According to the latest variable compensation survey published in 2016, 36% of executives believe that the target bonus represents the best financial incentive system!
Many companies today use an incentive compensation system. A real motivator for employees, target bonuses encourage them to surpass themselves while giving the employer some flexibility in setting these variable compensations.
How to define and calculate the target bonus? In this article, some elements of answers in order to set up a relevant variable pay system.
"The objectives must have been defined in time, be understood by the employee and be realistic. » Maître Cécile Reyboz, Lawyer at the Paris Bar.
First of all, it is necessary to know when and in what context to set up a target bonus. This method of variable compensation is particularly suited to functions for which it is easy to define clear and coherent objectives. Indeed, the target bonus represents the best solution of incentive compensation for the positions where it is possible to fix in a precise way a level of quality of work correlated with a clear level of performance.
The target bonus offers the possibility to evaluate both quantitative and qualitative aspects of your employees' work. In addition, distinguishing different levels of requirements in terms of customer satisfaction is quite possible. Contrary to commissioning, where each beneficiary receives a percentage of a global result, the bonus on objective makes it possible to remunerate a beneficiary according to a specific objective. The performance of the collaborator, defined in relation to his actual achievements according to predefined objectives, will then rest on his ability to reach and exceed his objectives.
The definition of a bonus based on objective will depend mainly on the type of missions carried out by your workforce. In the case of a commercial function, it will be wise to list the tasks performed by a sales representative, translate them into specific objectives with thresholds to be achieved and measure them using coherent quantitative and qualitative indicators. For example, you can base your target bonus on the turnover achieved, the opening of new accounts receivable, the level of satisfaction following a customer questionnaire, the percentage of margin achieved or the rate of repeated business etc.
The more relevant your evaluation criteria are, the more you will encourage your employees to achieve the goals set. The idea is to offer a financial incentive by acting on performance levers really activated by employees. In fact, the collaborator must be able, by investing more, to succeed in reaching and exceeding his objectives and to perceive the results of it.
Be careful, however, not to fall into the trap of an incentive compensation system clearly encouraging your salespeople to focus on quantity to the quality of a sale. Just as it is common that an employee favors a virtuous strategy for his remuneration but sometimes at the expense of the company. It is therefore essential to be attentive to the choice of the right criteria.
As an employer, you have the possibility to unilaterally set the objectives to be attained for each of your employees. Nevertheless, these goals must be attainable, measurable, coherent and realistic. Some experts mention the notion of SMART objectives: specific, measurable, achievable, realistic and time defined. The idea is to explain clearly what is expected from your employees to make them more easily join your business project.
"The objectives set for employees, whether quantitative or qualitative, must meet a requirement of precision and be checked if needed. It is imperative that they are realistic and achievable, given the economic situation of the professional sector in which the employee operates, his skills and the means at his disposal ", Maître Marine Conche, Associate Attorney at Flichy Grangé Avocats, and Maître Maxime Aunos, Lawyer at Actance Avocats
Targets set in a variable pay system must be specific and time-bound. Indeed, if the methods of awarding bonuses on objectives are formalized in the contract of employment of your employee, you are obliged as an employer to renegotiate each year this device. Thus, the application of these target bonuses can be done only after negotiation and formal validation of the employee. Changes in objectives or method of calculation of variable compensation will be made through amendments to the original employment contract, negotiated each year.
On the other hand, in the configuration where the contract of employment does not include a variable compensation clause, it is left to the discretion of the employer to set objectives in the conditions of validity fixed by labor law (realistic, achievable and measurable).
After setting these bonuses, you have the option to distribute them annually, quarterly, or even monthly. But be careful not to confuse payment period and performance period. It is sometimes necessary to pay monthly but that does not mean that the performance can be evaluated every month. Indeed, it is necessary to assess the good evaluation period, i.e. the time required for the employee's action plan to produce the expected results.
To another extent, the target bonus may be individual and / or collective. More and more companies are choosing to integrate a collective variable part in the consideration of individual performance. Indeed, indicators promoting team work, collaborative exchange between colleagues or between departments, compliance with internal rules, etc. appear in the calculation and evaluation grids of bonus scheme. The integration of indicators rewarding the teamwork spirit of a collaborator allows to establish a more positive mutual support and thus reduce individualism. Here, they are encouraged to exchange information and are even rewarded financially.
To summarize, an effective target bonus motivates your employees provided that it is adapted to your activity and the profiles of your employees!