Practical Solutions to Business Puzzles

A clear bonus program that is aligned with an organization’s interests can improve a firm’s performance.  Bonus programs can be used to align the organization’s interests with the interests of the individual.  As is often the case, the more clearly we can identify the organization’s interests, the easer it is to describe the behavior sought, and to measure results.
Five things to consider when looking at bonus programs are:

1. Organizational interests to be furthered through the award
2. Each employee’s ability to contribute to the organization’s interests
3. Behavior that is desired
4. Measurement of results
5. Current situation

Organizational interests

What is the bonus program supposed to do?  When we have not defined the goal for the bonus program, the bonus program can look like a “me too” approach.  In that I mean that we can be communicating that, since everyone else is doing it, we decided to do so as well. 
By defining our goals, we can create a bonus program that is aligned with the goals.  Additionally, defining the goals enables us to develop clearer rules and provide certainty to employees.  Clarity and certainty make it easier for employees to understand what behavior we want them to change and increase the likelihood that they will change their behavior to comply with the standards we have established.

Employee contribution

Employees vary in their ability to contribute to the organizational goals.  Some of the variance is attributable to each employee’s knowledge and experience.  Another cause of the variance is that employees may perform different tasks.  Some tasks are more closely related to the goal or have greater ability to impact the results than other tasks. 

Desired behavior

The more closely we define all of the behavior that we are seeking from employees, the more likely we will be successful in incenting appropriate behavior.
Can you imagine a situation where firms adopted bonus structures that led employees to focus solely on achieving the bonus?  One hears stories about such results from time to time. 

Measurement

If one is trying to incent behavior through the bonus, how does one know whether the bonus has been an effective and efficient way of incenting the behavior?  The simple answer is that one should measure results and identify opportunities for improvement. 
Measurement is a factor that we should always take into consideration when designing bonus programs.  This way, we are more likely to be successful and to allocate our resources efficiently. 
A few questions that we may want to consider in deciding what to measure are:

1. What are we currently measuring?
2. What results will we realize if employees are behaving in the desired manner? 
3. How will we know if the bonus has contributed to, or caused the change?

Current situation

Understanding the current situation helps us answer a variety of questions.  The questions that we may be trying to answer include: 

1. How much change is required
2. Whether a bonus program is necessary
3. The likelihood that a bonus program will help us realize the desired results
4. What options might incent the desired behavior
5. How the program will impact our cost structure