Currently I have four projects re-designing “bonus” or profit sharing plans for a wide range of clients (from 30 to 3000 employees, and from a local company to two mid-sized regional to a global one).

They all are faced with the same challenges:

  • Bonus calculations are discretionary (picked by the manager), with limited guidance on how to calculate an amount
  • Employees are likely not incentivized for the work that achieve business goals
  • Managers cannot clearly explain to employees what they need to do to earn the same or more next year
  • Employees don’t like or trust the plans (they do not believe bonuses are internally fair, or that their performance makes a difference in the final amount, or that their bonus is market competitive for their position)

To transition your bonus (profit sharing, incentive) program from a perk for employees to one that motivates and rewards performance and business results, it needs to follow the “4 C’s model.”

4’s Model of Variable Pay Plans

  1. Control- key individual performance measures in the plan align with business results and are under the control of the recipient
  2. Clarity – recipients understand the behaviors, activities and results they need to achieve what reward
  3. (not) Complex— maximum 4 measures (per job role/ level)
  4. Communication- recipients receive regular updates on the key performance measures to monitor if their work is achieving the target (even if payout is annual, monthly updates are ideal)

(4’C is the revised model from Dr. Jerry Newman’s 3’C Model, University at Buffalo)

Design steps to effective variable pay programs with the maximum business ROI

1. Basically, you need to go back to the drawing board to identify what matters most:

  • Outline key business metrics that add the most value to your firm and show achievement toward 5-year goals (strategy)
  • Cascade goals and down to department and job level key performance indicators (KPI)
  • Create a tracking and reporting system to communicate a monthly dashboard of KPI results (individual, department, company)

2. Finish with Incentive Plan Design:

  • When you have completed these first three elements, then link your incentive pool and payout calculation to reward those KPI
  • Keep it simple Sam, and communicate clear results often

The real “bang for your buck” will be that everyone be focusing their work on the most important things and finally understand how they can contribute to achieving organizational goals.

Then the incentive pool will be worth every penny.

(Sounds like a daunting task? With expert guidance to facilitate your management team through the 10 key decision steps, you can design a plan in about 3 months.)