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Why Bonus Plans Don't Motivate Employees

I'm a big fan of performance-based compensation, such as commissions and bonuses. I believe that such plans can motivate people to succeed and excel. That being said, I've noticed that many bonus plans do nothing of the sort. In fact, most bonus plans are wasted effort, because the managers who set them up didn't follow these eight simple rules:
  • RULE #1: Show Me the Money. Bonus plans that feature travel (like to business meetings), logo geegaws, and gift certificates are really just so much horse manure when it comes to motivating people. If you can't figure out a way to get hard, cold cash into the hands of your employees, you might as well not bother. You're not fooling anybody. If you want top performance, pay for it.
  • RULE #2: Keep The Plan Simple. Ideally, a bonus plan should expressible in a single sentence, so that it can be in the back of the employee's mind as a "touchstone" for day-to-day behavior. Unfortunately, I've seen bonus plans so complex that they can't even be expressed on a single page. What happens in this case is that the employee tends to ignore the whole thing because it's too much mental effort to translate the plan into "what do I do next."
  • RULE #3: Make The Plan Achievable. Some managers set "stretch goals" so high that they never really expect employees to achieve them. The idea, of course, is to get the benefit of having a bonus plan (better employee performance) without having to actually pay out more money. However, employees know that unachievable goals are a form of lying and that managers who trot them out are a******s. And that's the opposite of motivation.
  • RULE #4: Tie The Plan To Individual Goals. A bonus plan can only motivate somebody if that person's activities drive directly towards the achievement of the goal (e.g. a bonus paid to a sales rep for achieving a certain sales amount). By contrast, paying a line employee a bonus if, for instance, the company makes a profit, is idiotic. The activities of that individual are such a tiny part of that profitability that the employee simply won't care.
  • RULE #5: Reward Individual Contribution. In cases where a small team must work very closely together to achieve a goal, a team-based bonus may be appropriate. However, in most cases, bonuses tied to goals of entire groups are just an invitation for the slackers on the team to sit back and let the sloggers do all the work. This creates resentment and anger and, eventually, results in the sloggers leaving the group, while the slackers remain.
  • RULE #6: Pay the Bonus Promptly. If you're trying to drive behavior, you want the recipient to feel an emotional connection between the behavior and the reward. Paying the bonus months, or even weeks, after the activity the won the bonus waters down the emotional impact. Worst case, the employee can forget why the bonus was awarded, especially if the firm is ignoring Rule #2 above. Of course, paying late is better than not paying at all...
  • RULE #7: Keep The Plan Stable. The more you change your bonus plan (or your commission plan for that matter), the less effective it will be. This is especially true in cases where bonuses are paid as the result of the fruition of weeks or months of work. I've seen cases where a sale rep developed a big account, expecting a huge bonus, only to see the bonus plan change, right before the deal closed. That's a recipe for angry top performers!
  • RULE #8: Publicize the Wins. While the bonus should definitely involve money, you're getting less bang-up jobs for your buck if you don't make sure that everyone else knows that an employee won that bonus. Needless to say, this rule only applies if you followed the previous seven rules. That way, the other employees will know that the bonus was deserved, was appropriate and (most importantly) start trying to win one themselves.
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