There are all sorts of reasons that you, as a small business owner, would want to give your team bonuses. Bonuses motivate people of course, but it is more than that. Rewarding people for a job well done fosters the kind of culture you want in your business. It also helps you attract and retain top talent.

So yes, in theory, employee bonuses are a great idea. But here’s the deal: Bonuses have to be done right if they are to generate the intended result, i.e., motiving staff to excel while simultaneously rewarding them for a job well done.

The challenge actually is three-fold:

  • First, employees can get used to bonuses, in which case the bonus will fail to do the desired job of motivation
  • Second, if employees fail to earn a desired bonus–either because the goal was unrealistic or because they were not up to the task, the bonus becomes, not a boon, but a bone of contention, and finally,
  • Get too stingy with bonuses, and you will get a revolt of a different sort.

Here's what not to do: My pal Craig manages a busy retail furniture store. Every month, the owner gives his desired sales numbers, for Craig and his staff. Craig is given no budget however to give his team bonuses for hitting their numbers, so whenever he (Craig) gets a sale, he awards it to a different salesperson. The good news is that his staff is rewarded and motivated, and the big boss gets his quotas hit, but Craig never sees anything remotely like a bonus because all his sales go to his team.

No wonder he is looking for a new job.

Bonus plan overview.

Bonuses plans are also called incentive plans and as a best practice, having a scheduled and predictable incentive plan is smart. The purposes of having an attainable bonus structure are many: Of course, the main reason is to motivate people to excel, but of equal importance is to reward them for doing so. Additionally, a good bonus plan can be a recruiting tool, as, especially in this tight job market, attracting top talent is tougher than ever.

What then exactly are the elements of a good employee incentive plan? Essentially, there are three key factors involved:

  1. It needs to be easy to understand. This cuts both ways; not only do staff members need to understand what it takes to get the bonus, and why, but so does management.
  2. It needs to be fair: Your bonus plan has to make sense for everyone. For instance, it would be wrong to create a bonus for sales growth and have that apply equally to your accounting department.
  3. It needs to be real. The money or other rewards that people get cannot be in lieu of what they normally would receive, that is, the bonus has to really be bonus bucks.

Types of bonus plans.

Needless to say, your bonus plan is contingent upon the type of business you have and the reasoning behind the plan. Here are your options:

Annual bonuses: Think your typical holiday bonus. This type of bonus is great because yes, it applies across the board, and yes, people love getting extra money for no real reason other than a good culture. People want to be appreciated.

Performance bonus: The idea here of course is that, as opposed to fostering goodwill, the potential bonus is an attempt to motivate people to reach pre-determined goals. The imperative here is that 1) everyone is clear on the goal, 2) that the goal is achievable, and 3) that the bonus really is an extra reward. If those three criteria are met, your bonus plan should be a great incentive.

Milestone bonuses: These bonuses are offered when specific work goals are reached, be it getting a project done on time (or early) or making a pre-determined number of sales calls in a month or what have you.

Occasional bonus: A manager might say one day that the high salesperson of the day will get $100 cash. Or the owner might go around and give everyone a $20 gift card. Either way, the unexpected bonus is always a welcome treat.

Non-monetary bonuses: The reward need not involve money to be considered valuable, for example consider "employee of the month" recognitions, preferred parking spots for a month, or shout-outs in the company newsletter.

Structuring the plan.

First, for performance-type bonuses, be sure that the milestones are both ones that will help you get your business to where you want it to go, but also reachable for the employees in question. Be sure to put the plan in writing and communicate it effectively with your team. On that last point, staff members need to understand the thinking behind the bonus structure, how it is a win-win for both the business and themselves, and finally, how to accomplish the goal in question. Incentive plans can be done individually, or per team or department, or companywide. It depends on the form and goal.

The good news is that a great bonus plan is indeed a bonus for everyone–your team, your business, and yourself.