Best Practices: How to Set Up an Employee Bonus Program
Wondering how to set up an effective employee bonus program that’s profitable for both your business and your team? Read on!
“If things within the bonus program aren’t really easy to understand, that’s where you start to have a disgruntled employee, and your program has the effect of de-motivating your team.” That’s Shabir Ladha, CPA, CA, and partner at KBH Chartered Accountants in Edmonton, Alberta, warning us about the dark side of employee bonus programs in a Facebook Live where we interviewed him on this topic.
Luckily, Shabir shared some key insights into how you can implement a motivating employee bonus program, and also ran through two real life programs examples his team helped implement for clients.
But first, why implement a bonus program in the first place?
Employee bonus programs can be effective for motivating your team, making them more efficient, and, ultimately, making the company more efficient and profitable. (One note: Being already profitable when you’re starting a program is a requirement because you don’t want to be paying out bonuses to employees when your company is still in the red.)
In other words, a bonus program is a strategy to increase your profit while sharing it with your employees.
If this sounds like a strategy you’d like to implement in your business, here are Shabir’s five recommendations:
1. Use the KISS principle
“I suggest business owners focus on the KISS principle, Keep It Simple—and you can fill in the last S with whatever word word you want. A simple program is way easier to monitor and deal with than a really complicated program,” recommends Shabir.
When in doubt, think hockey
A simple program would be offering a hockey superstar like Sidney Crosby or Connor McDavid their salary plus a bonus for every goal they score, motivating them to do better at their job, which is essentially to score goals.
A complicated program might be based on goals, assists, minutes on the ice. Power play goals versus shorthanded goals…
“They could layer in all these other complexities to reward all kinds of other things but then becomes really hard to calculate and you need a mathematician to figure out what the numbers are. So simple is better in most cases,” says Shabir.
2. Make it measureable
“It needs to be measurable,” emphasizes Shabir. “If I go back to the Connor McDavid example, it’s easy to count how many goals he scored. It’s fairly easy to count how much time you spent on the ice, but it’s a little more work to do that. Goals are simple.”
What this means for your business is:
1. It needs to be clear what employees need to do to earn their bonus. What is their ‘goal’?
2. It should be simple to calculate the final bonus based on that goal.
3. Ensure your employee has control
If you’re asking your employee to work toward a goal of some type, you have to make sure they have direct influence over this goal.
“If you were going to pay a bonus strictly based on company profitability and the employee has no say over what certain dollars are spent on, on expenses, that’s not ideal,” says Shabir. “Imagine the management group decides ‘we’re going to buy a $10,000 cappuccino machine for the office or we’re going to repaint all the walls this year, even though they were done last year.’ All those things can affect an employee’s bonus, and the employee actually had no say in any of that, and may not even get any benefit out of some of those things.”
Instead, think about their day-to-day. A lawn care employee might be motivated to mow more lawns in a day. An appliance repair and install business might challenge their employees to complete more installs in a day. A cleaning business might base their bonus structure on customer satisfaction if they have clients fill out a survey or a scale rating system—but again, you have to ensure you take this kind of ‘subjective’ feedback with a grain of salt because it’s out of the employee’s control if one client is super nitpicky compared to others.
Which brings us to recommendation number four.
Shabir Ladha, KBH Chartered Accountants
The more lawns somebody can get through, the more revenue the company has, the more profit it should have, the more it can pay out in bonuses. But what if the quality isn't there?
4. Account for quality assurance
In service-based businesses, bonuses are usually based on speed, so the ability of an employee to get more work done in the same amount of time.
“The more lawns somebody can get through, the more revenue the company has, the more profit it should have, the more it can pay out in bonuses,” says Shabir. “But what if the quality isn’t there? What if the person mowing the lawn isn’t bagging the grass properly or isn’t cutting evenly or cleaning up?”
That’s a big ‘what if’ when so many home service businesses rely on return service and word of mouth.
Revenue versus profit
Are you looking at the right numbers when it comes to assessing your business goals?
“If the quality of the service isn’t there because all they’re trying to do is get through as many lawns as possible to earn their bonus, well, you’ve now defeated the purpose of the program,” warns Shabir.
“Sure you got through a lot of lawns, but you’re going to have some disgruntled customers. So you can’t sacrifice speed for quality. And at the same time, you can’t sacrifice quality for speed. Just like you can’t have somebody skip all the cleanup just to get to the next lawn, you can’t have somebody spend so much time to make this lawn perfect that they only get through two lawns when they needed to get through five. There has to be a good balance there in order to make it all work.”
Using Jobber for quality control
How do you ensure quality? That’s where a system like Jobber can come in handy. Many of our customers use Jobber’s notes and attachments feature for just this situation. They have their employees take photos of their work at the end of the job and load them into the Jobber app.
For lawn care businesses that could be a few photos of crisp edges and a clean driveway. For one of our appliance repair customers this process involves dozens of photos uploaded to the Jobber app and reviewed daily by an operations manager. Bonus: these photos are a handy record of good work if a customer comes to complain about an issue or damage that’s not your team’s fault.
5. Make the bonus amount meaningful
“The quantity or the factor that you use for the bonus can be really hard to figure out,” admits Shabir. “At the executive level, in some cases the bonus can be as much as 30% of their base pay—that’s a huge bonus when you look at it. For a dealership I worked with [see example program 2 below], we did exactly that. It was 10% based on personal, 10% on on your team, and 10% based on overall company profitability. But that’s at a very senior executive level, and these are six figure executives to begin with. That’s the market and the standard.”
When it comes to a service employee in the field?
“If somebody was to hit all of their bonus targets over the course of a year, I think that bonus needs to be 10% of their base pay to have enough of an impact to motivate,” says Shabir.
Think about it this way: If you’re paying someone $20 an hour, so approximately $40,000 a year, and they get a $1,000 bonus. Will they look back at all their hard work and feel like it was worth doing it again for $1,000 next year? The answer is likely no, and a 10% bonus working out to $4,000 feels much more motivating.
Shabir Ladha, KBH Chartered Accountants
If somebody was to hit all of their bonus targets over the course of a year, I think that bonus needs to be 10% of their base pay to have enough of an impact to motivate.
The trick is to remember that this bonus is being paid out while your business is keeping a considerable amount of that extra profit.
On that note, Shabir has seen cases where an employee in a sales role had an amazing year, and his bonus was a percentage of all his sales—which added up to a lot.
“His bonus worked out to be two times his annual salary,” explains Shabir. “His employer’s first thought was ‘Well, I can’t pay on that bonus.’ And then we sat down and analyzed how much money the employer, the company, made because of all of those sales. When he looked at that, the bonus became irrelevant to him. It was great. His attitude was ‘I’m happy to pay that bonus because I made 10 times that number or five times that number,’ whatever the case may be.
When you’re paying somebody on a commission type bonus program or a percentage program, if they hit it out of the park, those numbers could be really big. And you’ve got to be cognizant of that idea and recognize that if they did that well, the company had to do really well.”
There’s also no pressure to go overboard. In Shabir’s experience, an employee’s decision to stick around and do their best work is not all about money at the end of the day.
“We have a bonus program internally, but when we read about what keeps employees happy—why they stay where they work—compensation is not number one or two on the list generally. It falls down to somewhere between four and seven depending on the survey and the marketplace, the industry, etc. People will stay at a well paying job while they’re unhappy for a period of time, six months, eight months, but at some point the money isn’t enough to keep them there if they’re unhappy.” says Shabir.
Without further ado, let’s apply these principles to two real life programs Shabir and his team helped implement.
Shabir Ladha, KBH Chartered Accountants
People will stay at a well paying job while they're unhappy for a period of time, six months, eight months, but at some point the money isn't enough to keep them there if they're unhappy.
Example program 1: Emphasis on efficiency
An industry like manufacturing is similar to home services in the sense that employees have fairly structured roles with clear outputs. A natural fit was implementing a bonus program based on production and efficiency, where employees who exceeded 24 widgets a day earned a bonus.
Simple, measurable, totally within the employee’s control, but what about quality?
“If you produced above 24, there was a bonus for exceeding your target and you had to pass the quality control check,” explains Shabir. “A quality control person made sure what you produced met the quality standards so that as it got moved down the line into the manufacturing of the piece of equipment, it all worked.”
The bonus program was a success.
“What they found was that they met all their quality standards, and productivity went up,” says Shabir. “Obviously, if they’re able to produce 28 in a day instead of 24, they pay a little bit more on in the bonus to cover off that extra. But the company is much further ahead with that extra production done in the same amount of hours as it normally used to take to produce 24. So they found real value in it and it worked well because the quality control stayed in place and they maintain that.”
Example program 2: Leadership structure
Let’s say you’ve scaled your business so that you have senior staff in leadership roles, making decisions at a high level around sales, operations, etc. In other words, they may be taking the lead on estimates or relationship building, but they’re not in the field working directly on repairs or installs.
Shabir shares another fitting example.
“A large automotive dealership we work with was looking at a bonus program for the executive team. Now the executive team doesn’t sell anything,” he points out. “They’re not on the floor selling; they’re not in the service department. It becomes a much harder to figure out—they’re not like a production-focused staff member.”
The solution? Unique goals and targets for each member of the executive team.
“In that case, the program we put together had a three pronged approach: there was a piece of the bonus for company profitability, a piece of the bonus related to achievement of goals by their department, and then there was a piece of a bonus related to achievement of goals for the individual themselves,” explains Shabir.
“Not that different when I go back to the landscaping company and mowing lawns, where the personal goal was to do four lawns a day and you get a bonus if you get five. The CFO in this example just had a different set of personal goals. So it’s quite similar in terms of, at a very high level, targeting things under the individual’s control, and the inclusion of overall company profitability ensures no slipping in quality.”
Conclusion: A good bonus program is good for business
At the end of the day, a good employee bonus program is meant to result in more profit for your business, and is a potentially low-cost way of achieving new financial success. After all, you only pay employees out when they hit their goals.
Following Shabir’s recommendations should ensure you have happy employees working through a simple, measurable program, that doesn’t compromise quality.
And if the program isn’t working? Cut it.
“If you’re trying to motivate a certain behavior and you’re not getting that motivation, I think you have to reevaluate the plan,” advises Shabir. “Maybe a bonus program isn’t right for the type of thing that your employees are doing. Maybe there’s a better way to compensate them.”
In other words, a good employee bonus program needs regular monitoring to ensure it’s still a good employee bonus program. And like all financial decisions, an accountant, like Shabir at KBH Chartered Accountants, can be a great advisor and sounding board for a potential program.