Paying bonuses based on a company’s overall financial success can be an effective strategy to get employees pulling in the same direction, and smaller organizations may actually have an advantage over larger ones in this area. “I believe it’s easier for a smaller business to tie individual incentives such as bonuses to corporate performance,” says Priya Kapila, manager of compensation consulting at CBIZ Human Capital Services. “That is because there are often fewer employees performing varied functions with the goal of advancing the business. As a result, there is often greater transparency with respect to financial performance, and most employees are vested in seeing the company succeed.”
David Lewis, president and CEO of OperationsInc., a human resources outsourcing and consulting firm, agrees. He says tying compensation to company revenue goals is easy: “Just put a revenue goal on it, but make sure you account for unforeseen expenses and initiatives that could alter profitability. I think the bigger the business, the more distractions and factors enter into the equation, with larger firms tending to tie compensation of this nature to individual goals and objectives, in concert with the company’s success.”
The vast majority of organizations—more than 90 percent—provide some kind of incentive/bonus compensation plan to their employees, notes Tom McMullen, U.S. reward practice leader at global human resources consulting firm Hay Group. “It is an attractive tool because variable pay aligns with the business’s success—and risk—much more than fixed pay such as base salary and benefits do,” he says. McMullen suggests six practical steps businesses of any size can adopt to make their review process for determining compensation more effective:
- Help employees to view their pay as more than base salary and bonuses. “Total rewards” also include recognition, meaningful work, and career opportunities. Raising employee awareness in this area can boost morale and increase motivation.
- Clearly communicate the link between performance and rewards. Clearly explain the reasons for any reward and the amount. Employees who understand how specific actions and outcomes lead to specific rewards are more motivated to pursue them.
- Ensure that performance assessments and total rewards appropriately differentiate the best, solid, and weak performers. It’s a fact of business life that not all employees are created equal, at least as far as performance potential is concerned. Employees with the ability to perform at a superior level will be more motivated to do so if they know their resulting compensation will be significantly better than that of lesser performers.
- Understand what truly engages and motivates employees. “Often, it is much more than money,” McMullen points out. “Be mindful that different people value different rewards.” Then use that understanding to match performance-boosting incentives to individual employees.
- Assess and improve the organization’s work climate by training managers in how to motivate their employees.
- Use feedback as a gift. Make it meaningful, and give it often. In the process, be sure to emphasize how changes in an employee’s performance will be rewarded.
Owners can and should use the review process and bonuses to effectively set clear expectations with employees, to shift any priorities as needed, and to encourage desired behaviors, says James A. Mutz, director of benefits & 401(k) at CoAdvantage, a provider of human resource outsourcing solutions. “In the design of employee compensation plans, business owners need to have transparency and visibility. They need to be open with their employees, and the organization’s goals should be understood. Communicating where the business stands and how the company is doing is a must,” he emphasizes. “One thing some business owners forget is to write it down. Make sure the plan is clearly documented and communicated so there’s no misunderstanding.”
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