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How To Set Up An Employee Bonus Plan

Last Updated on February 23, 2023 / Benefits & Compensation

IMAGE of a pile of money to represent setting up an employee bonus plan.

HR Question:

I am having trouble motivating my employees to do more than just the fundamental functions of their job. Could an employee bonus plan help? And if so, how do I set this up?

HR Answer:

Yes! While some people are driven solely by their own internal motivation, many behaviors and accomplishments are encouraged and strengthened by external rewards, prizes, or incentives. Think about your own behavior. Do you eat healthy all week and reward yourself with a sweet treat on the weekend for a job well done? Or is there a meaningful work project that would suddenly become more tempting to tackle if there was a reward for knocking it out of the park?

“Behavior that is motivated by a desire for reinforcement or incentives” is known as the Incentive Theory of Motivation. From this, we learn that providing the right external rewards can drive human behavior. In a work setting, incentives can help to set your employees’ course of action and encourage them to perform projects or tasks that might be above and beyond their daily work responsibilities, stretch and grow them in areas that will further benefit the company, and drive advancement and change in your organization.

While there are a variety of ways to incentivize employees, one of the easiest and most impactful ways is a financial incentive or bonus. Not all individuals are motivated by money, and you have to know your employees well to know if and how much money will actually be motivating, so it might prove to be beneficial to conduct an employee survey to understand your employees’ motivators.

There are many creative ways to structure bonuses to incentivize the behavior you want to see. The Economic Research Institute provides a description of the most common types of bonuses used by employers in their article, “How to Calculate Employee Bonuses.” We are going to focus the remainder of this article on the performance bonus.

How to establish a performance bonus plan

To implement a performance employee bonus plan in your organization, we recommend the following steps:

  1. Work with your company leadership team and chief financial officer to establish a budgeted amount of money that will be available at the time bonuses will be paid out.
  2. Determine who is eligible to participate in the bonus program. Remember that if you include non-exempt employees, the bonus amount will have to be added to the base hourly rate in the calculation of overtime for that time period.
  3. Define the time period that the bonus will cover and how often it will be paid out (i.e., monthly, quarterly, semi-annually, or annually).
  4. Establish maximum bonus amounts for participants – will it be a percentage of their salary or a fixed amount? Will this vary based on the pay grade their job is assigned?
  5. Prepare a policy with all of this information and communicate the program to eligible employees.

Setting goals for bonus payout

Once you have established the structure of your bonus program, the next step is the MOST IMPORTANT one in the process – setting goals. Work with your employees to set stretch goals that will motivate them to perform their essential functions better, improve processes, learn a new skill, or complete specific projects. These goals should align with both the organization’s annual goals and the department’s goals for the year.

As you align your bonus plan payout with your company, departmental, and individual goals, you may want to allocate percentages of the bonus to each of these areas. By tying the bonus payout to multiple relevant factors, you can set minimum expectations for the financial and performance metrics that need to be met for a full payout. This also provides flexibility to offer a partial payout if certain measures are partially met.

For example, you could structure your employee bonus plan like this:

1. Company Goal – A financial goal the company must meet/exceed – 25% of the eligible bonus amount
2. Departmental Goal – A goal the department must meet/exceed measuring quality, performance, customer service, financials, safety, etc. – 25% of the eligible bonus amount
3. Individual Goals – Two individual goals measuring projects, training/development, performance, safety, productivity, attendance, etc. – 50% of the eligible bonus amount

Once the goals are set, your next critical priority is to follow up on these goals. Whether you are setting a bonus goal for the year or for the month, meet with your employees at regular intervals and discuss their progress on their goals. Assure that the goals are attainable and that they continue to make sense as time moves forward. Company leaders should also provide updates on company and departmental goals so employees have a sense of organizational progress and success.

Finally, at the end of the bonus period, meet with your employees to assess their progress in reaching/exceeding the goals. Reward those goals completed at 100% and lessen the reward if the goals were not fully met. Be sure to assess the effectiveness of your bonus plan at the end of the year and tweak it accordingly before rolling it out again next year.

Thank you to Lorrie Diaz, MS, Sr. HR Business Advisor, for contributing to this HR Question of the Week.

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