Designing a Bonus Plan - 8 common mistakes
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TALENTONIC RESEARCH DIVISON | www.talentonic.com
“I do hope that we have a few more arrows in
our quiver. The answer to all our business
challenges is not to motivate and coerce
employees by amending the bonus plan. What
happened to good old leadership? Don’t
abdicate that to your compensation and benefits
manager!”
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may not be used, copied or forwarded without the written consent of the Company.

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8 Common Mistakes in Designing Bonus Plans
The ease with which bonus plans are designed is 3. Balanced
risk
&
return.
inversely proportionate to how big a disaster they
can be. In some companies my advice would be to The risk return equation is wrong. You define
junk the plan and add 75% of what it costs to target bonus and put in 6 reasons to discount the
fixed pay. Employees will be better engaged, the target bonus. Not enough reasons to define how
CFO will be happy and the C&B Manager will the target bonus can be increased. Employee
bless you for not making the team work nights expectation of cash in hand falls in line with the
making endless calculations. risks you have loaded, and you lose the advantage
of aligning employee behavior. New employees
8 common mistakes. say “ Its better to negotiate a higher fixed pay than
to but my bets on this bonus plan”
1. Competing
Objectives
4. Short
term-­
long
term
confusion
The first lesson I learnt about 30 years ago. If one
team wins the other team loses. Locomotive “I don’t want to pay these folks so much money
operation is paid for runtime and locomotive for having met their personal objectives and met
maintenance is paid for downtime! Quality is paid all the financial targets of the Company. What
for finding mistakes and operations is paid for about the long term?” Figure it out. Do you have a
solving them. Somebody up there enjoys the total compensation plan? Do you have a way of
divide and rule philosophy. Obviously mis- rewarding employees for near term as well as
aligning people is the objective here. longer-term objectives? Are you trying to achieve
too much with one instrument? Why not a bonus
plan bundled with equity compensation plans and
2. Overdesign.
keep both simple.
There are realistically only two reasons to make a 5. Not
variable
enough
bonus payment to an employee. (1) The Company
has done well. (2) The individual employee has The bonus plan is not variable enough. It is too
done well. The company performance metrics are loaded towards personal performance. So as
supposed to look after the first, and the company performance goes up and down….the
performance management system is supposed to degree of variability in the bonus payout is low.
look after the second. Anything else just Classical case where you should just add it to
complicates the simplicity of the performance fixed and forget about it. Some organizations will
story. Build sophistication into the main two use it to manage personal performance and
pillars and avoid experimenting with systems, integrate it with the performance management
which are trying to set up a third leg. system. (Consulting Organizations). That’s fine if
that is what the objective is.
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porttitor. Suspendisse potenti. Nulla eleifend
dictum lectus, ac auctor urna volutpat et.
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8 Common Mistakes in Designing Bonus Plans
8. Integration with the business
6. Integration
with
the
leadership
culture.
What is important to the business is a starting
point that is sometimes forgotten. What
Is it discretionary or driven by policy? Does business results is it feasible to expect by
middle management have a role to play? What spending this money? Treat the total cost as an
communication supports the plan? Is it integrated investment and ask your self the question. “is
with the planning cycle of the organization? You this money better spent elsewhere to obtain the
cannot be a manufacturing organization teaching result of employee alignment towards business
inter- dependence and teamwork and then install a goals ?”
personal performance incentive plan.
At this point, what business results do you want
7. This
will
solve
all
our
management
&
to align your leadership and middle management
behind? Growth in revenue? Increase in margins?
leadership
problems.
Growth by acquisition?
I do hope that we have a few more arrows in our On this will depend whether you look upon the
quiver. The answer to all our business challenges bonus plan as a cost or as an investment
is not to motivate and coerce employees by
amending the bonus plan. What happened to good
old leadership? Don’t abdicate that to your
compensation and benefits manager!
Deepak Dhawan
CEO & Founder
Talentonic HR Solutions (Pvt) Limited
deepakdhawan@talentonic.com