How to Establish an Effective Bonus Program

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How to Establish an Effective Bonus Program

The end of the holiday season marks the start of the New Year, which is an excellent time to review the basics of how to establish an effective bonus program. Want to know what bonus to offer at the end of the year? Without setting performance targets at the beginning of the year, it’s difficult to know whether the employee met their goals or not and warrants a bonus at year-end.

Bonuses are typically provided to employees because the company has met or exceeded key performance measures, or because the employees themselves have exceeded the expectations of their position. Rewarding strong performance is one way to attract and retain top talent. If employees feel as though they are compensated for their efforts, they are more inclined to strive towards excellence in their roles, especially if the value of the bonus is perceived as rewarding.

Some key steps and recommendations to consider when determining bonuses are:

1. Determine your budget for bonuses
Decide whether bonuses will be a lump-sum amount, a percentage of salary, or some other option. Ensure that the bonus is affordable to the company.

2. Determine the factors that will influence bonuses
Decide on the portion of the bonus that will be based on company performance, team performance and individual performance. Determine whether any baseline targets need to be met before bonuses will be paid out.

3. Determine the evaluation period and frequency of bonus payments
Decide how frequently bonuses will be paid out – quarterly, semi-annually, annually, or other. Determine whether goals will be set for each evaluation period or set for the year with regular milestones for review.

4. Communicate bonus program to employees up front
It is important that employees are aware, at the start, what the company bonus program is and what they will need to do to earn a bonus. Ensure that employees understand the components that will factor into their bonus.

5. Establish goals & targets
Determine the goals and targets that will be used to calculate bonus achievement. The goal-setting process should occur at the beginning of the evaluation period rather than at the end so employees know what to work towards. Ensure there is employee involvement in determining goals. When setting goals, ensure they are SMART – Specific, Measurable, Achievable, Relevant & Time-Based.

6. Evaluate performance against those goals & targets
At the end of the goal period, compare employee performance to the goals and targets. If the goals, and corresponding expectations, have been met, then that should affect the bonus amount the employee will receive.

7. Determine the amount of bonus
Based on the evaluation of performance, the bonus amount for which an employee is eligible should be easy to determine, if the criteria were determined up front.

8. Communicate the bonus and acknowledge employee contribution
Since the purpose of a bonus is to reward performance, make sure employees know what they are being rewarded for. When distributing bonuses, be sure to thank the employee for their contribution and acknowledge a job well done.

Not all employees may be eligible for bonuses. It is at the employer’s discretion who will or will not be eligible for a bonus. It is also at the employer’s discretion how much bonus each individual will be eligible for. Ensure that whatever process you use to determine bonus eligibility and amounts will be perceived as fair company-wide. Otherwise the bonus program will not have the desired effect of motivating strong performance and improving morale.

For more information on how to establish an effective bonus program for your small business, please contact Vancouver-based Clear HR Consulting, or check out the Paying & Rewarding Employees module of our HR How-To Series for Small Business.

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