Building a Bonus Plan that Works

Article by:
Scott Fritz , EO Las Vegas
Scott Fritz
EO Las Vegas

Scott is an entrepreneur, business coach and angel investor. He recently founded Growth Connect to help entrepreneurs and companies break through the box and escape the status quo. Scott can be reached via e-mail at scott@growthconnect.com.

Throughout my experience as an entrepreneur, I have been a part of, created and destroyed many a bonus plan. And through it all, I have discovered three keys to cultivating a results-driven team through rewards. Here is what I consider before creating a plan for the entire company, select departments or an executive team:

Fine-Tuning the Financial Preparation
Before I pursue the creation of a bonus plan, the first and most critical thing I do is ask myself: "Can we even afford a bonus plan?" In my experience, this is the number one failure of most plans. Owners and managers love to put together elaborate plans with multiple tiers and triggers without ever putting a pencil to paper on the "true" cost of the plan. I try and put myself in the shoes of my employees. As an employee, there is nothing worse than having a bonus plan changed or canceled mid-stream due to bad financial preparation. Conversely, as an employer, there is no bigger killer of morale and respect.

Making sure my company can afford the plan is simple: My plan must be focused on performance, and more importantly, on productive activities that go above and beyond the basic job description. My rule of thumb is that for every dollar paid in bonus to the employee, ten dollars needs to be realized by the company. I make sure these dollars are realized on the net income line, or at the very least, the gross margin line.

Fitting into the Formula
The second thing I consider is whether or not the bonus plan falls into the categories of Actionable, Realistic, Measurable and Dated (ARMD). Actionable – Can everyone involved in my plan participate and be a part of the challenge? Realistic – Are the numbers and levels realistic, but beyond the forecast and/or minimum standards of the company? Measurable – Is every aspect of my plan measurable, with clear metrics attached to the results for the employees and management team to view? Dated – Clear, defined dates must be set for results, payout(s) and changes to the plan. If my bonus plan meets the ARMD criteria, I know I have a winner.

Motivating the Employees
The final thing I ask myself before instituting a bonus plan is: "If

I’m an employee reading this plan, am I motivated to achieve the maximum payout?" I realized back when I was "working for the man" that without a bonus plan that fired up the discretionary effort inside of the employee (me), the plan was useless and bound to fail. I find that the best bonus plans touch that inner drive for excellence and promote competition between the employees I want to motivate.

Over the years, these three guidelines have helped me create some outstanding, results-driven bonus plans that have pushed my employees to reach new heights of professional success. I know that if I keep my bonus plan simple, short (monthly or quarterly) and available for all to see, I can recognize those who are leading the pack.

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