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Bonus Your Way to Profits!
Why do we pay people? Well, that’s a silly question you say. You would probably say we pay them because they work. I say that you are wrong. We don’t pay people because they work. I thought about this long and hard and came to the conclusion that Woody Allen was right. Woody said, “80% of life is showing up.”
Well, OK, he was almost right. In truth it’s more like 100%. We pay people for showing up. For showing up!! In America today, applicants are screened, interviewed, interviewed again, hired and trained all at considerable expense, and then all they have to do is show up and they get paid. Punch in and get a paycheck. Show up and get some cash. That’s all there is to it.
So, here we are, in the nation that practically invented business; in the country that founded the Free Enterprise system; in the most innovative nation on the face of the earth and we have embraced the business model of paying all our people … for showing up! That’s it? That’s the best we can do? We stand here now facing the greatest economic crisis of our lifetimes and we are ready to do battle against this formidable foe armed with the strategy of paying our employees for showing up. We couldn’t set the bar lower if we tried.
OK, so if we don’t want to pay people for showing up, what DO we pay them for? Well, in today’s world, the fact is that you still have to pay people for showing up because we have minimum wage laws and other workers’ rights with which we must comply. The solution is actually quite simple. Simply do not pay them ALL of their salary for showing up. Pay a percentage of it for actual performance. Pay a bonus to every employee every payday or every month and make that bonus amount significant enough so that it succeeds in motivating and affecting employee behavior. Create a compensation system that includes bonuses for performance as a normal and standard process.
When the bonus amount is paid religiously on every paycheck (or every month), the employees begin to believe in it and understand that their individual actions have a direct relationship to how much they are paid. When you, as the employer, can drill down to the individual act performed each day by the employee, so that they are actually thinking about the pay related to that act at the moment it is happening, you have struck gold! Properly structured, consistent and on-going bonus programs have the power to modify behavior and get results. Employees begin to act in “enlightened self-interest” which, coincidentally, matches the company’s goals. You can move your company from apathetic to empowered! With employees engaged, you have the opportunity to truly change your corporate culture!
All right, this is about the point where the typical business owner or manager agrees that having a motivated work force is always a good thing blah blah blah. It’s not the general philosophy of paying for performance that is controversial. It’s the mechanics of making it happen. So, sure, we all agree that rewarding specific performance is a positive strategy … but how do we do it? It’s not the who, what or why part that stumps us. It’s the HOW that is the mystery.
Thirty years ago, I faced that mystery head on. I bought my first company and immediately set out to create a compensation program that rewarded specific performance. Since then, I have owned over a dozen companies. In every one of those companies, I paid out a regularly scheduled bonus to every employee….from the General Manager down to the janitor. Everyone was on a bonus program! I wanted my employees to be motivated, involved, inspired, engaged and empowered to be able to affect the size of their own paycheck.
Now when I started out, I was not the sharpest tool in the shed. I spent my college years making every effort to avoid Business Administration classes because I wasn’t going to be just another business guy! Shrewd! So, I wasn’t the sharpest tool, but I knew I wanted to get the most bang for my payroll buck so I started immediately putting everyone on a bonus program. Over the next 25 years I designed over 200 different bonus programs. Virtually every one of them was a modest success! Do you know what the definition of modest success is? That’s corporate speak for dismal failure. With just a little bit of spin on it… just a little spin! Virtually every one of my bonus programs failed. How do I know? I defined failure as any program that was not a win for the employees, the customers AND the company. An effective program is one that motivates, engages and rewards the employees properly, one that improves the quality of your product or service for your customers and one that returns equal or greater value to the company. When you do that, EVERYONE GETS MORE! It’s got to be a win/win/win and anything less than that is a failure.
During those early years I was treating my company like my own private Petri dish, experimenting with new ideas and utilizing trial and error, with, apparently, a heavy emphasis on the error part. I found thousands of ways to screw up a bonus program. I think I invented half of them myself! I found tons of things that didn’t work and a few that did. Eventually, after 25 years, I realized that there were thousands of ways to fail … but only 8 ways to succeed.
I call those ways the EIGHT ESSENTIAL ELEMENTS of a quality bonus program because they truly are ESSENTIAL. I found that if I created my bonus program and incorporated the Eight Essential Elements into the design of that program, then it worked. Every single time! The employees were properly rewarded and motivated. The customers saw an improvement in our quality of service, and, most importantly, the company received equal or greater value back in return for the cost of the program. What I had discovered through 25 years of stubborn trial and error, was the blueprint for Bonus Program Design. I had discovered the HOW!
Now my mission is to share that information so that businesses can stop paying people just for showing up! Imagine an America with 100% of its workers truly motivated and engaged in their profession! What mountain couldn’t we climb? Whether you are a company having great success in your industry or a business fighting off bankruptcy, owners and managers can employ the Eight Essential Elements to specifically reward employee performance and improve the bottom line. Successful companies can “share the wealth” by rewarding employees for those actions which continue to make them successful. Businesses in trouble can restructure payroll to reward top achievers while cutting costs overall. Bonus programs can be designed to solve specific problems, enhance teamwork, cut costs or drive sales. All you have to do is design the program with the Eight Essential Elements in mind.
So, what are these Eight Elements? Let’s take a look.
The 8 Essential Elements of a Quality Bonus Program
GRADIATED – Structure the bonuses so that there are 3 to 5 levels. Tier it. Create multiple levels of goals. Make the first relatively easy to reach to whet their appetite for success. The middle tier bonus is a reward for doing “quite well” while the last levels are for record-breaking performance. This creates multiple opportunities for achievements and success.
EQUITABLE – The bonus amount must be fair and equitable. Design different bonuses for each work group. Make sure they are appropriate for the pay levels of those people and consistent with other similar programs in your company. If you have many people in the company on various bonus programs, one program cannot be so attractive that everyone else wants to change jobs to get to it.
TIMELY – The frequency of the bonus should vary inversely with the level of the employee. Lower level or entry employees should get paid their bonus frequently as in once every payday or once every month. Longer than that simply fails to keep their attention and focus. Middle level Managers should be paid monthly for the previous month’s performance or at the least, Quarterly. Senior Management can be rewarded once or twice per year. This is extremely important. If you do everything else correctly but fail to pay in a timely manner, the entire bonus program will fail.
SIMPLE- Just keep it simple: simple to understand, simple to explain and simple to calculate. Clearly explain how your bonus program works. Put it in writing and make the computation of it so simple that anyone can understand it or do the math themselves. If they don’t understand it, they won’t care.
MEANINGFUL – The bonus must be meaningful on two levels. First, it must be based on an action that is relevant to the employee’s job function. In other words, they have to be able to affect results. By definition, this virtually eliminates the use of Profit Share Programs. Well intentioned as they are, they simply will not motivate people on a daily basis to do the right thing. Second, it must be a large enough amount of money to be meaningful to the employee. A good rule of thumb is to structure the bonus to pay a mid level bonus of about 6 to 8% of the employee’s base pay. More than that when performance is very good and less than that when it is poor. But, in order to motivate, the mid tier bonus must be at least 6 to 8% or your program will fail.
OBJECTIVE – The bonus must be based on objective rather than subjective points. Base the bonus on something that can be counted without ambiguity. For example, base the bonus on the number of widgets sold each pay period or month; or the number of consecutive days when Quality Control shows a 95% service level. Do not base it on how management perceives the employee is performing or on how well employees dress for work. Nothing should be subjective. Make it things you can count.
REINFORCED- Feedback, feedback, feedback. Give the employees a daily or frequent periodic recap of their performance as it relates to the bonus. Post the results for all to see if it is appropriate. Team goal bonuses should always be posted on the wall and updated daily. Make sure everyone knows how they are doing and how likely it is that they will hit bonus level 1, 2, or 3 (or 4 or 5).
EASY- Yes, we already discussed making it easy to understand, but also make it somewhat easy to succeed. Bonuses work best in an environment where base pay is artificially lower than the norm but the bonuses are consistent and attainable. Set the first tier bonus at a level that virtually every employee can achieve so that nearly everyone gets “something”. Set the next higher levels to be more challenging and skew them up so that the greater the achievement the greater the reward….in a big way.
Create your bonus program correctly and the employee, the company and everyone GETS MORE!
What I have offered here in this article is only a cursory review of the bonus process. In some ways, I feel a bit like the fellow who gives you step-by-step directions for constructing an atomic bomb but leaves out a few pages because they were too complicated. I am not saying that what I propose is easy. But, honestly, it’s not that hard either. With a bit more detail and some guidance, any company can change their corporate culture virtually overnight. Stop paying your people for showing up. Pay them for performance and re-energize your company.
Many more articles in Performance Improvement in The CEO Refresher Archives