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7 Best Practices to Take Your Bonus Plan Up a Notch

Jul 10, 2019 by Bill Collier 0 Comments

7 Best Practices To Take Your Bonus Plan Up A Notch

Did you have a bonus plan in place last year? If so, was it effective? How is this year’s plan working out?

If you have a good year and want to share some of the fruits of your labor with your team, great, but to do so without a well-planned and executed bonus plan is a wasted opportunity. So, here’s a list of best bonus and incentive practices to help you get the most bang for your bonus bucks.

1. Get an Early Start

In order to get a good start on a successful bonus plan, get ahead and begin the planning process for next year’s incentive program well before the year starts. Pick out key numbers that drive your plan, make them known and understood by the entire team, and talk about the plan at every opportunity to generate excitement. Create scoreboards that clearly display where the team is at and encourage folks to pay attention to the progress. 

2. Make the Bonus “Self-Funding”

A self-funding bonus plan means that the bonus payouts are generated out of profits over and above your targetthe after-bonus profit remains at your desired level. For instance, if you’d be tickled pink with $90,000 profit before tax, then make your bonus kick in for profit dollars above this number—a predetermined percentage of all profits above $90k going to the bonus pool.

3. Make the Bonuses Large Enough to Modify Behavior

The potential bonus needs to be significant enough to generate excitement and actually motivate your people to help achieve the profits that lead to bonuses.

4. Divvy Up the Bonuses in an Equitable Way

Many companies divide the bonus pool according to base salary so higher-paid people get a larger percentage. Consider using “shares” like the stock market in the example below:

Make each $5,000 of base pay equal to one “share” in the pool. So, someone making $30K has 6 shares, and another making $35K has 7. If these are the only two employees in the bonus plan and the pool has $10,000 in it, there are now 13 shares worth $769.23 each ($10K/13 shares.) So employee #1 gets $4,615.38 and #2 gets $5,384.61.

Build an effective bonus plan with these bonus plan tools

If you take this route, be sure to keep it simple! You’re associates need to be able to track and understand progress toward their goals and bonus.

5. Don’t Get Carried Away with Aggressive Targets—Especially the First Year

Within The Game, you want to give your team the chance to win early and often to keep them motivated and engaged. Nothing will discourage your people more than starting a new bonus plan and then not earning a bonus. Set a fairly easy target in year one to show folks you are serious and give them a taste of winning.

6. Consider Paying the Bonuses After 30 Days

Paying bonuses 30 days after the end of the quarter (or on your own bonus cadence) can help cash flow, and after all, your customers don’t pay you until after 30-45 days or maybe more. So why not cut the bonus checks after that same amount of time? It’s a great real-life business lesson for your team.

7. Keep the Bonus Separate From Regular Pay

I strongly recommend that bonuses are NOT put on a regular paycheck. Don’t forget that you must take out payroll taxes, but make a separate check run so it isn’t perceived as pay. Make it clear that this is an additional reward for achieving a goal and is not an entitlement.

Your incentive plan can be a business drain or a business gain. Take the time to get it right.

Download Our Bonus Plan Tool


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Topics: Bonus Plans, Planning, Gathering 2019 Speaker

Bill Collier
Written by Bill Collier

Bill Collier is the author of “How to Succeed as a Small Business Owner … and Still Have a Life”. He helps businesses improve their financial results by teaching employees to think and act like owners.

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Our approach to running a company was developed to help close one of the biggest gaps in business: the gap between managers and employees. We call our open-book approach The Great Game of Business. What lies at the heart of The Game is a very simple proposition: The best, most efficient, most profitable way to operate a business is to give everybody in the company a voice in saying how the company is run and a stake in the outcome. Let us teach you how to develop a culture of ownership, where employees think, act and feel like owners.