Bonus Plan or Performance Plan—Is One Strategy Better?

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The Hiring Zone
Issue #11241 - August 2019 | Page #80
By Thomas McAnally

The goal is the same for both a bonus plan and a performance plan—reward an employee for performance. The higher the position, the more defined are the goals. Not many bonuses that are consistently over $10k are subjective. It can’t be about how well departments out of your control did or how that affects the mood of the boss. It must be very objective and measurable. It must be consistent year over year to build trust. That is why more companies are structuring compensation with an integral performance component, along with a Standards of Performance to measure results and give reliable expectations to employees.

In essence, the process works this way. The Standards of Performance (SOP), what the company expects of you to be considered satisfactory performance, is defined at the beginning of the year. This amount is your base and this amount is your performance package. If you do x, y, and z, your job performance is satisfactory, and your compensation is as expected. Not a stretch, or reaching for the sky, only a defined performance for the position that is acceptable. Employee and manager both need to sign off on the package. Quarterly reviews are needed to keep people focused, followed by a year-end final review that determines if you met your SOP. If you made it, you get 100% of the performance portion of your package. If you got 90% and had areas needing improvement, then the scale slides down. If you blow it out of the park and meet 120% of your goals consistently (especially volume and error rate), you get 120% of the performance part. My last real job used SOP, back in the late 1980s, so I can attest to them being around for a while and worth the effort. It’s good to know what expectations are up front and what you get if the expectations are met. It also gives a reality check during the year of you feel your performance isn’t up to speed.

More companies are using SOP or a similar program, and I have several clients who start the process when someone is hired. They have learned that SOP can increase loyalty and team effort as a result. It also lets midlevel managers understand what all that hard work and long hours mean to the company and to them. We all know that pay for performance benefits sales and, like with sales commissions, companies must be consistent with performance rewards. Even so, consistency and time to manage a program are why many in our industry avoid this level of commitment. Much easier to pat Johnny on the back and throw him a bone. Just hope he is still there to catch it…

You're reading an article from the August 2019 issue.

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