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Monroe Porter

Bonus plans – maybe you shouldn’t start one

By Monroe Porter

Imagine it’s Christmastime. You have some good guys working for you. So, you hand a $100 bill to each of your key guys. You overhear one of them saying, “This is all the boss thinks I am worth, after all the years I worked here.”

Or, imagine you have a job bonus program that kicks back extra bucks on individual jobs that come in under budget. Your newest foreman, Armando, just got a big bonus check. You put him on an easy job and padded the bid for a couple of things that never happened. So it went perfectly.

The 2 other foremen are on difficult, ugly jobs that are not going well and there will be no bonus. One of the foremen is actually saving your behind over a bad estimate and may get the job to come close to breaking even. Armando says to your best foremen, “Let me buy you old guys a beer as you can’t make budget and earn your own beer money.” Both foremen abruptly stomp off.

Or, imagine you put in a bonus plan some years ago to share the good times. But, this year has been a tough one. Winter has gone a little too long and the economy is not all that good. In fact, after 5 years of great profits, there is no question you are going to lose money this year.

Your key people are good guys and others would love to hire them away. 5 years ago they each received about $2,500, the next year it was $3,500 and after 5 years of good times it had grown to $6,000 annually. One of them just got divorced and commented on how much he looked forward to this year’s bonus because he needed it.

Things a bonus plan can’t do

Messing with employee pay is a mistake that is rarely forgiven. I have seen many kinds of bonus plans. Some seem to work, others fail miserably especially when the marketplace tightens.

Here are some of the things a bonus plan will not do for you:

A bonus plan does not take the place of good management. Many contractors think that by paying people to do something, they will be more likely to perform. The most powerful piece of a bonus plan is that something has to be measured to make sure the program works. The measurement process forces accountability but I believe it’s possible to pay people well and hold them accountable to accomplish the same thing without a bonus plan.
If an employee cannot perform a certain skill, then rewarding their performance will not help. For example, if you have a poor salesperson, paying a commission will not teach them to be a good salesperson. Many contractors mistakenly think that if a commissioned salesperson does not sell the job, the contractor has not lost anything. Your cost of lost opportunities can be tremendous. Bonus programs cannot teach skills.
A bonus plan will not make your employees think like an owner. If they thought like owners, they would be your competitors, not your employees.
Bonus plans will not take the place of employee reviews, follow-up and skill review. As owners, we are all busy and can quickly grow weary of sitting down and reviewing pay and performance. Unfortunately such reviews are part of the owner’s job and a monetary reward system will not take place of the reviews.

Bonus system dos and don’ts

Okay, so you still want to have a bonus system. What can you do to ensure success? Here are some dos and don’ts:

Never distribute the money at year-end or during the holiday season. If you have been giving money to employees at year-end, you may need to see this as more of a deferred compensation plan and less of a reward program. People adjust lifestyles and personal habits to such programs and they can be almost impossible to take away. No matter how hard you try, holiday rewards tend to be viewed as presents.
Consider an incentive. What’s the difference? An incentive is a temporary program rewarding a specific behavior. Suppose you want the crews to get out of the shop quicker and on to the job earlier each morning. You might develop a month-long system where every crew that leaves within 15 minutes daily wins a chance for a Friday drawing where everyone in the winning crew gets a $50 bill. Crews that keep it up all month are entered in another drawing where everyone in that crew receives a $100 gift certificate at a local sporting goods store. This program has a purpose, beginning and end.
If you are going with a bonus program, carefully play “what if” to make sure you know the most you might pay out. Run all the numbers. Everyone must know the rules and how they apply. The rules must be fair. Pay people fairly and use the bonus system to keep score, not reward big dollars. You also want a system that has obtainable goals. If goals and rewards are unreachable, people will be frustrated.
Consider having the system apply to more than just money and job cost savings. You can throw in other factors such as adherence to company policy, safety, customer service, etc. While these things can be harder to measure, you can have a committee of peers grade people and give the money away accordingly. Grade each person on these various factors and then prorate what they get based on this score.
Make sure your bonus plan does not put the participating employees at odds with your goals or those of the company. What happens if you decide to buy yourself a nice company car and your employees see that as dipping into their profit sharing? Suppose you want to expand you business by investing in certain equipment. Don’t be surprised if your employees do not endorse your vision and would rather have the money in their pocket. Your employees are not your partners. If the business goes broke, they are not at risk of losing their property.

Beware the economic downturn

If you go ahead with a bonus plan, just remember that in a softening economy such programs might hurt what the bonus was designed to improve, company profitability. As you bid jobs tighter and margins drop, make sure you keep employees informed of what is happening in the marketplace and how year-end profits/bonuses might look. There is no magic system. All are complicated and need to be well thought out. There is no magic answer.

Monroe Porter and PROOF Management offer business consulting through industry networking groups and he can be reached at (804) 683-6628.