A surprising number of CEOs still award annual employee bonuses the old-fashioned way -- at their own discretion. That landed William Duff, president of $7-million FormPac, in Sandusky, Ohio, in a bit of trouble four years ago. "We were going through some rough times, so even though employees were working very hard, they weren't receiving bonuses, and they couldn't understand why," recalls Duff. The company had lost a major account and was also heavily in debt after an investment in a new plant. But Duff thinks that because employees weren't privy to the company's financial situation, many of them suspected him of filling his own pockets and leaving them unrewarded. "I felt that there was a lack of trust," he says.

Over the past three years Duff has taken two important steps to regain the trust of his employees. First he began posting the company's monthly sales and pretax profits on a display board near the time clock. "It's a running bar chart that shows two years of sales and profits and compares our projections against how we actually did," explains Duff. That, combined with industry reports that are also posted, gives employees the context they need to make sense of their annual awards or lack thereof. "Before I began showing them the numbers, the bonus program had no credibility," says Duff.

His next step was to give "rhyme and reason" to the bonus plan by developing a formula linking the annual awards to the company's profits. Duff also wanted the plan to help boost productivity in order to "grow the company 30% in the next two years." So last year he announced that he would dedicate 20% of the company's after-tax profits to a bonus pool. Sixty percent of the total would be distributed among all employees, 20% would go only to hourly workers, and the remaining 20% would be divided among the management team, excluding Duff, who has no formal bonus plan for himself.

Duff decided to base the bonus distribution on wages and seniority, ranking all employees by their hourly wage or an equivalent, and multiplying that number by one-quarter of the number of years they've been with the company. "Since we might have someone who has been on the job 20 years making as much as someone who's been with us six months, it was important to stress seniority in the bonus program," says Duff. "The older workers were really delighted to see that their loyalty was being rewarded."

Last year the average award at FormPac was 8.4% of compensation, and profitability was up 25% -- a gain that Duff attributes at least partly to his bonus strategy. Plant manager Kent Johnson says that employees check Duff's postings religiously. "They're more aware of their contribution, and they're more conscientious," he says. Johnson also believes the new system has helped the company retain good employees in a highly competitive labor market.