Designing the right employee incentive programs and bonus plans

Bonus and incentive programs can effectively drive employee behaviour and yield the desired business results. However, if not properly designed and implemented, bonus and incentive programs can become a major barrier to business success and create high levels of employee frustration. It is important to be aware that every organization is different and that simply implementing a program you’ve seen elsewhere could prove to be a big mistake.

The design of the employee bonus or incentive program is critical

Startups are often attracted to bonus and incentives programs because the programs are perceived to have a direct link to corporate success. The perception is that if the business does not make money, it does not have to pay out, which appears to be an obvious benefit to a cash-strapped business as it “self-funds.”

But be careful: there are other aspects to employee incentive programs that you need to consider. While bonuses and incentives are a common part of the cash compensation package, they are often misunderstood. It is key that they be properly designed and implemented in order to successfully focus employees on the desired outcomes.

Developing the bonus or incentive program: What to consider

To develop a solid bonus or incentive program for your employees, you need to consider the following elements at your startup:

  • Business goals
  • Financial goals and constraints
  • Market trends
  • Employee demographics
  • Employee preferences
  • The desired behaviours

It’s also critical to think about how you’ll fund a bonus plan. What is the additional business value you expect in return for paying out a bonus? 

Types of bonus or incentive programs

There are different types of bonus or incentive plans to use as a basis for yours. Some common types are listed below.

Ad hoc bonus

What does it look like? When should it be used? Benefits Risks
A company decides to give an unexpected or unplanned bonus To thank an employee or a group for going above and beyond in a particular instance (i.e., a situation that is not expected to recur) – Is a great recognition tool and does not need to be substantial to achieve the desired effect
– It requires no upfront commitment—can be decided on at the time
– If awarded regularly (annually or quarterly), employees may come to expect it, whether or not they should
– Employees who are not clear on what they need to do to get the award may focus their efforts on the wrong things

Performance bonus

What does it look like? When should it be used? Benefits Risks
A company offers an employee the opportunity to earn extra compensation, whether a fixed dollar amount or a percentage of their salary, if they achieve specific outcomes assigned by the company – To incent an employee to achieve specific goals that will progress the business
– Can be used on an ongoing annual basis or as a one-time chance to share in the success of a key business milestone
– To ensure an employee is competitively paid—e.g., if the market generally pays a business analyst a bonus, then to remain competitive, you may have to as well
– Promotes a results-oriented culture
– Employees clear on where to focus to add value—doing what needs to be done in the business
– Makes clear to employees in advance what to do to earn their reward
– Allows the organization to define and control the maximum amounts paid
– Enables the organization to forecast and budget for payments
– If objectives are not properly set or assessed, the organization may not get value for money
– The plan requires budgeting and monitoring throughout the year
– Not all employees care about incentives—they are not motivated by them

Other common types of employee incentives

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