Bonus Plans: Why Most Fail
You have a job bonus program that kicks back extra bucks on individual jobs that come in under budget. Your newest foreman, Armando, just got a big bonus check. You put him on an easy job, it went perfectly, plus you found you padded the bid for a couple of things that never happened. The two other foremen are on difficult, ugly jobs that are not going well and there will be no bonus. One of the foremen is actually saving your behind over a bad estimate and may get the job to come close to breaking even. Armando says to your best foremen, “Let me buy you old guys a beer since you can’t make budget and earn your own beer money.” Both foremen abruptly say “no thanks” and stomp off.
It’s been a tough year. Winter has gone a little too long and the economy is not all that good. In fact, following four or five years of great profits, there is no question you are going to lose money this year. Your estimator and superintendent are good guys and others would love to have them work for them. Five years ago, you put in a bonus plan to share the good times. Five years ago they each received about $2,500, the next year it was $3,500 and after five years of good times it had grown to $6,000. One of them has just gotten divorced and commented on how good it was going to have that extra money and how much he needed it this year.
You can make a lot of mistakes as a manager but messing with employee pay is rarely forgiven. As a consultant who has been working with contractors for 27 years, I have seen many a bonus plan. Some seem to work; others fail miserably. As the marketplace tightens, these plans can be a real problem.
What a Bonus Plan Will NOT DoAs management consultants, PROOF Management believes you should pay people a fair livable wage on the high-end of the local pay scale for that position and then hold employees accountable for their performance.
We understand some of the reasons why contractors start bonus plans and there are lots of plans of the month and ideas but here are some of the things a bonus plan will not do for you:
A bonus plan does not take the place of good management. Many contractors think by paying people to do something, they will be more likely to perform. The most powerful piece of a bonus or incentive plan is that something has to be measured to make sure the program works. The measurement process forces accountability. But as consultants, we believe you could pay people well and hold them accountable and accomplish the same thing.
If an employee cannot perform a certain skill, then rewarding their performance will not help. For example, if a salesperson is poor at selling, then paying a commission will not teach them to be a good salesperson. Many contractors mistakenly think that by paying a commission, if the salesperson does not sell the job, they have not lost anything. What about all those sales you lost because the salesperson could not convince the person to buy from you? Your cost of lost opportunities is tremendous. Bonus programs cannot teach skills.
A bonus plan will not make your employees think like an owner. If they thought like owners, they would be your competitors, not your employees.
Bonus plans will not take the place of employee reviews, follow-up and skill review. As owners, we are all busy and can quickly grow weary of sitting down and reviewing pay and performance. Unfortunately such reviews are part of the owner’s job and a monetary reward system will not take place of the reviews.
Tips to Ensure SuccessOK, all is said and done, and you still want to have a bonus system. What can you do to ensure success? Here are some dos and don’ts:
Never distribute the money at year-end or during the holiday season. If you have been giving money to employees at year’s end, you may need to see this as more of a deferred compensation plan and less of a reward program. People adjust lifestyles and personal habits to such programs and they can be almost impossible to take away. No matter how hard you try, holiday rewards tend to be viewed as presents.
Consider an incentive. You might ask what is the difference? An incentive is a temporary program rewarding a specific behavior. Suppose you want the crews to get out of the shop quicker and on to the job earlier each morning. You might develop a month-long system where every crew that leaves within 15 minutes wins a chance for a Friday drawing where everyone in the winning crew gets a $50 bill. Then at the end of the month, you have a drawing where everyone in that crew receives a $100 gift certificate at a local sporting goods store. This program has a purpose, beginning and end.
Run all the numbers. If you are going with a bonus program, carefully play “what if” to make sure you know the most people will make. Since the real value of a bonus system is measurement, you may want keep the numbers small and when someone that does a good job can win. Everyone must know the rules and how they apply. The rules must be fair. Pay people fairly and use the bonus system to keep score, not reward big dollars. You almost want a system that has obtainable goals. If I never reach any of my goals or my incentives, I am going to be frustrated.
Consider having the system apply to more than just money and job cost savings. You can throw in other factors such as adherence to company policy, safety, customer service, etc. While these things can be harder to measure, you could have a committee of peers grade people and give the money away accordingly. Grade each person on these various factors and then prorate what they get based on this score.
Make sure your bonus plan does not put the participating employees at odds with your goals as owner and the plans of the company as a whole. What happens as owner if you decide to buy a nice company car and your employees see that as dipping into their profit sharing? Suppose you want to expand your business by investing in certain equipment. Don’t be surprised if your employees do not endorse your vision and instead would rather have the money in their pocket. Your employees are not your partners. If the business goes broke, their houses do not get repossessed. We have actually had managers complain during strategic planning meetings about how costs would affect their bonuses. Ironically, the meeting was needed to discuss methods to improve performance, thereby ensuring that profits increased and in the long run would enable the company to pay a bonus in the first place.