Motivate Workers by Tying Bonus to Job
by MBA and MBA
As the end of the year
approaches, its time to begin calculating the bonuses that youll be
distributing to your employees. Many companies simply take a percentage of each
employees salary or one or two weeks salary and earmark that amount as the
employees bonus. Employees who work harder than others and put more effort into
their jobs are disappointed that theyve received the same percentage as everyone
An increasing number of
companies are choosing another route. They pay a competitive salary as a fixed amount and
then distribute the companys profits as a variable amount based on a formula
for each type of job. Jack Stack highlighted this compensation methodology in his book, The
Great Game of Business, in which he profiles a company plagued by problems. Stack and
the employees purchased the company and when the employees learned how their jobs
affected the bottom-line, profits soared.
Another type of bonus
distribution is based on an employees contribution to profits. This type of system
works particularly well with law, accounting and other firms where employees bill their
time and/or bring in business. Firms pay a competitive fixed salary or slightly less and
then reward employees with a variable bonus based on several factors, including the number
of hours billed over a minimum number, the expenses incurred by the employee, or the
amount of new business generated by the employee.
Take for example an associate
in firm A, who is asked to bill 1,800 hours per year. For one reason or another, the
employee is short on hours each month. Yet no matter how many hours worked or not worked,
the employee will still receive the agreed- upon salary. Because the employee is not
sharing in the profits, there is little regard for expenses, which the employee does not
hold to a minimum. Frequent overnight messenger deliveries for work that could have
been completed in time for less- expensive regular delivery by the U.S. postal service are
commonplace. Meanwhile, the associate is jockeying for a larger window office that just
became available after a partner moved to a new firm. The employee receives a bonus at the
end of the year equivalent to one weeks salary.
Now contrast firm B.
Employees are asked to bill a minimum of 1,500 hours at a fixed salary that is competitive
with other law firms requiring 1,500 hours. For each hour billed in excess of
1,500, the employee receives a percentage of the hour's revenue as a bonus. To discourage
padding the hours billed, the employee and the partner in charge of the work agree
on the number of hours that it should take to complete the project. For example, an
employee is preparing an estate plan or a tax return. The partner has told the
client that the fee will be $2,500. The partner allocates two hours of his or her
time to review the work. At a partner fee of $250 per hour with $500 total for two
hours, the remaining fee is $2,000. If the employee's billable rate is $100 per
hour, then the partner allocates 20 hours for the employee to complete the project.
Or if the employee's billable rate is $125 per hour, then the allocated time is 16 hours
for the employee to complete the work.
The employee receives credit
only for the specific number of agreed-upon hours, no matter how long the work takes to
complete. Prior to the awarding of the bonus, expenses, either for the individual or
the firm, are deducted first. For example, if the employee uses overnight messenger
service instead of regular mail delivery, that expense is deducted from the bonus.
If the employee wants a large window office, that extra overhead expense is also deducted
from the bonus. Meanwhile, the employee who works in a small inside office is
credited with the amount saved from the allocated office expense given to each
employee. If the employee brings in new business from current clients or new
clients, then a percentage of that revenue is added to the bonus.
Businesses that follow firm
Bs method, find that employees work longer hours and work smarter, while constantly
seeking ways to drive down expenses. The result is that the partners income can
increase dramatically, because the rule of thumb is that approximately one-third of the
billed revenue is profit for the partners.
For non-billing or
non-revenue-generating employees, performance-based job descriptions are critical since
bonuses are based on whether the employee meets or exceeds the performance criteria in the
job description. For example, if the job description for a receptionist is to answer the
telephone, the performance-based job description would be for the receptionist to answer
the telephone within two rings.
Because January is one of the
biggest months for employees to switch jobs, make sure that your salaries are in line with
other companies. Many trade organizations conduct compensation surveys and provide reports
to their members. Several Web sites provide salary data to help executives set appropriate
compensation for their employees: www.wageweb.com, members.aol.com/payraises,
www.execunet.com, www.jobsmart.org and www.futurestep.com.
In an age when excellent or
even good service is sometimes rare, the companies that tie their employees bonuses
to performance and bottom-line results are finding that workers treat their customers or
clients as if they were their own and the company was theirs. At firms where service
is already outstanding, employees realize that their bonuses ride on the success of the
company and work hard to improve income and limit expenses.