Like many management ideas, John Westrum's bonus plan had its origins in a problem. In the mid-1990s, the home building company was growing like mad. From 1991 to 1994, Westrum Development's revenues skyrocketed 700%, to $28 million.

But John Westrum became alarmed when he realized that the demands of dramatic growth were overshadowing the four principles that his company was founded on: quality construction, customer satisfaction, on-time delivery, and on-budget performance. "Customers were unhappy, contractors were screaming at us, and our management of invoices and payments broke down," recalls Westrum.

So Westrum took his 30 employees on a retreat and enlisted their help in developing measurable goals that would address those four original principles. The result was an 11-point plan that included guidelines addressing the length of construction time, the quality of the construction job as measured by a lengthy checklist, customers' willingness to recommend Westrum to their friends, and so on. As an incentive to employees, Westrum set up a companywide quarterly bonus pool linked to a series of goals. The bonus plan at Westrum Development, which is located in Fort Washington, Pa., currently helps employees focus on improving the company.

"For each point, we set intermediate and ultimate goals," says Westrum. "If you set unrealistic goals in the beginning, people will be discouraged." Employees agreed that when intermediate goals had been achieved, Westrum would pay into the bonus pool and then raise the bar to the next goal. For instance, after employees had been rewarded for a 19-day reduction in construction time during two consecutive quarters, the ultimate goal (a 26-day reduction) kicked in. "In the beginning, it was a little bit demoralizing, because we weren't doing as well as we thought we would," says Westrum. In 1994, the plan's first year, only 20% of the pool was paid out.

But Westrum persisted, formatting the company's performance on Excel spreadsheets and graphing the results over the previous four quarters, then posting them. "Employees started focusing not so much on the dollars but on the results," says Westrum. "Anytime we weren't meeting an objective, people would rally behind the person who needed help. After about a year and a half, the effect was phenomenal."

By 1998, Westrum says that his company, which reports $40 million in sales and employs between 45 and 50 people, has met all of its original ultimate goals. To keep the program interesting, Westrum finds that he has to raise and change the goals periodically to match the company's improved performance. He tries to keep the goals challenging enough so that the company, at any given time, is paying out 40% to 70% of the pool.

Bonuses for 1998 were expected to range from $500 to $20,000, depending on seniority, level of experience, and other more subjective criteria, says Westrum. He reports that net margins are up, 94% of customers said they would recommend Westrum to a friend (up from 50% in 1994), and quality inspections of finished homes routinely yield scores of more than 95% (compared with percentages in the low 80s in 1994).