating the employee to replicate success and to strive for higher or greater goals in the future.

6.    Prompt payment is essential from two perspectives. It is demotivating for an employee to be left hanging, wondering about the anticipated receipt of the bonus.   When employees anticipate a bonus, they consider it money earned and delays in calculating and paying it do not enhance your image.  If you really cannot determine the results of the calculation for an extended period, consider paying a timely portion of the bonus (say 75%), and following it with the balance once the numbers are final.

7.    Where necessary, have the courage to admit that the bonus formula was badly designed and re-design it, together with your staff to ensure that you get “buy-in” from all players. Communicate the new goals and structure before the beginning of the bonus period, not when you “hand out” the prior year’s bonus.  These are two very different communications and linking or combining them can only diminish one or both of the messages.

8.    Use the awarding of a bonus as a key motivating opportunity to focus the employee for the coming year. Prepare for the meeting and ensure that you clearly set out what the employee achieved. Then go over these points again, stating what the employee could have done better to increase the amount even further and how this can be achieved in the future.

9.    Leave the employee with a detailed calculation of the bonus so they can review it later. Oral communication will often not fully penetrate as the employee’s mind may easily be distracted during the conversation and the opportunity to really think through the details afterwards is an essential take-away. Also, if the formula or targets have changed, the communication should illustrate the scenario for the coming year. Remember, not all employees are numerically astute, so give them something that sets it out simply that helps them comprehend what will drive a better bonus for the coming period.

10.    “Money motivates” is synonymous with giving bonuses.  Why else would a business award them?  Money complemented by good communication, increases motivation and results, significantly. “Marketing Instincts” is a newsletter  by Hugh Latif and a recent, excellent article “Effective communication for successful executives” sets out the following three easy steps to clearer communication:
a.    Prepare ahead of time;
b.    Clearly explain the message and ask the person for confirmation of what they understood; and
c.    Follow up to ensure that the message has been received correctly.

Ensure that you get value out of the bonuses that are awarded to your employees by ensuring that you use the ten steps above to create a quality program that is effectively communicated, to motivate your staff to strive for the goals that will drive your business to maximize results in the future.

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