Perhaps you have seen it in action: A coworker suddenly receives a bonus that you do not, despite being in the same position for the same amount of time. When you ask your manager why you didn’t receive a bonus, they give you a vague response about your performance “efficiency.”
But, how was your performance graded compared to your coworker’s? How were you supposed to know that metric was a key factor in your compensation? And how do you know your manager wasn’t showing favoritism toward your peer?
Discretionary bonuses based on previously established policies, such as referral and holiday bonuses, can be great rewards. However, giving spot or random bonuses to an employee for “doing a good job” could lead to claims of favoritism and discrimination. Instead, businesses should consider a bonus plan based on performance metrics.
A performance-based bonus plan not only mitigates claims of bias but also helps employees understand the key aspects of their job, creates consistency across teams, and motivates employees to do well. To implement a successful performance bonus strategy, businesses should identify the metrics that are most important as well as the impact of incentivizing employees in this way.
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What Are Employee Performance Metrics?
Employee performance metrics, or key performance indicators (KPIs), are analytics used to measure employee performance. They are quantifiable metrics that can be tracked to show both the success of the employee and, in turn, the company as a whole.
Performance-based metrics can be industry-specific, company-specific, or both. Take, for example, metrics used to determine customer satisfaction. A shipping company could track the number of timely deliveries. Meanwhile, a retail store could measure the number of people who signed up for its rewards program. Both measure a specific aspect of customer retention and satisfaction but are tailored to their respective industries.
Great performance metrics identify key areas of a business in need of growth or improvement and quickly pinpoint where employees have the most impact. Managers can utilize performance metrics to tailor an employee’s individual goals to wider departmental or company goals, such as decreasing a fast-food restaurant’s drive-through wait time by tracking food preparation time.
Also read: Building a Strong Executive Team: Creating Consistent Talent Management Standards
How to Implement a Performance Bonus Structure
To implement an effective performance-based bonus structure, companies must identify business goals, connect them to specific KPIs, create a standardized bonus policy, and maintain consistency with bonus payouts.
Also read: Redesigning Your Performance Management Process for Success
Identify business goals
First, employers should thoroughly research what aspects of their business are worth measuring. To do this, companies should conduct a 360-degree survey and then define the company’s overall macro-goals.
Get a 360-degree look
A 360-degree survey allows companies to receive feedback from managers, employees, and external stakeholders such as customers, clients, vendors, or investors.
These kinds of surveys are unique in the way they place equal value on the voices of both internal and external individuals. Many employee engagement software solutions and customer relationship management (CRM) software come with 360-degree survey features that can assist employers during this information-gathering stage.
Define the macro-goals for the business
Businesses should use the data gathered in their 360-degree surveys to identify opportunities for growth or improvement across the company. A small business might have an unwritten goal, such as “increase profits by 3% by the end of the quarter,” that is not shared with the rest of the organization. If managers and employees do not know this larger goal, how can they take strategic measures to reach it?
Companies should take a moment to reflect on the bigger picture and ask such questions as:
- “What milestones should the company hit by the end of the month, quarter, or year?”
- “Where has the company struggled lately?”
- “What factors are driving success?”
These questions should help companies determine where they hope to see themselves in the next few years. Whether it’s increasing profits, expanding brand awareness, or branching into different markets, establishing the company’s main priorities will help determine the smaller, micro-goals needed to attain it.
Determine actionable metrics
Companies should develop trackable metrics that aim to reach the company’s larger goals while remaining grounded in employees’ day-to-day work. Be careful not to choose too many metrics to measure, as this could have the opposite effect of overwhelming an employee or lead to micro-managing. Select one or two metrics to track at most, and make them realistic.
Some metrics could also increase burnout and resentment among employees who feel like a particular metric threatens their work-life boundaries. For example, absence tracking with the goal of reducing call-offs by employees could discourage employees from taking time off, especially for reasons like illness, injury, or childcare.
In the same vein, such metrics could have the unintended consequence of being discriminatory, as women are more likely than men to call out for reasons like childcare. Companies should seek guidance from their DE&I committees to see if their chosen metrics could have any negative impacts on minority or protected status groups. Small businesses without such a committee should consider reaching out to employment law attorneys or engaging in multiple meetings with managers and workers that include opportunities to voice concerns.
Examples of great employee performance metrics
Below are some performance metrics that employers can use.
- Attendance goals, such as the number of times an employee volunteered for an undesirable shift or tardiness tracking
- Safety goals, like the number of days without an injury
- Number of sales in a specific time period
- Number of units produced in a specific time period
- Customer satisfaction score
- Customer retention rate
Remember that these are only examples and that the best metrics are customized to address company pain-points while keeping the employee’s specific job duties in mind.
Create a standardized bonus policy
Companies should tie their performance-based metrics to an attractive reward. The bonus policy should be clearly defined in writing and added either to the company handbook or other employee documentation.
When developing the policy, companies should consider the following best practices:
- Be clear on what metrics need to be satisfied in order to qualify for the bonus: For example, a salesperson might need to gain X amount of new clients by the end of the quarter, while an assembly line worker might need to produce a certain number of products by the end of the week.
- Make sure the bonus is enticing enough to motivate employees: Offering shift differential pay for undesirable shifts is a great example of tying the metric to the bonus amount itself — for instance, providing a $2 bonus for every hour worked during the 11 p.m.–7 a.m. shift.
- Explain how the bonus is calculated for non-exempt versus exempt from overtime employees: Because performance-based bonuses are considered non-discretionary, these bonuses must be included in determining overtime amounts for non-exempt employees.
- Indicate when the bonus will be paid out to the employee: The earlier the bonus is received following the completion of the metric, the more likely employees are to tie the reward to their great performance.
- Identify when the policy will be reviewed: The policy may have to be updated often to accurately reflect current metrics and ensure the rewards remain exciting.
Once the company writes the policy, distribute and review the policy among the team. Everyone should acknowledge the policy in writing. Most human resources information systems (HRIS) include employee portals that allow for document upload, communication among coworkers, and electronic signatures.
For example, platforms like BambooHR allow users to create custom forms, select segmented groups of recipients, and add automated email reminders. Such tools are valuable for managing performance bonus updates, as these policies are much more likely to adapt to evolving goals than an occasional update of a handbook policy.
Remain consistent with bonus payouts
As with every company policy, managers and human resources (HR) must remain consistent with bonus payments and policy enforcement.
Even if unintentional, deviation from the policy could result in claims of favoritism or discrimination. However, bonus plans based on performance metrics are a great way to prevent such claims, as they are based on data and not a manager’s perception.
Software solutions like Lattice can even make the rollout of the new bonus plan easy. With features such as employee goal-setting and KPI analytics, HR can see when employees have satisfied their targets and become eligible for a bonus.
Performance-Driven Bonuses Are More Equitable and Effective
While assigning value to an employee’s work performance can seem nebulous, employers who take the time to track the best metrics can improve business outcomes. Not only do employee performance bonuses incentivize employees to do well, but they can also increase team morale and reduce the risk of discriminatory compensation practices.
If the implementation of such a plan seems daunting, there are a variety of software solutions available to help employers with the process, including policy templates, distribution methods, and employee analytics tracking. Explore a comprehensive list of potential solutions in our Performance Management Software Guide.
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