Creating a Bonus Plan

“I’d like to provide my employees with a bonus but I’m not sure how it should work.”

Your HR Survival Tip

Bonus programs can be a great incentive for employees. A good program recognizes the need to give employees a target to achieve… an incentive. Your first step is determining what you want to achieve with the bonus plan. Perhaps you want increased productivity, quality, and/or efficiency. Or perhaps you want to share a portion of profits as they improve.

Decide what the employees can do to help you achieve these things. Set specific goals for each employee to encourage them to be more productive, produce higher quality work, or work faster or more creatively. The goals should be a bit of a stretch for everyone but you want them to be achievable or your bonus plan will end up having a negative effect.

Also, consider eligibility for participation. How long must an employee be working for you before they are eligible? What happens to their bonus if their employment ends? Does anything change if the employee is written up or on probation? Does the employee need to be actively employed on the day the bonuses are paid out? Does the company need to have a certain level of revenue to have any bonus at all that year?

Bonuses are a reward for helping the company succeed. An employee shouldn’t be earning a bonus if they haven’t met their goals or aren’t doing a good job. Remember a bonus will appear as a big gold star in the employee’s file and will work against you if you want to terminate them for poor performance a month or two later.

When you develop a repeating bonus plan, it will be considered a non-discretionary bonus because it will be expected. When the bonus is non-discretionary, the bonus amount is included in your calculations for the “regular” rate of pay. This regular rate is used for various types of pay, such as sick time.

We prefer a six-month plan because it’s less likely outside forces will affect the plan as much as with an annual plan. Once you’ve made all the decisions, put all the details of the plan in writing and present it to your employees. Implement the plan and let your employees feel they have a valuable role in helping the company succeed.