You want to reward employees for a job well done, and a performance bonus can be a great way to do that. But handing out checks at the end of the year simply because they worked hard isn’t necessarily a performance bonus.
A true performance bonus is tied to clear, measurable goals where employees know what they are working toward, how their performance will be evaluated, and what they need to accomplish to earn the bonus. For small business owners, putting this structure in place can make performance bonuses more meaningful for employees while also helping your company accomplish important goals.
Performance Bonuses Should Have a Purpose
It can be tempting to make bonus decisions based on how the year went or which employees seem most deserving. You may even have an informal system where certain employees tend to receive larger bonuses or everyone eventually “gets a turn.” The problem is that employees may not understand how those decisions are being made.
A performance bonus should have clear criteria behind it. Before the performance period begins, establish specific goals employees must meet to qualify for a bonus. This gives your team something concrete to work toward and takes much of the guesswork out of the process. Employees should be able to answer a simple question: What do I need to accomplish to earn my bonus?
Set Meaningful Goals
A good starting point is establishing three to five performance goals for each employee that connect directly to that person’s responsibilities.
Depending on the role, goals could involve:
- Individual contributions toward company revenue targets
- Completing projects by established deadlines
- Improving efficiency or productivity
- Customer retention or satisfaction
Performance goals aren’t only appropriate for salespeople or employees whose work directly generates revenue. Almost every position contributes to the company’s success in some way, so the key is to identify what successful performance looks like for each employee.
Determine How to Measure Each Goal
“Improve customer service” isn’t specific enough for a performance bonus plan. How will you know when an employee has accomplished it? Each goal needs an objective way to determine the outcome. You can also establish thresholds instead of treating every goal as pass or fail.
For example, an employee might receive full credit for achieving 100% of a target and partial credit for reaching 90%. You could also establish a minimum threshold, such as requiring employees to achieve at least 80% of the target before that particular goal contributes toward their bonus.
The percentages and measurements you choose will depend on your business and the goal itself. What matters most is establishing them before you evaluate performance.
Make the Bonus Structure Clear from the Start
Employees shouldn’t reach the end of the year and wonder why their bonus was larger or smaller than expected. That’s why it’s important to document your performance bonus program and explain how it works. Employees should understand their goals, how each one is measured, the performance period, and how their results translate into a potential payout.
It also helps to revisit those goals throughout the year. If an employee is falling short of a target in June, finding out in December doesn’t give them much opportunity to improve. Instead, making time for regular conversations will help employees understand where they stand and make adjustments while there is still time to reach their goals.
Take the Guesswork Out of Performance Bonuses
Performance bonuses can help motivate your employees, recognize meaningful contributions to the team, and keep your team focused on the priorities that move your business forward. If you’re creating a bonus structure from scratch, however, deciding what to measure and how to measure it can quickly become another task on your already-full plate.
45 Solutions provides fractional HR support to help small business owners create practical HR processes that work for their teams and their businesses. From setting performance goals to developing clear policies and procedures, we can help you spend less time managing HR and more time running your business. Book a call with 45 Solutions today and learn how the right HR strategy can support your growing business.
