Ways to Improve an Incentive Bonus Plan

Stephen D. Kirkland CPA, CMC, CFC, CFF
November 14, 2013 — 2,144 views  
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Here are some potential ways to improve an employee bonus plan.

Reduce base salary and increase variable pay.  Make the potential bonus large enough that the employee is truly motivated to work for it.

Simplify the bonus plan.  People have a tendency to be skeptical of anything they do not fully understand.

Use the bonus plan to unify, not divide, your workers.  If everyone gets a bonus when the company meets budget, the employees will pull together rather than competing and finger-pointing.

Include some flexibility and subjectivity so you can adjust the amount upward or downward for hard-to-measure attributes like attitude.  You do not want to be contractually committed to paying a year-end bonus to someone who was just fired for embezzling.

Consider spot bonuses.  You can recognize someone’s unexpected, extraordinary performance by awarding an on-the-spot bonus.  These bonuses are intended to show immediate appreciation for an exceptional accomplishment.  These bonuses are completely subjective and are usually small (it’s the thought that counts) and should be given soon after the time of achievement.

Personalize it.  Rather than simply having the net amount electronically deposited in the employee’s bank account, consider hand-delivering a paper check.  Look the employee in the eyes, shake their hand, and say “Thank you!” while handing them the check.  Or, send a hand-written note to their home address.  We live in an electronic age but the old-time personal touch is still powerful.

Pay bonuses more often.  Once a year may be a golden handcuff, keeping employees on board until the annual bonus is finally paid.  But in today’s want-it-now society, a year can be a long time.  Perhaps more motivation can be derived from two six-month bonuses rather than one annual bonus.  Also, pay the bonus as soon as practical after the amount has been determined.  Attitudes tend to sour when people have to wait longer than they think they should.

Be careful with non-qualified deferred compensation.  This is simply an unfunded promise to pay some amount at a future date if certain conditions are met.  Strict requirements must be met to avoid tax problems and care must be taken to record the contingent obligation correctly on the books.

For more information on determining and paying bonus amounts, see www.ReasonableComp.biz

Stephen D. Kirkland CPA, CMC, CFC, CFF

Atlantic Executive Consulting Group, LLC

Stephen Kirkland is a compensation and tax consultant with over thirty years of experience.