How to design a performance-based bonus plan that works

January 12, 2007 8:31 AM

Help me help my manager design my bonus plan.

I started my current job as a senior consultant in May of last year. During my interview, I told my (now) manager that I would be interested in a performance-based bonus plan, in addition to my regular salary. He agreed with the idea, but asked if we could talk about it a few months after I started.

Things have been going pretty well, and my manager has mentioned twice in the past few weeks that he's ready to talk with me about implementing my bonus plan.

The hitch: my company has not offerred any bonus plans in the past, and my manager would like for me to help him design one. I have no experience designing such plans, and am not sure where to start. I would like to end up with a plan that strengthens my motivation, in addition to putting more money in my pocket.

My duties consist primarily of business analysis and consulting, software architecture, and managing a team of outsourced software developers.

posted by syzygy to work & money (3 comments total)

I had similar input into designing a bonus plan for myself a few years ago.

It's a tricky ball to have plopped into your court, as of course it is no more or less than another salary negotiation - albeit one in which neither you nor your boss is likely experienced or comfortable in the appropriate protocols.

In the end we arrived at a simple % calculation. Of a 25% of total annual salary possible max, 15% was achievable through meeting financial targets (in my case it was company turnover, but mainly because I had a responsibility in this area - if you're consulting, then it might be based more on client turnover, upselling etc).

The remaining 10% was split into 5+ concrete objectives that had been previously identified in employment negotiations and appraisals. Things like defining and meeting an agreed target for staff retention and the like.

In the end I thought it worked pretty well. The top-end of the financial targets were of course pretty ambitious, so meeting the full 25% was always going to be a tall order, but 15 - 20% was very achievable, subject to a productive year and some hard work.

The disadvantage was that it wasn't easily rolled into the next year, as all targets were specific to current business situation and goals. Inertia was a problem in defining objectives for a similar scheme during the following year, and it might be the same for you depending on the company you work for.

Goes without saying, but in negotiation you should make sure that all targets in your bonus plan i) relate to the work that you personally do, and the responsibilities that you hold (individually or collectively) ii) are achievable.
posted by bifter at 8:47 AM on January 12, 2007

Here's some quick ideas to get you started. I work significantly with sales compensation in my current work.

First, define your criteria. Decide what projects and initiatives on which you can make significant progress. Once you've got some ideas pull together some numbers on how this will benefit the company financially (this will help you sell higher monetary amounts for your bonus).

Second, define your schedule. Will the bonus be calculated and paid monthly, quarterly, or yearly? This will obviously be determined based on the cycle of your projects, goals, and initiatives as well as the feasibility of managing the time necessary to calculate the progress.

Third, define the percentage of "at risk" or bonus money. This could vary from 5% of your yearly money to 100% plus. How much of your salary are you willing to put at risk? At my company different positions have different "at risk" targets varying from 6% (low level administration jobs) to 70% (outside and retail sales representatives). Use your calculations from step 1.

There's much more to it but this will definately get you moving in the right direction.
posted by Octoparrot at 9:10 AM on January 12, 2007

At my previous place of employment, individual targets for evaluation were established per employee. They might be revenue targets, or cost reduction targets, or customer satisfaction targets, or specific deliverables. Individuals were then rated as having exceeded, met all, met most, or met few of their targets.

Bonus percentages for each of those categories were determined based on overall company performance. So people who exceeded all got, say, 8% salary bonuses, while people who met all got 5%, people who met some got 2% and people who met few got put on a plan to improve or fired.

It ended up being fairly 'fair' in that people were evaluated against mutually agreed upon goals (though those goals were different for each person or department) and then paid bonuses based on percentage of their salary. There was some wiggle room in the percentages, as well, so someone who waaaaaay exceeded could be given more of a bonus than someone who sort of exceeded.

On a one person basis, this might pan out as setting the goals and pre-establishing a percentage bonus to go with different categories of meeting vs. exceeding them, but the bonus plan can extend to larger groups fairly easily as well. It did mean doing the work of establishing goals every and evaluating against them every year, though, which was not inconsiderable.
posted by jacquilynne at 9:14 AM on January 12, 2007