Bonus vs. Incentive Compensation

I never particularly liked the concept of paying people year-end bonuses. I found over the years that people tend to expect them as part of their basic compensation package. And, in many organizations, the basis of the bonus is often not clearly defined ahead of time. Too often bonuses depends on "how well the company does." Whatever that means?

Instead I think it makes more sense to find ways to provide people with clear incentives tied directly to their own performances as well as to the performances of the organization in total. For example, sales people can certainly be compensated with a base salary plus a commission based on their individual sales results. The commission portion of the total compensation should be substantial. But, since nearly all  people within an organization can have a personal impact on sales maybe all employees should be motivated with a commission based on the total revenues of the company. Other incentive programs can be developed and implemented depending on the nature of the business. For example, professionals like accountants and lawyers could receive incentive compensations based on new business they generate or the profitability of their engagements. Teachers could be provided incentives based on the standardized testing results of their students.  Retail buyers could be provided incentive compensation based on the total mark downs taken on their purchases.

Certainly everyone in an organization could be motivated with a percentage of the bottom line results of the company with clear bench marks established at the beginning of the year. Maybe incentives could be established on a quarter by quarter basis plus a year-end program.

In developing an incentive program that works think through ways to insure that the pay out of incentives help you retain the best employees. Too often I have seen organizations lose key people just after they received a substantial bonus or incentive payment. They hung around just long enough to get their "big pay out" and then left for greener pastures.

Developing an effective compensation system for all employees that is reviewed and tweaked periodically can be a major competitive weapon. Make certain you are paying enough attention to your system. No two organizations are exactly the same. The compensation system that works for you will need to be unique in ways that meet your core business objectives.