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How to Structure a Good Bonus Plan

To get your entire staff pulling in the same direction devise your bonus plan to include all employees at some level and after a pre-employment evaluation period (often 90 days) with the company. Many plans include part timers as well as full timers but at a somewhat lesser share of the proceeds.

Bonuses Must Be Significant and of Perceived Value to the Recipient

To create an incentive, the recipient must perceive the bonus potential as a significant addition to income. Otherwise, the bonus is looked upon as supplemental income or even a “benefit”. There should be public (company) recognition of the employees’ performance that resulted in the bonus to add to the perceived value.

Bonuses Should Relate to Individual Performance

One factor in the determination of how much an individual employee receives should be their rating as determined by their last formal job performance appraisal. All other things being equal, a superior job performance should command a higher share of the bonus proceeds.

Bonuses Should Include a Factor for Employee’s Job Responsibility

It is reasonable to relate an employee’s rating for bonus purposes to their overall responsibility in the company as determined by the number of employees supervised and/or budget for which they have direct control. General categories can have different ratings in the bonus distribution process (hourly/clerical, supervisor, department head or officer).

Bonuses Should Include a Factor for Employee Loyalty

It is reasonable to associate time with the company as “loyalty”. An employee that has been with the company for 25 years should have a somewhat higher rating for bonus proposes than someone having only 1 year. A factor can and should be included in the bonus program for employee tenure.

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Bonus Plans should be Based On and Pay a Predictable Share of “Excess Profits”

Set a trigger level that must be achieved before bonuses are paid and communicate this clearly to all staff. The trigger level should provide a base for company growth and replacement of capital. Many small businesses find that this occurs at the 8-10% net profit level but each company. It is to be understood that a portion of the profits above the trigger level will be shared. The % shared may be determined by company owners but should not be so low as to yield little employee incentive or so large as to give away the bank. Typically, this share is 25-50%. Disclosing the trigger level and distribution share percentage is at the discretion of the owner but the more open the system is the more trust, rapport and enthusiasm will be developed with the staff.

Devise a Distribution Method and System to Manage Bonus Disbursements

Devise a rating system that accumulates the value of the criteria mentioned above (responsibility, loyalty, performance). Aggregate the values for all employees. Determine the amount of money to be distributed as a percentage of “excess profits” and divide that amount by the aggregate points for all employees to determine the dollar value per point. Individual bonuses can then be determined by multiplying the individual’s score by the average value per point. A spreadsheet can be easily set up to automate this task with only a little maintenance required to update employees and employee performance ratings.

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