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Bonuses: How To Be Fair

Adapted from content excerpted from the American Express® OPEN Small Business Network


Bonuses can be a great motivation tool, even for employees of the smallest business. They can also be a waste of money. How they are planned and administered makes the difference.

Properly administered bonuses can reinforce behavior that will lead your company to success by rewarding people for making a specific contribution to the organization. Bonuses dolled out improperly will lead to disgruntled employees who expect a bonus, but who may not be happy with what they receive.

Set Goals

To reap the most out of bonuses, tie them to clearly-set goals. A good time to set these goals is at the beginning of the year. These goals should be concrete, attainable, and critical to the growth of your business. The steps below will help you set good bonus goals:

  • Set goals with Employees

    Employees are often the best source for information about what job-specific goals will contribute to overall increased productivity, responsiveness, or other business goal. Involving employees in goal-setting will also do away with resentment that can come from the imposition of goals from senior management.

  • Reevaluate goals frequently

    Do this, at a minimum, halfway through the year to insure that goals still make sense and that employees are on track. Big companies tend to have concrete goals but smaller companies let this information slide.

  • Make goals specific and measurable

    Don't set goals such as "Do a better job," because a general goal does not instruct an employee in what steps to take. An example of a constructive goal is "Increase response time to customer calls by one-third" or "Cut customer complaints by 50%."

  • Set goals that tie employees into the success of your company

    Don't automatically assume that bonuses should be tied to increased sales or even profitability. For example, it may be most important in a given year for your business to cut costs or raise visibility. Tie bonuses into that critical goal rather than one that is traditional.

  • Make sure employee goals are attainable

    Most people tend to set goals that are too high and this leads to employee frustration and demotivation over time, which kills off the value of setting goals.

Other Reasons to Give Bonuses

If you didn't set goals with your employees last January, that doesn't mean that you can't pay bonuses this year. There are a number of reasons that you might want to consider paying year-end bonuses to your workers. According to Ted A. Hagg of Ableman Management Services, a New York City-based financial and management consulting service for individuals and small businesses, you can still make an educated decision at year-end by asking yourself the following questions:

  • Can I afford to give bonuses?

    It is legitimate not to be able to give bonuses every year. If you did not make a profit, for example, bonuses are inappropriate.

  • Do I want to retain the workers I have?

    Bonuses are a tool for attracting and keeping good employees. If you are concerned about losing someone to the competition you should factor that into your decision.

How Much to Pay

There are no hard and fast rules except that you should make bonuses equitable among peer groups and always have performance justification for bonuses. Employees will discuss bonuses, and paying inequitably will generate strife or potentially lawsuits.

When you deliver bonuses, be sure you explain the reasons for them. These reasons should be non-subjective, measurable, and performance-oriented. When you deliver bonuses, make it clear that a bonus is an extra that may not always be available. As nicely as possible, drive home the fact that you are rewarding them for this year's accomplishments and that bonuses are available based on the company's performance this year only.

Bonus Nuances

The end of year is not the only time bonuses can be given out. Some business owners believe that whether you give bonuses or not, you should also provide periodic rewards for jobs well done. Accountants often give them at the end of tax season, other entrepreneurs give them at the end of a large job or busy season to demonstrate appreciation for employees' devotion and hard work.

Even a bonus as small as USD50 can mean a lot to someone because it demonstrates that you acknowledge their hard work. If you don't have a lot of extra money to spare, a small bonus or a bonus in the form of time-off can work.

Some people believe that giving all bonuses at the end of the year is not a good idea. According to David H. Bangs, Jr. author of "Smart Steps to Smart Choices" (Upstart Publishing Company), end-of-year bonuses can create a mine-is-bigger-than yours syndrome in your company. Bangs recommends providing bonuses for goals attained at the time of the achievement.

When you are doling out bonuses during the year or at the end of the year, don't forget the behind-the-scenes people who have made the big orders, the successful client presentations, and the travel, possible. Clerical staff is instrumental in making all other functions of the company operate smoothly. Reward them for it.

Bob Adams, author of "Adams Streetwise Small Business Start Up" (1996), and head of Adams Media Corp., contributed to this story.

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