Time to Revisit Bonus Plans

By Randy MyersBusiness on Main

As the economy picks up, it’s time to think about incentive and retention programs to keep your clients and employees satisfied.

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It’s time to start thinking a little harder about keeping your best workers happy.

The U.S. economy added 216,000 jobs in March, after adding 194,000 in February. The latest hiring activity has driven the unemployment rate to 8.8 percent, its lowest level since April 2009. Soon, your star employees may have real opportunities to work somewhere else.

“Companies feel like 2011 is starting to pick up,” observes Randy Ramirez, regional practice leader for the compensation and benefits practice at BDO Seidman LLP, a national accounting and consulting firm. “We’re not only putting in revised or new incentive plans for our clients, we’re also putting in retention programs.”

Design a program that worksRetention programs are designed to keep valuable employees on the job, with payouts typically conditioned on employment continuing for several years. Cash is an appropriate reward, but not the only option. Some small companies, Ramirez notes, will give key employees a car that they are allowed to keep, at no charge, if they are still employed three years later.

Incentive programs are designed to drive employee behavior, not just longevity. They work best when they are linked to metrics that employees can control. Accordingly, terms can differ from company to company or even within the same company. If you run a construction firm, for example, you might link bonuses for your project managers to their ability to bring labor and material costs in under budget. Your bookkeeper, by contrast, might collect incentives for minimizing receivables.

DeAnne Merey, president of New York City-based DM Public Relations, rewards her employees with weekly bonuses linked to the number of times they are able to get their clients mentioned in the press — a key deliverable for her media relations firm.

“It rewards activities that are desired by our clients,” Merey says. “If one of my associates wants to spend 10 hours fiddling around with our graphics, they can — but it won’t earn them any extra money. I’m trying to align their interests with the interests of our clients.”

Apparently it works. After implementing the bonus system, Merey says, her firm’s media placement numbers soared to record levels despite what was then a slumping economy. She still uses the system today, and as a side benefit now spends less time micromanaging her employees. “I’m still an active manager,” she notes, “but I don’t have to hover as much.”

Knowing what not to doWhen crafting a bonus plan, try to avoid imprecise language that can lead to unintended consequences. Ramirez recalls working with a small bank that had been rewarding its executives based purely on the bank’s revenue growth.

To meet that goal, the executives simply went on an acquisition spree, buying up a bunch of smaller competitors, taking on too much debt in the process and overleveraging the bank’s balance sheet. It wasn’t what the bank’s owners wanted, but revenues rose and the executives were compensated for it. A better plan would have rewarded the executives for revenue growth only if they were able to maintain the bank’s capital ratios within predetermined guidelines.

“You have to do a prudent cost analysis, taking into account what can happen in a best-case and worst-case scenario, and what it will cost the company,” Ramirez says. “It’s OK to put in circuit breakers.” Ramirez is fine with caps on bonuses, too, as long as the bonus plan isn’t for sales personnel. In their case, he prefers to use language that ensures bonuses are paid only for profitable sales.

Still, Ramirez recommends keeping bonus plans as simple as possible. “Companies will tend to overcomplicate an incentive program by trying to address too many things at once,” he explains. “When you do that, you muddy the message. We like to say that if you can calculate the incentive in your head, you have a really good chance of it being a successful program.”

With the economy heating up and jobs becoming more plentiful, that’s a goal worth working toward today.

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