Performance Bonus Programs represent a straightforward practice used to motivate performance, improve employee engagement and ameliorate a team’s compensation concerns while managing fixed salary expenses. Many times the decision to implement a bonus program is driven by the business leader, and the process of developing the plan involves financial modeling and a myopic focus aimed at solving a single problem, such as the need to improve sales or grow the customer base.
Seems simple enough! However, there are underlying principles that need to be thoroughly addressed if a bonus program is going to achieve the goals it is designed to achieve. If these elements are ignored in the initial decision-making you may find that your bonus program fails to achieve the desired results, creates unintended and unpleasant consequences—and you end up pouring your money down a rat hole.
Lesson #1: A bonus program will drive the behavior that is incented, therefore, be clear on how you structure the goals.
My first experience with this “fatal flaw” was with a sales organization in which the EVP of Sales launched a bonus program intended to increase sales. The fundamentals of the program were very simple: after a person sold 100% of their quota they would receive an incremental bonus payment in relation to the incremental improvement in sales. At first the program seemed to be working great —sales were growing, and in some locations, the numbers were stratospheric. However, in about six months the EVP started receiving data from the accounting department that sales cancellations and uncollectable accounts were also growing at an alarming rate—and in many cases correlated to the locations showing record sales.
The EVP turned to HR to help get the program back on track and I was assigned this task. While I won’t go into the details of my investigation, the bottom line was that the goals of the bonus program had not been thoroughly thought through and focused on one aspect of sales growth—writing new business. When setting the goals for a bonus program be sure that they not only drive the stated behavior, but do not encourage undesirable behaviors, as well.
- Ask yourself, “If the team only focus on doing “x”, what could go wrong?”
- Align the bonus goals with other performance goals, as in “Increase sales over quota without increasing the cancellation rate.”
- Keep the goals, simple, clear and measurable—remember S.M.A.R.T. goals.
- Bonus goals should be strategic business drivers and be sustainable. Although they may need to be tweaked from time to time, if the direction is constantly changing, the bonus program will lose its credibility—fast.
- Don’t have a laundry list. Keep a laser focus on what you want to accomplish and identify the 2-3 things that will make it happen.
Lesson #2: The goals and objective for which people are incented must be tracked and visible to people in real time or at least in frequent intervals.
My second bonus program nightmare comes from another organization that launched a bonus program for a team that was sort of a hybrid sales-relationship management operation. To the credit of the top executive, he hired a well-known consulting firm to design the program. They came up with a solid design along with two very important metrics that clearly drove revenue and a smaller percentage of the payout that was tied to personal KPIs.
I started working with this team one month before the first bonus payout was to be made. During that first meeting I learned that while the goals and metrics were clear the calculations were not shared with the employees until well after they’d received the bonus check. When the first payout was made, the employees were confused and disgruntled. Many people thought they had performed better than indicated by the amount received and there was a feeling that the bonus program was unfair and arbitrary, even a bit of a bait and switch.
The analytics team worked very hard for several more quarters to create a better and more visible tracking system for the team, but could never figure out a way to do that because there were too many variables involved in the calculation. Bonuses continued to be paid and people continued to be unhappy with them. At the end of the year I had a conversation with an employee who was leaving her role to take a position in another business unit, one that did not have a performance bonus program. She told me she was leaving because the other position paid more. Her statement puzzled me since I had the salary information for both positions. She currently made $80,000 and had received a bonus of $28,000 making her annual compensation $108,000. The new position paid $88,000 with a straight company bonus of 15% or total annual compensation of $101,200. I pointed out that she actually made more in her current position. She replied that the bonus didn’t count— to her it was “magic money”.
- Bonus programs drive performance when people can adjust their efforts to improve their results against their goals.
- If people can’t see how they are performing against these goals they don’t have the ability to correct course and will not feel they control their earning potential.
- If performance metrics are not visible to people, the program may lose credibility and people may start to view the bonuses as “magic money,” or worse.
- If the organization does not have the ability to track metrics and make them visible and accessible to participants in the bonus plan—come up with a different compensation strategy.
A bonus plan is both a strategic business decision and a financial decision, but neither the strategic nor the financial goals will be met if you ignore the fundamentals of clear goals and clear communication. HR’s role is to make sure that the impact of a bonus plan is positive, motivating and in support of those strategic goals.