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4 Secrets to Making Employee Bonuses Work

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.

Why the discrepancy? Most companies tie bonus awards to individual performance only loosely, if at all. That’s true even in organizations with so-called performance-based pay plans.

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 connection.

“Slightly more than one-third (36%) of U.S. employees surveyed see a clear link between performance and pay.”

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.

  1. 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.
  1. 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 motivation.
  1. 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.
  1. 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.

About Aubrey Daniels

Aubrey Daniels
Aubrey Daniels, Ph.D., is the founder of workplace consulting firm Aubrey Daniels International and president of the Aubrey Daniels Institute. Dr. Daniels, who coined the term “performance management,” is the author of six management books, including Oops! 13 Management Practices that Waste Time and Money (and what to do instead), He blogs here and for Talent Management Magazine.