EO Cincinnati Blog
4 Secrets to Making Employee Bonuses Work
Monday, December 22, 2014
We’re in the midst of bonus season. Before you sign
those checks, think about this: While money can be an effective
motivator, bonuses frequently fail to deliver incentives for better
performance. Worse still, they may punish the best performers.
The last Towers Watson Global Workforce Study to address this topic, in
2012, found that only slightly more than one-third (36%) of U.S.
employees surveyed see a clear link between performance and pay,
including bonuses, and workers are becoming more skeptical about such a
When every employee in a company or at a given salary grade receives the
same incentive pay, people are rewarded merely for showing up. Such
bonuses waste time and money because they tell employees to do just
enough to stay on the payroll. These non-performance-based bonuses do
not improve productivity, quality, customer service or creativity. They
also breed an entitlement mentality.
Bonuses themselves aren’t the problem. Money can be a significant
positive reinforcer, generating outstanding financial results, morale
and teamwork, if used in the right way.
To be effective, bonuses must be strongly and specifically connected to
an individual’s performance and must reinforce desired behaviors.
These steps can help make bonuses more beneficial to your company and its people.
- Identify results and supporting behaviors to reinforce. Pinpoint
what each employee needs to accomplish to add value. Cover all elements
of the job. For example, beyond meeting sales quotas, a sales
professional might be required to file reports on time and share
information with colleagues.
- Create an easy way to measure results and behaviors. Precise
metrics are essential. Lincoln Electric has such an effective
performance-based pay system that it often awards bonuses equaling
regular compensation—although other companies have found that bonuses
representing as little as 3% of base salary can provide substantial
- Help employees track their performance. Bonuses should not bring
surprises. Employees need a simple way to monitor how they’re doing in
relation to a potential payout. Behavior analyst William B. Abernathy
developed Profit-Indexed Performance Pay, which has been implemented
successfully at various organizations. All compensation in addition to
base salary is paid against a company’s profit. Each employee gets a
scorecard showing performance-based pay earned every month that the
company is profitable. Using this type of pay system, employees at the Bob Barker Company
improved their performance so much that during the 2009 recession,
while merit increases averaged about 1.4% nationwide, the company’s net
income rose 16 percent, enabling employees to receive pay increases
averaging 6 percent.
- Consider eliminating annual bonuses altogether. Switch
to monthly payouts. Even when aligned with individual performance,
yearly bonuses can have less impact than more frequent payments because
of the distance between the rewards and the behavior they reinforce.
Several years ago, Aubrey Daniels International (ADI) replaced annual
bonuses with a system of monthly evaluations and rewards, to close the
time gap and encourage incremental improvements. With this system and a
focus on the value-added contributions of each team member, the
marketing team was able to increase online sales by nearly 25%.
Following these recommendations will not only make bonuses more
meaningful and improve individual performance but also provide other
advantages. At ADI, the shift to monthly bonuses in particular has
helped the team work smarter and saved management time. What’s more,
understanding how their work affects monthly results and profits has
increased employee engagement and satisfaction.
On a related note, it’s also important to remember that money isn’t the primary motivator for everyone. As discussed in this video,
managers need to learn what reinforces each individual and apply those
unique motivators for optimal engagement and productivity.
NOTE: reprinted from Chief Executive Network