Setting Up a Bonus Plan

Bonuses are typical ways in which companies compensate executive management. Bonuses help make up a large percentage of executives' living wages. The higher a person moves within an organization the more money they are likely to make from other compensation outside of straight salary. The problem is that bonuses do not always encourage strong practices.

There are many different types of bonus structures that companies use. However, not all bonus structures work well. A company can decide to give a straight bonus or adjust that bonus based upon the position the employee holds within the company. Sometimes bonuses are paid for individual performance and at other times for company performance.

Bonus Structure Concepts:

50/50: 50% on company performance and 50% on individual performance.

Bonus Scale: As management level increases so does the percentage of company performance. For example, 70% individual and 30% company performance may work at middle management while 30% individual and 70% company performance may work at the executive level.

Caps: A company may be able to include criteria that the organization must meet 90% of its revenue projections.

Criteria: It would be wise for companies to put into place criteria that make someone ineligible or eligible for bonus pay. This might include promotion to a management position, discipline within the year, excessive absenteeism, demotion, etc...

There is an advantage to tying bonuses at the executive level to the performance of the organization as a whole. The higher up an organization a person is the more ability they have to influence the performance of the entire organization. As CEO compensation could be based 100% on organizational performance.

It is also important to put in place criteria when bonuses should not be paid. This may include a decline in performance, ethical violations, terminations of employment, etc...Bonuses should not be paid out simply because the CEO works there. He or she is an employee like everyone else and should be held to the same standards.

The purpose of bonus is to further the incentive of management to achieve organizational objectives. One of the most important organizational objectives is profit but this isn't the only thing that bonuses can be attached with. In many cases one would tie bonuses with a basket of employee retention, cost savings measures, positive performance reviews, or even ethical measures. The needs are endless.