A Fresh Carrot Approach to Using Non-Discretionary Bonuses
As published in the December 2007 edition of South Florida CEO
Many companies manage employee bonuses as an art form, rather than a science. Both are part of the process. Increasing the “science” can strengthen a company’s ability to motivate employees and increase its bottom line. There are two types of bonuses that companies can offer: discretionary and non-discretionary. Employees typically do not have expectations for receiving a discretionary bonus, which is a reward for going above and beyond to get the job done. Because employees have no expectation that discretionary bonuses will occur, these incentives have limited motivational value for managing future performance.
On the other hand, non-discretionary bonuses are given after the employee meets certain agreed-upon and usually very specific goals or objectives. To be effective, the goals and objectives must be measurable. Because employees know what they need to do to achieve these bonuses, the incentive to work harder and get the job done is in place. Non-discretionary bonuses improve a company’s ability to meet its business goals by encouraging increased efficiency and productivity; they also directly impact future performance.
Establishing non-discretionary bonuses
A non-discretionary bonus system requires the development of specific employee goals. For best results, they should be based on company needs, and they should be S.M.A.R.T. — Specific, Measurable, Attainable, Realistic and Timely. Ideally, the goals should be set at three levels: company, departmental and individual. Colin M. Betty, chief financial officer at Equitable Bank in Fort Lauderdale, says “goals can be expense-reducing or income-producing since achieving both is typically required to yield best-in-class financial results.”
The first step in this process is for the executive team to decide what the goals will be for the company. Once this is determined, individual departments decide how they can help achieve those goals. Additionally, individual departments will outline expectations for what each employee should be able to accomplish to help the company attain these goals. Many department managers will even have individual employees set S.M.A.R.T. goals of their own to help
the department meet its goals.
Scoring the incentive
Before you can determine bonus amounts for specific recipients, the executive team must first decide how much is available for that purpose and then set an attainable percentage for each of the three levels: company, departmental, individual.
For example, suppose the company budgets a potential bonus of $2,000 for Employee A. It might set the percentage potentials so that:
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The employee’s individual performance can earn the individual up to 80 percent of that amount, or $1,600.
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The department performance can earn the employee up to 20 percent, or $400.
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The sum of the employee and department performance amounts will be multiplied by the company’s success percentage, which is based on a specific financial goal like Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Expanding incentives to non-exempt employees
Despite the fact that the US Department of Labor requires non-exempt employees who work more than 40 hours a week to receive one and a half times their normal salary for each hour worked beyond 40 hours, we continue to see a desire on the part of many employers in South Florida to expand incentive plans into the non-exempt ranks of organizations. Non-discretionary bonuses are a great way to accomplish this. “Equitable Bank provides the opportunity for all employees to earn bonuses,” Betty explains. “This helps to foster an environment of unity among the entire staff and ensure that everyone is focused on key goals and objectives.”
These plans also may be based on achievement of individual, department or overall company goals. More often than not, these bonuses are performance-based. The payout usually represents a small portion of the non-exempt employee’s total compensation and is intended to convey the “all in the same boat” message. The expectation is that any payout under these plans is in addition to market-rate wages or salary.
When setting goals for non-exempt employees, it is crucial to watch out for overtime pay. The goals should be created to help improve a company’s efficiency. If non-exempt employees are working overtime to achieve these goals, for which they must be paid additional monies, it can seriously decrease the company’s financial benefit from non-discretionary bonuses.
Exempt employees continue to be more traditional recipients of non-discretionary incentive pay, with targets of around 10 percent to 15 percent of base salary at lower levels in the organization and up to 100 percent for employees at higher levels.
When measured wisely, non-discretionary bonuses can be very motivating to your staff, which can only fare well for you and your company.
