Company directors usually favour target bonuses when it comes to boosting individual performances. While the advantages of this approach are evident, it’s still essential to know how to properly define and calculate your target bonuses. Read on for our top tips.
Target bonuses are becoming more and more common in companies across all sectors. Moreover, this form of compensation is no longer reserved for those working in sales, as various departments are now realising that target bonuses can be a powerful factor for motivating teams.
WHY AND WHEN SHOULD YOU USE TARGET BONUSES?
Target bonuses are particularly well-adapted to situations in which you can define a coherent objective, setting a precise level of performance requirement and linking it to compensation received. As opposed to commission (link to article on Target Commission), it allows you to take both quantitative and qualitative indicators (such as customer satisfaction, for example) into account. It also enables a clear differentiation between the requirement levels for various employees, by taking each person’s potential into account. In addition, target bonuses offer better budget control.
When it comes to defining optimum target bonuses for your staff, there’s more than one way to proceed. However, there is an overall method that will enable you to approach a multitude of situations.
PRECISE AND VERIFIABLE ASSESSMENT CRITERIA
Something that’s well-designed can be clearly explained: in order to successfully define bonus objectives, it’s a good idea to draw up an inventory of activity indicators that will allow you to measure performance levels, e.g.: monthly revenues allowing you to measure sales, gross margins to measure costs, clients having been invoiced to measure customer loyalty, and scores entered on client feedback questionnaires to measure customer satisfaction.
Examine how much possible each employee has in terms of improving their score for each indicator - your choice should be made based on indicators linked to areas of performance where the financial leverage is significant and the employee’s actions play a highly determining role.
Next, you’ll need to effectively pinpoint any possible negative side effects for the indicators chosen (for example, if your sales staff’s objectives are to sell more to increase revenues, they might be tempted to lower prices and therefore weaken your profit margins), and to establish preventative measures by ensuring that the sales agent cannot bypass one of their objectives. Once this is done, these clearly-defined objectives can be linked to financial compensation for the employee.
DEFINING OBJECTIVES TO BE PURSUED
It is within your managerial power to unilaterally define the criteria for defining target bonuses. While there is of course a certain part for negotiation, this can often end up being an opportunity to provide greater clarity on the resources being allocated to achieve the objectives in question, rather than a co-decision on the targets themselves. Here once again, we stress the importance of quality of communication. The link between the methods used and the commercial strategy must be clearly indicated, as well as the motivational drivers you are seeking to engage. A bonus scheme that is poorly understood cannot be effective.
METHODS IMPLEMENTED BY OPERATING STRATEGIC CHOICES
Objectives must be achieved with a time limit!
These can be monthly, quarterly, etc., but in principle are reset on a yearly basis. Think about decoupling the performance period from the payment period - just because the performance period is yearly doesn’t mean that bonuses have to be paid annually! Quarterly payments, for example, can be excellent drivers for motivation.
Of course, much depends on the level of variable pay and its purpose. If the variable pay is 15% of annual salary, say, there’s a good chance you’ll be able to pay this annually - especially for executives with a comfortable salary. If the bonus rate is higher (30, 40 or even 50%), this will have a considerable influence on the sales agents’ daily performance. In this case, it may be more suitable to adapt the payment periods. Each situation is different, depending on the sector, type of product being sold and sales cycle involved. Our experts in variable pay are here to support and guide your choices.
Target bonus schemes can be individual and/or collective
In a group bonus scheme, the amount of the bonus is identical across the entire group. This can be an useful approach when you need to create collaborative behaviours; in retail, for example, in-store sales team often receive collective bonuses so that customers do not feel pressurized by salespersons chasing individual targets.
The number of objectives is not open-ended
Even the fastest greyhound can only chase one rabbit at a time. Your objectives should reflect your company strategy; if you have too many objectives, your employees might be tempted to cut corners. Spreading your objectives too thinly is undesirable, and can sap your employees’ motivation levels if they lose sight of how their bonuses will fluctuate based on their performance. Limit your targets to four or five main areas.
VARIABLE COMPENSATION DESIGNED TO MOTIVATE
Quantitative and qualitative objectives are necessary in order to properly define a target bonus scheme, but successful communication of the scheme is also paramount. Indeed, before any attempt is made to define a bonus scheme, it’s important to understand one thing: considering a incentive compensation alone won’t be enough to motivate your teams.
Motivation isn’t something you can dictate – its presence depends on how you’ve developed your compensation plan. The motivation wheel allows you to see in detail the thought process your employees will go through when judging how motivational your incentive strategy is. They’ll try to estimate if your objectives are ambitious (but also suitably realistic and achievable), and whether their bonus is worth the effort they’ll need to put in to achieve it, etc. As such, these stages represent 5 essential steps you can’t neglect to overlook when defining your system for target bonuses.
