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I’m a huge fan of incentive compensation.  I find people will do what they get paid to do.  Unfortunately most incentive compensation programs I see are “pennies from heaven” programs.

This means that the participants in a bonus program get the bonus but don’t know why they got the bonus or don’t understand what actions have brought the extra compensation.  If this is the case in your company your bonus program is not getting or helping to get any particular behavior from your employees.

Click here for your special report on using key metrics to create a bonus plan

Instead think about having several different bonus programs in different parts of your company.  These programs are based on things your employees can actually control.  If you use lean manufacturing, constraint theory, or any program with KPI’s (key performance indicators) and drivers setting up a meaningful bonus plan is easy.

The following steps will help you set a bonus plan where your employees will understand why they’re getting extra money in their paycheck.

  1. Have a clear measurement system in your company for what success is.
  2. Post measurements so that all can see them.
  3. Make sure the measurements are meaningful to the employees who are doing the work.
  4. Have a program where employees can suggest and implement changes to make their measurements better.
  5. Have a baseline for you expect area performance to be.
  6. Decide what the economic value is for improvement in different performance areas.
  7. Decide what percentage of the improvement you will give to your employees for success.
  8. Communicate the change or implementation of your bonus plan to your employees.
  9. Monitor and change the bonus plan if it becomes unfair to either party.
  10. Be ready to change the bonus plan as improvements happen and new improvement areas appear.

These ten steps will help you implement a program that has meaning to your employees and the bottom line of your company.  I’ve found that bonus plans with meaning help build moral and understanding in my own companies and companies I’ve done work with.

Making incentive compensation part of how you pay your people will produce results.  Those results often improve as you tie compensation to things your employees can control.

Josh Patrick

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

Topics: for business owners, enterprise value, value, Key Performance Indicators (KPI)

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