The Right Way to Give a Bonus

Source: The Marc Rosenberg Blog

The following complete blog post by Marc Rosenberg is reproduced with permission.

The best staff bonus plans I've seen base bonus payouts on two factors: how well the firm performs vs. a target, and individual achievement of formal, written goals.

The mechanics work like this:

1. Decide on a target bonus pool.
2. Add up the base salaries of participating staff.
3. The ratio of (1) to (2) determines each person's target bonus. So, if the target bonus is 10 percent, and a person's base is $80,000, he or she can earn an $8,000 bonus if the firm achieves 100 percent of its profit target and the individual hits 100 percent of his or her goals.
4. Individual bonuses could slide higher or lower than target, depending on the extent to which the firm's profit target is met or exceeded.
5. The entire bonus pool is paid out. So, money NOT paid to lower achievers is paid to those who enjoyed a high achievement rate.

The goals should have four main characteristics:

1. All goals should be SMART: Specific, measurable, attainable, realistic, and time-bounded.
2. Staff goals should be aligned with the firm's vision and with individual skills and performance attributes that each person needs to grow.
3. Each person should have two types of goals: Production and qualitative. Production goals are the common ones: Business brought in, size of client base, billable hours, realization, etc. Qualitative goals help the firm and improve the skill level of the individual.
4. Reserve 25 percent of each person's bonus for management's discretion because there will always be performance aspects that can't be measured by goals.

Download a sample bonus pool for staff.

From The Marc Rosenberg Blog, December 21, 2011, http://blog.rosenbergassoc.com/.