MaRS Library Creating employee bonus and incentive programs: An overview
Read time: 3 mins
Read the highlights
- Bonus and incentive programs for employees (e.g., sales-related commissions) can be very motivational.
- When creating incentive programs, customize and implement them carefully, or they can present a barrier to business success and frustrate employees.
- Types of bonus and incentive programs abound.
- When creating employee incentive programs:
- Get management, finance and HR involved.
- Think the bonus and incentive program through.
- Implement the program.
Bonus and incentive programs can effectively incent employee results and behaviour. However, if not properly developed and implemented, they can, in fact, present a barrier to business success for your startup and frustrate employees.
Types of employee bonus and incentive programs
There are many different types of bonus and incentive programs you can create for your employees. The most commonly used programs include:
- Sales-related commission or bonus programs
- Annual performance bonuses
- Profit sharing
- Project milestone bonuses
- Ad hoc bonuses
Creating an incentive program at your startup: The basics
When creating an incentive program at your startup, keep in mind that every organization is different and that recycling a program from your last organization could be a big mistake. Follow the steps below to get on the right track. If you have any uncertainties, invest in a consultation with a human resources (HR) specialist.
Step 1: Get the right people involved as you create your incentive or bonus program
Creating a solid incentive or bonus program requires collaboration between your management, finance and HR staff:
- Your management team must develop business objectives and metrics
- Your talent management, or HR, team must assess market conditions and develop total compensation ranges
- Your startup must establish the components of the new program and the appropriate mix and weightings
- Your team needs to develop and test payment alternatives to ensure:
- The total target incentive is reached when 100% of the defined goals are achieved
- The incentives paid for less than 100% achievement are in line with what you are willing to pay
- The incentives paid for overachievement still fall within the required constraints to meet business objectives and are sufficient to reward and retain high-calibre talent
- Your startup must communicate and treat consistently new employees, terminations, program changes, program issues, and payments
Step 2: Think the bonus and incentive program through
When formulating the program, consider the following:
- How will your startup fund your employee bonus and incentive program?
- What are you trying to achieve?
- What are you willing to pay for objectives that align with these business goals?
- Who will be eligible for the program?
- Is there any potential conflict of interest to remove or be aware of?
- How will you tie the target incentive with the market value of the skills? (i.e., the combination of base salary and incentives)
- Will you accelerate the program for over achievement? If so, by how much?
- Will there be a maximum payout in your program?
- Will you pay at all for partial achievement? If so, define the parameters (consider the minimum threshold, and deceleration options)
- What will the elements of the incentive be and how will they be weighted?
- Are the objectives clear? Use the “SMART” principles to set objectives (i.e., specific, measurable, achievable, realistic and time-bound)
- How easy or difficult will it be to meet these objectives?
- How much control or influence does each participant have over these objectives?
- How will you protect your startup’s right to revisit the program as business conditions require?
Step 3: Implement your bonus and incentive program
Once you have sorted through the considerations above, it is time to implement your incentive program. This means you are ready to:
- Define terms and conditions of the program—this involves determining:
- Performance assessment process
- Design the program—this includes determining:
- Payment formulas
- Minimum thresholds for payouts
- Timing and calculation of payouts
- Establish the approval process (e.g., who has authority to make decisions on exceptions or unusual circumstances?)