Bonuses are probably the most misused tool in the management toolbox. Done correctly, bonuses can drive a team to excel; done poorly, they can actually make employees discouraged and dissatisfied.
Here are the four rules for making certain that your bonus plan gets the results you want:
If a bonus plan is too complex, your employees will find it difficult to translate the plan into "what do I do next" activities. Ideally, a bonus plan should be expressible in a single, short sentence that will stick in the employee's mind through the day.
"To win the bonus r, you must sell x amount of product y to company size b in industry q by date z with average margin of w and average revenue of n, etc."
"You'll get an extra $100 if you beat quota by 5 percent this month."
For a bonus to motivate, employees must feel that their individual contributions are directly connected to the goal. For example, a bonus tied to a higher stock price won't motivate engineers to work harder because they can't see how two are connected.
Managers who set "stretch goals" so high that employees are unlikely to achieve them are providing de-motivation rather than motivation. Employees will realize that the bonus is unachievable and set their expectations lower rather than higher.
Changing the rules right before employees are about to win is a recipe for employee dissatisfaction. Even if you believe you have a good reason for the change, your employees will assume that you're simply being cheap.
This is especially true with salespeople, who are extremely sensitive to changes in their compensation and commission plan. They will never forgive you or your firm if you undercut their bonus right before a deal closes.
If you're trying to drive employ behavior, you want employees to feel an emotional connection between the behavior and the reward. Paying the bonus months or even weeks later waters down the emotional impact.
More importantly, paying the bonus promptly makes it easier for you to publicize--among the rest of your team--the win that led to the bonus. Prompt payment helps inspire other employees to imitate whatever behavior caused the win.
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