Performance Incentives and Bonuses: Do They Work?

For various reasons, most business owners in this thread believe that productivity bonuses are a bad idea. February 1, 2015

Iím looking for assistance developing a plan to reward employees for performance (completing projects within allotted hours) and safety whereby they are incentivized to work with a sense of urgency without compromising quality. There are so many variables to consider within an incentive program. Would office staff (draftman, estimator's bookkeeper's, project managers) be included? I can't figure out how to launch this.

Forum Responses
(Business and Management Forum)
From contributor G:
It is very difficult to get a metric for an individual that is accurate because of many variables. Additionally the workers will figure out a way to game the system. Not to say that metrics are not important, just that they need to be relevant, which to me means on a macro level. If the work is quite repetitive a metric can be useful. I have found piece work to be effective but I don't see that working on a big scale. My advice would be don't put too much time into this it won't pay off.

From contributor D:
'Reward' and 'Incentivize/Motivate' are two different things. You can let them know you recognize their good performance with a smile and kind words, or with a lunch of ribs and potato salad. You don't have to spend a lot of money to get that point across. This can reinforce their opinion of their boss and company - 'Hey, I work for a pretty cool guy!' IMO, few floor people can have their fundamental level of motivation altered for very long, regardless of the carrot you dangle in front of them. I would tell them you have a lot of work, and now is the time to kick in some overtime to help the company and themselves. They will put in a burst of energy that they can see in their next paycheck, and after a few of those, they kind of get used to it.

From contributor X:
I think you got some good advice. I will just say to think it through carefully. Once you give them something it's hard to take it back. Even if it doesn't work out for you they will still expect it.

From contributor P:
I designed and implemented a plan for my company earlier this year, and so far it is working well. I wrote about the process in my blog - it's a five part series, a link to the first chapter is below. The key insight for us was to try to find a collective reward for collective performance, and not get caught up in the difficulty of measuring individual achievement. You seem to have clear goals in mind - if the change in results is measurable, then a bonus program might work.

From contributor L:
I tried the profit sharing motivator and would never do it again. Why? When times were good and there was an abundance of work we were making money. I gave the employees 25% of profits every quarter, open books and used most of the rest to expand the business. Then one quarter we had a loss, no profit to share. They still got their pay, just nothing extra. Result: I was accused of cooking the books to cheat them. Surely we made a profit, we had been turning out work. Some of them had already spent their "share." They wanted it, now! I had been careful in implementing the plan, telling them that we didn't always make a profit. There were no guarantees! Some chose not to hear that.

The results were two camps. Mostly divided into those who had tried to have their own businesses in the past and those who thought businesses made huge profits and concealed them. I have seen where part of this comes from. When my kid was in jr. high the teacher of a class called "business basics" or something like that, told the kids corporations made a 50% profit. When I tried to explain that it was highly unlikely that it could be that way, at least for very long. Proof was offered that a store could buy a dress for X $'s and sell it for double that, making a 50% profit. There is an accounting thing that defines a "gross profit" as the difference between what an item was purchased for and what it was sold for.

I had a past employee come and ask if he could use my shop to work in, using my equipment, so he could take on a job for which he was not equipped. He offered to pay my overhead costs, which he and another ex-employee had figured at between $3 and 4 per hour/ employee. There are probably some owners out there that think that's a bit low! But it illustrates why some employees will always feel shorted. After all my shop rate is $65 and only pay $22/ hour. Add my overhead of $4 and you can see that I'm making $39/hr/employee, times 15 employees and I'm getting rich and over fist. Be real careful of the "profit share" thing. Not all employees will view it the way you do. Been there, done that, never again! Don't like being called a liar and a cheat. Running this business has enough hassles without that one.

From contributor G:
The purpose of an incentive program is to increase production, the single biggest barrier to production is disagreement. Tools that create agreement are policy, organizational charts, hats, training, organized facilities, accurate schedules, hitting the schedule, etc. Paul Akers talks about the eighth waste, which is under-utilizing his workers. The above boils down to company culture. I would say that your odds of increasing your production are much greater if you work on the above instead of working on an incentive program.

From contributor D:
Want to instill a sense of urgency? Talk about the customer frequently, what their expectations are, how you depend on them for your livelihood, what you do that makes them happy, what ticks them off. This makes it very unselfish, appeals to their sense of responsibility in satisfying the people that matter, etc. Build a culture of 'customer satisfaction' over time.

From contributor E:
Why assume that shop people (or any people) would be incapable of understanding a simplified P&L? Do a 12 (or so) line white board presentation. The first year, let's assume a profitable one, they're only going to be interested in the bottom line - the profit to be split up. Let's say the next year turns into a loss, with nothing to be shared. You can turn it into a learning experience.

Top line - gross revenue from all customers. Anyone think anyone doesn't understand what that is? Cost of the stuff the shop made - wood, hardware, etc. They all know what this is.

Shop overhead - utilities, insurance, supplies, mortgage interest/property taxes (or rent,) accounting services, etc. Everyone knows what this stuff is, but they probably have no idea of how much it all adds up to.

Depreciation on equipment - it's a non-cash item, but almost everyone can grasp the concept that equipment wears out and has to be replaced and provision must be made for that.

Employee payroll. They definitely are aware of this, but may not understand how big the total is.

Employee payroll taxes. Few will know about the employer's half of FICA, or FUTA, or state unemployment taxes, but they all know about Social Security and unemployment benefits. Don't forget workers' compensation insurance. Time to explain all of the other stuff that they don't see that you have to pay just to employ them. A total for all of it expressed as an hourly rate will hit home with them. Other employee benefits, if any. Maybe health insurance, maybe a 401-K match. All of it is directly to their tax-free benefit.

Your basic compensation as the manager/owner. Even a dope can understand that you would have to pay someone else to do your job if you weren't there.

Sales commissions, other sales support costs and marketing costs. Most understand that sales don't materialize out of thin air.

Allowance for bad debts - if you're an accrual-basis taxpayer and it was significant. Everyone knows what a deadbeat customer is.

Income taxes - depending on the type of organization, corporate or personal.

Income tax due. Everyone understands taxes on income.

Bottom line - net after-tax profit or loss. By the time you write these numbers on the board, half of them will still be shocked and thinking about how high some of the above costs were. When last year's profit turns into this year's loss or a smaller profit you can put up the numbers for both years and make your point. For instance, sales fell, but costs (and there they all are in black and white) didn't fall enough to remain profitable or as profitable. Or, sales were flat, but costs rose, whatever the case may be. Tell them what the plan is to return to profitability next year. If you've got a number for waste from do-overs of botched work, explain how every dollar of it drops straight through to the bottom line, resulting in a smaller profit or no profit to share.

The typical employee has no idea how expensive it is to run a business. Open their eyes with a simple presentation, most of it directly related to them as employees. Anyone who then still claims that you're a crook should probably be fired, being too stupid to recognize reality and likely to be a bad influence on other employees. The rest of them have probably never had an employer take 15 minutes to explain what the basic numbers actually are and might even appreciate it. All of this does not go to whether this type of profit sharing plan is good or bad. Opinions and experience vary widely on that. The only point is that if you're going to do it, make sure the basic nuts and bolts are made clear enough so that people have confidence in the integrity of the plan.

From Contributor J:
I have owned an installation company and installed millwork for over 35 years with 25 men working for me at times. Your approach will not work. You are on the verge of disaster. Employees are just worker bees. As soon as you offer the incentives they assume you are making large profits and they are the ones responsible for your bounty. As for working faster and smarter that is your realm as an employer you need to supply the best tools and equipment also staging area for them to produce. You need to be selective in your work distribution if someone installs base fast use them to install base and so on. Give them 401K. Security is what motivates people.