In National Lampoon’s Christmas Vacation, Clark Griswold, when confronting his kidnapped boss about his very disappointing “Jelly of the Month” club membership, says people count on bonuses as a guaranteed part of their salary. If your employees agree with this sentiment, you are incorrectly communicating and distributing bonuses.
Don’t panic! You can fix your approach to end-of-year bonuses (and incentive compensation as a whole), to drive revenue for your business, avoid disgruntled employees and prevent your cousin Eddie from kidnapping the boss in his RV.
Understanding End-of-Year Bonuses
You pay out end-of-year bonuses to recognize employees’ hard work and accomplishments from the past year. Effective bonuses are truly variable. Variable pay means the pay is likely to change from year to year. Whether a commission or bonus plan, variable compensation is driven by the direct or indirect actions an employee takes to increase revenue for the business.
If the business isn’t successful, then you can’t fund your bonus pool. If you are a business owner, your stake in the business is clear to you, if the business doesn’t earn, neither do you. Variable bonuses give your employees a stake in the business’s success. An effective bonus program helps employees connect their behavior to outcomes, similar to an owner’s mindset. But too often they are an annual expectation with no concept of the risk behind them.
To truly maximize your return on investment of a bonus, communicate the risk to the business and the reward potential to the employee while clearly outlining the path to receiving their incentive-based income
Benefits of End of Year Bonuses
A business should not make an investment that doesn’t have a return on the investment. For your end-of-year bonuses, the returns on investment are:
- Reinforcement of profit-driven KPIs
- Positive conclusion to the year and the motivation for employees to continue their hard work in Q1
- Employees are given direct insight into “what good looks like” and how their actions contribute to the success of the business
The Importance of Thinking About End-of-Year Bonuses in Q1
If end-of-year bonuses take place in Q4, why think about them in Q1? To provide you with the maximum return on investment, link your bonuses back to the success of your business and the behavioral and performance expectations you have of your employees. Create this link between employee behaviors and bonuses in Q1 by:
- Setting goals and KPIs. Create organizational goals to drive your business forward. Share these goals with your team and have them create goals that support the larger business goals. Your employees’ goals should be SMART. These will be the behaviors that will lead to revenue and fund your bonus pool.
- Creating a line of sight to the bonus. Let your employees know how your bonuses function. Inform them how the profit of the business funds the bonus pool and how their goals impact this profit and their bonus potential.
- Continuing to refocus on goals and how they impact bonus potential throughout the year. If individual or business goals need to shift to support the needs of the business, update your team. This empowers your employees to influence their total compensation and drive business success through their actions.
Strategically Plan Your End-of-Year Bonuses With an HR Consultant
Ultimately for your end-of-year bonuses to be effective they need to be data-driven by your profits and your employees’ performance metrics. This can be a big change for employees who have previously viewed their bonuses as part of their guaranteed compensation. At Red Clover, we have a proven process for managing employee performance and driving this performance through variable pay programs. If you need help managing this change, contact us to get started.