From my experience, a properly structured, incentive-based bonus with clear objectives and rewards based on performance is too much work to design and maintain for the average company.  So it becomes an entitlement system with all the baggage described above- and don’t forget favoritism.  At the above average ones, all staff should know exactly what the end-of-year holds for them as the bonus discussion was had and numbers defined months ago.  Great article.

Mike,

Interesting and timely. I also enjoyed the 10 min. video which revealed the scientific finding that autonomy, mastery and purpose trump money and threats as human motivators. … Hmmm. There are some few extraordinary people in our disintegrating culture who have never forgotten this. I’m glad science is finally catching up.

I think I can speak for most employees in America when I say that being treated like an individual human being is all the ‘bonus’ I could ever desire.

Ron

Hi Ron:

I’m glad you enjoyed Dan’s video. There’s a lot of wisdom contained within his message. While I subscribe to Dan’s way of thinking, I also believe financial incentives, properly structured, can also be quite effective. Both financial and non-financial incentives work better in concert with one another than they do independently of one another. Thanks for stopping by Ron.

Hi Sean:

Thanks for sharing your observations. I would submit one of the reasons why average companies remain average is they shy away from doing the right things because they involve “too much work.” Incentive compensation doesn’t have to be complex, but it often ends-up that way due to improper construction and implementation. Thanks again for stopping by Sean. 

I have had 1 raise in 11years and am undearning. I have no retirment and have had to cash in my 401k and pay the penalty for the last 2years to survive. I live off credit for the year to make up for under earning and pray a bonus will be given to pay the debt at least partially at years end. It is a vicious cycle. I went back to school this year and am learning a new trade. The hotel and tourism industry is so cut throat I can barely take a single day anymore. 26 years of experience and I am worse off financially than when I was 18 and making minimum wage. Due to the cost of rent mainly. 1/2 Gallon of milk is $6.00 in NY. I have good health insurance and am trying to find a 2nd job or anything to keep the wolves at bay and pay my loan and creditors. I am blessed to have a job, yet the underearning and lack of a raise leaves my self esteem in a place that is dragging down my confidence. A bounus feeds me and catches me up for 1 month a year January I have little burden,  Feb. it starts all over again. I am the dying middle class in NY.  21 years in the city and my home. I do not even have enought to get out.  A bonus is my link to not becoming homeless

Congratulations on taking the steps needed to improve your situation. Changing careers after 26 years is a move that sounds long overdue for you. I wish you the best and hope you receive a bonus. 

The most important thing I learned over the years is to never expect a bonus and plan your expenses based on the wage you earn. As for bonus plans, I am one that subscribes to the balanced scorecard approach…profit (as a gatekeeper), market share and guest satisfaction. The criteria should be specific and measurable so there is clear understanding of the program. There will be years a bonus is earned, there will be years it is not. That is why it is called a BONUS.

This is both a timely and important topic.  I have retired from two careers (so far, working on the third).  In my first career (US military), there was no bonus and performance evaluations were essentially a totem pole ranking against your peers (promotion selection was a very thorough and structured process that resulted in, what I think are, superior results — but’s that’s an entirely different story).  Without any embarrassment at all, I’ll assert that our performance, individuality and collectively, was outstanding.  I think that it was Autonomy, Mastery and Purpose that motivated us — certainly not the money.

My second career was in industry and the company had (and still has) a pretty sophisticated bonus system.  This system weighed both company and individual performance and had a formula something like personal performance times company performance times target bonus equalled individual bonus.  Senior executives (as is common in the US) had pretty impressive target bonuses (but nothing close to Goldman Sachs) while more junior people had smaller and smaller bonuses until the individual contributors had a nice but really fairly small target.  Never, in my entire time with that company, did I hear anyone say or imply that they were motivated by the bonus or that they were doing something out of the ordinary to earn the bonus.  In fact, almost all of the discussion of the bonus focused on a feeling of impotence in trying to personally affect the company’s performance.  Much of that dis-satisfaction revolved around a performance evaluation system that had a long history of inflating performance scores and a process that was long and often cumbersome but was too frequently gamed by a significant minority of managers.  To their credit, the company tried throughout my tenure and continues to try to improve that system.  Nonetheless, it was not and is still not clear to me that the annual bonuses really had any impact on individual or company performance.

Brilliant – “That’s why they call it a BONUS.” Thanks for sharing Chris.

I don’t dispute for a second that intrinsic motivators are superior to financial incentives. Financial incentives simply cannot fill a void created by a lack of values. That said, financial incentives (properly constructed) can help add to align those around a set of performance metrics that support the overarching vision. 

We just gave our holiday bonus. We just decided a total we could afford and all staff got one. Over the past 3 years we could not give raises. Finely in 2012 looks like we will be able to give raises but we have decided to change the bonus system. Our business is dependent on customer and staff satisfaction. Every employee can impact both or one of these measures. We will be funding a bonus system on profit margin. If we meet P/M goal we will then payout a bonus based on meeting the following measures repeat business and new business acquisition. We are working on a measure for staff satisfaction…Any ideas?

We are a small company (25 staff) and have what we call a ‘discretionary
bonus plan’, meaning it’s at the MD’s discretion what and if they get it.  It’s probably a result of not currently having
the capacity to define a more complex scheme. It’s basically a loose tie in
between company performance and individual contribution to that performance. Any
manager or MD should be fairly in touch with how much and which people are contributing
to the company so should be able to have a gut feel for who should get bonus
and how much. Some companies have a culture of a 13th pay cheque – we
take the view that is extreme as a standard for all staff so our bonus ranges
from 10% to 30% of their currently monthly salary depending on how much they have
contributed. It is also important to be consistent year to year if the company
is doing well, and to raise it slightly each year for people getting them so they
feel a sense of progress and improvement. For special employees it’s also nice
to let them know in a separate letter or meeting to appreciate and acknowledge their
contribution.

Thanks for sharing Jeremy. 

Thanks for your comment and question. Employee satisfaction can be measured in a number of different ways including: Net Promoter Score, length of service, attendance, contribution, collaboration, customer satisfaction, etc. But if I were going to design a bonus around employee satisfaction I would poll the employees and ask them what they feel are the best metrics to use within your environment. I would then use a balanced scorecard approach weighted upon the most meaningful key metrics. I hope this helps.  

2 things: first of all, bonuses at the end of the year do NOT work, they don’t really create any incentives.  At the same time, because employees are already used to the bonuses, cancelling them would decrease employee morale.  So my advice, when you design bonus structure, give bonuses at the end of projects or when people actually create value.  End of the year bonus does not create any value.

Hello –

Thank you so much for writing this article! When I had my review in the middle of this year, one of my bosses mentioned that I was doing a great job and that while the company was not giving out raises, they were giving out end of year bonuses. Now that we are at the end of the year, there has not yet been any mention of bonuses. Since it’s called a “bonus”, would it be incorrect of me to bring this up and remind them of what we discussed a couple months ago?

Thank you!

Properly structured, the idea of project based incentives is a sound idea. I’m not so sure I agree with the absolute nature of your other observations.  My take would be less rigid – year end bonuses don’t always work, and they can backfire without proper construction and implementation. That said, they do sometimes work quite nicely.  

I’m always a believer in giving someone a chance to deliver on their commitment before I remind them of any perceived shortcoming. Therefore, I would suggest letting the year come to an end, and see what does or does not transpire before taking any action.

If the year passes on no bonus comes, then you have a decision to make. If you decide to bring it up, I would suggest doing it casually but professionally, courteously, and very respectfully. There’s never anything wrong with attempting to clarify misalignment and/or communication gaps so long as said clarifications are handled adroitly. 

Whatever the outcome, I suspect you’ll learn something valuable. Keep in mind however, that not all people like to be reminded of their shortcomings – they usually don’t see them as such:)