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The Building Blocks of an Effective Bonus Plan

Oct 30, 2018 by Rich Armstrong 4 Comments

building blocks-bonus plan SM

If you’ve watched the movie National Lampoon’s Christmas Vacation, you probably remember the failed “Jelly of the Month” bonus program. Picture Clarke W. Griswold daydreaming about the pool he couldn’t afford, based on a bonus he was simply expecting to get. Did the bonus make him work harder? Did it make him feel good about his job? Feel more connected to the goals of the company? No way! The bonus was seen as an entitlement; it was not intended to motivate behavior in any way.

Most bonus plans disappoint employees because they’re a mystery, they’re unpredictable and they’re never, ever enough.

So what can you do?

In this article, I’ll share the building blocks of an effective bonus plan. There’s no more powerful way to engage, motivate and involve people in their everyday work, their own goals and the goals of the organization. Here are the steps you need to take in order for your bonus plan to be most effective:

Rally People Around a Common Goal

In order to ensure that everybody remains focused on the same goals, choose a bonus target that everyone can impact. Be sure you clearly identify and explain how each department and work group contributes to the end goal. Which brings me to my second point…

Communicate, Communicate, Communicate

Poor communication is by far the main reason most bonus plans fail. Take the time to educate your team on the bonus plan and explain how their daily actions affect that plan. Follow-up with weekly communication at your company Huddles. Your team needs to have a clear understanding of where they are and what they need to do to move forward.

Give People a Chance to Win Early, and Win Often

Instead of one big lump-sum payment at the end of the year; consider small, frequent bonus payouts that grow as performance continues to improve. Incremental payouts will keep a continuous focus on the end goal and minimizes the likelihood that your employees will wait to focus on the end-goal until it’s too late.

Use the Bonus to Teach People About the Business

Your bonus plan may be the most effective educational tool you have in your business. Tying financial rewards to performance serves as an opportunity to teach all employees how they affect the specific metric your bonus is based on. This will give them a line-of-sight into your business’ daily operations that they may have never had before. Once employees understand how they are individually driving the bonus with their actions, you better believe they’ll start to work harder and work smarter.

Always Celebrate the Win and Recognize the Players

Don’t underestimate the simple act of recognition as a motivator. Your bonus program should not be focused solely on the pay – get in the practice of celebrating all personal and team wins with a handshake or a “thank you.”

building blocks

Of course, creating your bonus program will require you to clearly examine your company’s financial goals in order to develop a plan that is rooted in reality and provides an appropriate reward for employees. However, if you create an employee bonus plan using the building blocks above, you’ll be well on your way to developing a plan that is effective, motivating, understood and appreciated by employees.


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Topics: Bonus Plans

Rich Armstrong
Written by Rich Armstrong

Rich Armstrong has nearly thirty years of experience in improving business performance and employee engagement through open-book management and employee ownership, with service as a business coach and as a current executive at SRC Holdings Corporation, a thirty-five-year old employee-owned company and one of the United States’s top one hundred largest majority employee-owned companies. Rich has been instrumental in the ongoing development of SRC Holdings’ open-book management and employee-ownership practices through practical, “firsthand” experience leading several of SRC’s business units. This experience has enabled him to successfully apply these practices in both small- and large-scale company implementations around the world. He coauthored the update to The Great Game of Business—20th Anniversary Edition. Rich is a graduate of Pittsburg State University and serves on the board of the National Center for Employee Ownership (NCEO). He cherishes his time with his wife, Alicia, and four children, Ryan, Ethan, Rylee, and Jackson. Rich’s guilty pleasure is making music in his home studio and playing in his ’90s rock tribute band.

About The Great Game of Business

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.