Employee Bonuses: How do I make everyone happy without going broke?

“Everyone worked hard this year so I wanted to give them some kind of reward. Once the employee bonus checks went out I thought I would see increased engagement, or even an occasional Thank You. But I got nothing. What happened?”

Employee bonus time. It’s one of the most stressful times of year for employers and employees alike. Employers want to be fair with their employee bonus program; they try to retain profits throughout the year to make sure the company has the working capital it needs to grow, or sustain a downturn. As the year comes to an end, some of those profits can be shared with the team as a way of recognizing the contributions they have made.

employee bonuses

But throughout the year, the employees have been thinking about bonuses too! Typically they don’t have any awareness of the overall health of the business finances, or cash flow. They just know they’ve been working hard and the business is growing. Is the boss willing to share?

This sets up an almost no win situation. If the bonus comes in above the employee’s expectations they feel like they’ve won the lottery! If it comes in below their expectations, they are disappointed. How can you figure out what’s right?

I’d argue that any employee bonus program has three goals:

  1. Reward people for the results they produced, for their accomplishments.
  2. Provide bonuses that the business can afford and sustain.
  3. No surprises. Employees and employer feel that the amount paid is fair.

If these are the goals, let’s look at the typical “bonuses determined by owner discretion” plan.

“Spitball” employee bonuses

  • When a business owner spitballs employee bonuses at the end of the year it tends to reward the team for the results that the whole business achieved (measured by cash in the bank account). In other words, the cash distributed across the team may or may not be tied to the actual work accomplished by individuals.
  • Generally speaking, the owner is not going to pay unsustainable bonuses. However, there are times when despite hard work, a bonus is not on the table at all. And there are many business owners who feel obligated to pay bonuses based on the employee perception of financial success, even though the employer doesn’t really have the cash to do it!
  • Lastly, it’s almost always a surprise. The only way it’s not a surprise is if the bonus is about the same as past years and then it’s really just deferred salary. It’s not really tied to performance.

The “owner discretion plan” doesn’t really meet the goals I put forward, does it? And yet, time after time, I meet with business owners who use this plan! What if, instead of winging it at the end of the year by judging your bank account and the mood of your employees, you made a plan starting at the beginning of the year? What if that plan clearly laid out what the employee bonuses would be and how they would be determined? Not only will you meet these goals — you will see a different outcome.

So how do I do employee bonuses?

A plan that is based (at least in part) on company performance insures that the bonuses are sustainable. If they are results based, people feel like they are earning them. Because you laid it out from the start, and updated folks during the year, there are no surprises.

But this requires some hard work on the business owner’s part. First, we have to give our team some insight into what our company’s finances are. This can be scary for most business owners. What if they find out what I make?

Your team is already talking about how much you make — and let me assure you, their assumptions are much higher than the reality! If you index your employee bonus program to payout if budgeted cash flow is exceeded, you don’t have to give out an absolute number — just how much over or under budget you are (which could be a percentage) — so no one needs to know hard numbers.

Second, we need to be able to measure the achievements of our employees, either individually, or by department. Seems like that is something we’d want to do, regardless of our employee bonus program. Lots of good things can come from sharing a solid number that people can use to measure their achievement. Think about it.

Making a plan, communicating that plan to your team and then updating them through the year is one of the best ways you can make your bonus dollars work for you.

Free employee bonus tool

If you’re stuck on how to set up a bonus program, check out our employee bonus program tool that we use with small business owners to help them set up an employee bonuses.

Photo credit:  401(K) 2013

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