In my last blog, I addressed the importance of executive compensation to benefit both the employer and the employee. Today, I’ll focus on the importance of goals and performance bonuses.
Many employers provide year-end bonuses to their employees—some do this for the entire workforce, and others provide it only to selected employees (typically executives). For years, employers have embraced the concept of ‘discretionary bonuses,’ in which bonuses are awarded by considering each employee’s situation. While this concept is appealing because of its flexibility, the employer loses an opportunity to manage the potential recipients.
Why do we need goals?
In a discretionary program, the recipients are often left wondering what they did to earn the bonus, and what they could have done to earn a bigger bonus. Many employees will feel that their bonus was based more on the owner’s/CEO’s mood than their performance. The employer loses a strong motivational tool if only a discretionary bonus is used. As money is a major motivator for most employees, the promise of a bonus based upon pre-determined goals will help drive the behavior that the employer wants.
A personal example:
I worked at a consulting firm where 5% of our bonus was tied to the amount of work that we referred to other divisions of the firm. Little work was referred to other divisions, because the consultants (myself included), spent time on other tasks to maximize the bonus. The next year, 20% of the bonus was tied to referral production—and referral production increased by about 300%.
Pre-determined goals are commonly used by publicly traded companies and larger privately held organizations; therefore, if you are hiring someone from an entity that had performance-based bonus programs, this concept will be understood and appreciated. Goals can be used for annual bonus programs as well as long-term incentive programs (that would pay based on results, understanding that it takes a number of years to achieve).
Pre-determined goals not only help drive employee behavior towards the company’s desired results, but also can also serve as a reason not to pay bonuses if the goals are not met—and if the goals can be easily verified by the employees, this will eliminate any complaints about the employer positioned as unwilling to pay bonuses. If goals are not met, but the employer feels that an employee should be rewarded, a discretionary bonus can always be awarded.
How do we set goals?
Setting goals should be an analytical process by the employer—focusing on each employee and what he/she contributes to the company. Goals do not have to be the same for each employee. Here are my general guidelines for goal setting:
- Limit goals to no more than three—we want the employee to be focused on what should be accomplished.
- It is appropriate to have company-wide goals—but, if you are offering incentives to employees with responsibility (for example, a department or a product line), there should be at least one goal that the employee directly impacts.
- The company should benefit from the goals being established—and there is nothing wrong with saying to the employees that if an overall profitability goal is not reached, bonuses will not be paid.
- Goals can be established without sharing sensitive financial information.
- Goals must be reasonable or the employee will not pay attention and, unreasonable goals will likely produce an unmotivated employee.
- Goals should be easily measured and explained.
Setting effective goals can also help the company justify the cost of the incentive payments.
A properly designed incentive compensation program helps the employer (directs the employee to achieve appropriate short- and long-term goals) and the employee (knowing what needs to be done to receive the reward). We’re ready answer your questions and help you design an incentive compensation programs tailored to your needs.
Do you have questions about the bonus or incentive compensation program at your company? I’m ready to start the conversation and welcome you to meet for a no-cost consultation to help you get on track to design your benefit program goals.
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