Setting up a Bonus System does not need to be difficult, it doesn’t need to add unsupportable expense into your business, but it does need to be equitable and it does need to be easy to understand and implement.
When you decide to set one up for your business, keep these typical mistakes in mind, so you avoid making them!
Mistake #1: Equity is not a form of bonus
Many business owners often use ‘equity’ and ‘bonus’ as interchangeable terms. They want to reward their people for doing a good job, but aren’t sure exactly what they want to do for them.
Equity is a share of the company, and brings with it shareholder liabilities. Most people don’t want equity in their employer’s business, but they do want a bonus for good performance. Bonus payments are paid out of profit and based on degree of performance.
Mistake # 2: Most bonus systems are not based on forecasts
If you don’t know what your sales, margin and profit expectations are, how can you determine what amount you will allocate towards bonus payments?
Mistake # 3: Most bonus systems don’t include the company’s performance as well as individual performance
If the company doesn’t perform according to plan (refer Mistake # 2 about forecasts…) then there won’t be much excess for a bonus pool. If employees are offered bonus rewards that are contingent only upon their own performance and not the company’s, there may not necessarily be excess funds in the company at the end of the year to pay individual bonuses.
Mistake # 4: Bonus systems are put in place without a process to assess individual performance