Photo: David Croxford

How to Create a Motivational Bonus System

September, 2015

Question: I want to create a bonus system to recognize my employees for their hard work. How do I figure out the right amount to pay?

Answer: There are many ways to set up a bonus system, but make sure it works for your business. Here are guidelines.

Is the Time Right?

Bonuses can be great motivators, and a nice way to say thanks when employees go above and beyond their job description. However, remember that, once you start giving bonuses, it can be difficult to stop, as employees will grow to expect them. So only start them if your business is securely established and comfortably profitable.

How much?

Here’s one method: Say your payroll expenses are equal to 25 percent of all your revenue. Now, calculate how much income your company earns above the break-even point. BEP is the total of real monthly expenses, including payroll and loan payments, but excluding depreciation and amortization. If it is $10,000 a month, multiply $10,000 by 25 percent; that comes to $2,500 for your monthly bonus pool (see box for details).

Communicate this BEP number to employees, whether or not you give bonuses, so the team is clear about your business goals.

Time frame?

Choose monthly, quarterly or annual bonuses. Annual bonuses will be bigger and reward long-term success, but more frequent, though smaller, monthly bonuses create frequent motivators that may be more useful when you have monthly performance goals that you want to hit or exceed.

When you give the bonus checks, emphasize to employees that they are receiving a “raise” for that given time frame for superior performance.


This Month’s Expert

Mary McGowan, Esq.
Independent consultant

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