Five Steps to Giving Smart Year-End Bonuses

The year’s end is approaching, which means that employees everywhere are starting to count down the days until they receive their annual bonus checks. And that’s a problem, say Hay Group senior executives Doug Jensen, Tom McMullen, and Mel Stark. In their new book The Manager’s Guide to Rewards, Jensen, McMullen, and Stark emphasize that bonuses, or variable pay plans, should be tied to performance goals and used to reward performance – not as a pro forma event. If you’re planning to dole out year-end bonuses to your sales reps this year, here are some things to keep in mind:

1. Differentiate the size of the rewards. Adopting a “something for everyone” mentality undermines the whole point of variable pay, which is to recognize top performers. Those performing in the top 20 to 30 percent of your team should receive bonuses that are at least 50 to 100 percent above the norm, say Jensen, McMullen, and Stark. “Likewise,” they add, “it’s better to give 25 people $1,000 each than it is to give all 50 people $500.”

2. Manage employee expectations. Explain to employees how bonuses are funded, allocated, and the typical award amount so there’s no griping at bonus time. Say, for instance, bonuses are funded at 10 percent of base salary, but you want to reward the top 10 percent of your performers with a bonus equal to 20 percent of their salary. “This means that the typical award for the remaining 90 percent is about 8 percent,” say the authors. Explain this math to your team.

3. Tie bonuses to specific performance objectives. If asked, most managers would say bonuses help motivate performance. But the authors say that’s only part of it; managers need to be clear about what types of performance they intend to motivate. It may seem a no-brainer that as a sales manager you’d reserve the heftiest bonuses for the reps who close the most sales, but it’s a lot more complicated than that if you do it right. For instance, what if your company is heading in a new direction and trying to push a new line of products? Now you might need to differentiate bonuses based on the sales of these new products. Or say you’re in the process of adopting a solution selling approach – do you give the 20 percent bonus to the rep who closed the most sales but refused to use the solution-selling approach? Or do you reward performance based on new solution-selling metrics? And what about territory differences? Arguably, some territories will be more fertile than others; how do you account for these differences during bonus time? These are all issues you need to address at the beginning of the year to reduce grumbling at bonus time. And the way you do it is by selecting a few strategically important performance factors and awarding bonuses based on performance in these areas.

4. Maintain an ongoing dialogue about performance. It’s not enough just to select the performance factors that will be awarded with bonuses and announce it at the beginning of the year; you then need to follow up by talking with your reps about their performance on a regular basis. Offer praise when they do well and constructive feedback when they fall short of expectations. Document these events for use during later performance assessments and bonus discussions.

5. Make bonuses the exception, not the rule. Manage bonuses and incentives so employees don’t come to regard them as an entitlement. If you follow the first four steps, this step should naturally fall into place. The bottom line is you need to send a clear message that bonuses are not simply a check everyone receives each December; they reward performance.

For more information, visit www.haygroup.com.