How to Structure a Good Bonus Plan

Bonuses Plans Should Be Universal

To get your entire staff pulling in the same direction devise your bonus plan to include all employees at some level and after a pre-employment evaluation period (often 90 days) with the company. Many plans include part timers as well as full timers but at a somewhat lesser share of the proceeds.

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Bonuses Must Be Significant and of Perceived Value to the Recipient

To create an incentive, the recipient must perceive the bonus potential as a significant addition to income. Otherwise, the bonus is looked upon as supplemental income or even a "benefit". There should be public (company) recognition of the employees' performance that resulted in the bonus to add to the perceived value.

Bonuses Should Relate to Individual Performance

One factor in the determination of how much an individual employee receives should be their rating as determined by their last formal job performance appraisal. All other things being equal, a superior job performance should command a higher share of the bonus proceeds.

Bonuses Should Include a Factor for Employee's Job Responsibility

It is reasonable to relate an employee's rating for bonus purposes to their overall responsibility in the company as determined by the number of employees supervised and/or budget for which they have direct control. General categories can have different ratings in the bonus distribution process (hourly/clerical, supervisor, department head or officer).

Bonuses Should Include a Factor for Employee Loyalty

It is reasonable to associate time with the company as "loyalty". An employee that has been with the company for 25 years should have a somewhat higher rating for bonus proposes than someone having only 1 year. A factor can and should be included in the bonus program for employee tenure.

Bonus Plans should be Based On and Pay a Predictable Share of "Excess Profits"

Set a trigger level that must be achieved before bonuses are paid and communicate this clearly to all staff. The trigger level should provide a base for company growth and replacement of capital. Many small businesses find that this occurs at the 8-10% net profit level but each company. It is to be understood that a portion of the profits above the trigger level will be shared. The % shared may be determined by company owners but should not be so low as to yield little employee incentive or so large as to give away the bank. Typically, this share is 25-50%. Disclosing the trigger level and distribution share percentage is at the discretion of the owner but the more open the system is the more trust, rapport and enthusiasm will be developed with the staff.

Devise a Distribution Method and System to Manage Bonus Disbursements

Devise a rating system that accumulates the value of the criteria mentioned above (responsibility, loyalty, performance). Aggregate the values for all employees. Determine the amount of money to be distributed as a percentage of "excess profits" and divide that amount by the aggregate points for all employees to determine the dollar value per point. Individual bonuses can then be determined by multiplying the individual's score by the average value per point. A spreadsheet can be easily set up to automate this task with only a little maintenance required to update employees and employee performance ratings.

Distribute Bonus Payments Frequently

Pay bonuses as frequently as practical but no less than once quarterly, otherwise the incentive is not kept in front of the employee. Annual bonus plans are not looked upon as "incentives"; they often are viewed as supplemental income (and an entitlement) or a "Christmas Bonus". Bonus payments should be viewed much like salespeople's commissions, if not, the incentive wanes in the average employee.

When Bonus Plans Are Not Bonus Plans

Avoid devising a system that pays on a percentage of salary as it is difficult to relate to the three criteria stated above (responsibility, loyalty and performance). Even though companies contribute mightily to savings and investment plans such as 401k's, do not look upon these programs as bonuses. They are simply supplemental income, and although they may affect loyalty, they do little to meet the other two criteria.

How to Structure a Good Bonus Plan

Robert A. Normand is Executive Director of the Institute for Small Business Management ( and author of "Entreprenewal!, The Six Step Recovery Program for Small Business" ([]). Mr. Normand has served as principal management consultant for more than 100 businesses ranging from 0,000 to ,000,000 in annual sales and has owned and operated several small businesses of his own in diverse industries. Mr. Normand’s small business philosophy is premised on the belief that small business management skills can be developed by busy entrepreneurs using readily available information, tools and procedures not found in business schools or formal degree programs. He can be reached by telephone at 941-330-0889 or by mail at 3751 Almeria Avenue, Suite A4, Sarasota, Florida 34239.