A Bonus or Incentive?
A bonus or incentive plan can help motivate your employees to achieve company goals.

By Janice Schonwetter

As the economy heats up, so does competition for the best employees. One way to attract and retain top talent is through bonus and incentive plans.

Bonus vs. Incentive
Bonuses and incentives are both forms of variable pay, but they are not synonymous. Understanding the difference helps employers to know when to use each to reward employee performance.

A bonus is a one-time reward for superior performance. It is discretionary, unexpected and given after the fact. It is not a long-term motivator of
performance. Bonuses can be monetary or non-monetary rewards. Examples include cash or check, gift certificate, products and time-off with pay.

An incentive is based on the achievement of pre-determined objectives. Incentives are non-discretionary. Incentive objectives could include increased revenue, reduced repeat trouble tickets, improved customer satisfaction, increased earnings per share, and so on. Incentives are often monetary in nature. Long-term incentives might pay out in stock or in stock options.

Questions to Consider
Consider the following questions prior to implementing bonus or incentive plans:

•    Who will be eligible? No legal standards exist regarding who can participate. The decision to extend the program to all employees, targeted groups or targeted organization levels is a company decision. All employees in the target population must be treated fairly and consistently according to the rules of the program.

•    What will be the target performance level? Supervisors operating under company policy guidance may determine discretionary bonuses.  Incentive goals should be attainable with some stretch required to meet them. Goals can be company, team or individual. Data to measure the results must be easily quantifiable.

There are two ways to structure payout plans: all-or-nothing and thresholds. All-or-nothing plans pay out when 100 percent target is achieved. Consider a net revenue target of $1.5 million. Participants get 100 percent of their designated incentive dollars if the figure is achieved, nothing if less is earned, and no extra if the figure is exceeded. A threshold plan, on the other hand, allows for partial payout if less than 100 percent of the target is achieved, and extra payout if more than 100 percent is achieved. Using the same example, the plan might be structured with a 120 percent payout at $2 million or above, a 100 percent payout at $1.5 million, an 80 percent payout at $1.0 million, and no payout at less than $1.0 million.

•    How much will the pay out be? Payout amount should be enough to be meaningful. Remember that income tax and FICA deductions must be taken out of payments. After deductions are taken from a $100 bonus, will the $60 net pay to the employee be seen as a reward? Incentive pay amounts can be flat rate or percent of salary. Also, bonus and incentive for non-exempt employees must be added to regular earnings for calculation of overtime pay.

•    When will the plan pay out? Decisions on payment date are driven by the timeframe of the required performance. Discretionary bonuses usually have a short-term impact and are therefore paid out immediately. Incentives are designed for a longer-term impact and typically are paid out monthly, quarterly or annually. Annual payments do not have to be paid out at the end of the calendar year. They could be associated with the fiscal year or with annual seasonal fluctuation in the business cycle.

•    How will the plan motivate performance? This is the question many companies fail to ask. For bonus and incentive plans to elicit the desired performance result, eligible employees must view the plans as favorable and motivating. Consider these four questions:
1.    Will the chosen plan produce the desired results?
2.    Will the target population easily understand the structure of the plan and not be frustrated or confused?
3.    Will cash be motivating to older employees, or would they prefer long-term care options, health insurance discounts, drug coverage, etc.?
4.    Will waiting to receive payout be motivating to the younger generation used to TV and computer-generated instant gratification?

Final Thoughts
Bonus and incentive plans are not cure-alls. There are limits to their effectiveness, and employees quickly learn how to play the system to their advantage. Companies using bonus or incentives plans should formalize them. Having terms and conditions outlined up front will save grief at payout time. Bonus and incentive plans should be reviewed annually and revised as needed to align with company strategies.

Janice Schonwetter is president of HR by Design, which partners with small-medium size businesses, non-profit organizations and government agencies to resolve people and organization related problems. She can be reached at or (913) 484-5954.