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Many companies pay bonuses or incentives and many people look forward to receiving them. What would happen if they weren't paid? In some cases, nothing would change, in others there would be a rush for the door. Definitions Let's firstly try and define the difference between a bonus and an incentive. We use the following. An incentive is a contractual arrangement. If you do this - we'll pay you this amount. A bonus is discretionary. If we have a good year we'll pay a bonus. These discretionary payments do not happen much in large businesses. They tend to occur when the CEO is the owner. Bonuses Bonuses can be very powerful in building a culture but there is high risk if the payer becomes too subjective in what is paid to whom. If you want to pay a bonus, reducing the uncertainty of it as much as possible is advised. Using as many of the principles below which we use for incentives is a good start and sharing information during the year will keep people involved in the reasons for it being paid. Incentives Once a business has reached a certain size, or the market for particular jobs requires it, well constructed incentives are the best option. However, a salary system linked to the performance management system, something we consider absolutely necessary, may well be all you need. If you are going to introduce additional incentives over and above a performance based salary system you should consider the following. Objectives What is it that you want to reward exactly? Having clear objectives is important and they should link to the corporate objectives. Sales achieved for sales people are relatively simple and easy to measure - maybe this is why sales people get incentives more often. Other areas of the business can also be measured but it can be more difficult to get it right. If you can't be clear why you are doing it - don't. Control Employees should be able to control the outcome. If they can't then the incentive payment becomes a windfall. If keeping costs down is a measure, can they influence this? Participants must be able to understand the measures and what they have to do to earn an incentive. Challenge It must be challenging but achievable. A number of periods where no, or little, incentive is paid will quickly be no incentive at all. An easy target will quickly become expected each year and a downturn create dissatisfaction. How much? Holidays or "conferences" work for some people - but not all. There is a reason we usually deal in money - it can be converted into something we want. The incentive paid must be meaningful to the employee. It should be a reasonable financial reward. A percentage of salary is usually best as it can be the same relative importance for all eligible employees. When? Wherever possible, the payment of an earned short-term incentive should be as close as possible to the events being measured. For example, quarterly payments can often be made with a "reconciliation" on the 4th quarter after the annual results have been confirmed. Retention It should encourage high performers to stay with the Company. It should be rewarding with the chance of it being even more rewarding in the future. Long-term incentive plans can be designed to achieve this more easily than short-term plans. Budget The incentive must be within budget constraints. The organization must be able to pay what was promised without undue hardship and budget for this. Communication Whatever your incentive plan, it should be very clearly communicated in writing. Eligible employees must know exactly what is required and what the payment will be. There are often disagreements over payouts, especially if someone leaves, so getting the detail right is a good idea. If you can get these factors right you are on the way to being able to attract and keep good people.
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