How to Give Performance-Based Bonuses & Raises

Industry experts share best practices and advice on setting policies around performance-based pay & bonuses, raises, and internal rewards programs.

Danielle Riha
December 21, 2022

As employers become nervous about the economic outlook, they are starting to shift some of their attention from hiring towards retention by considering things like performance-based pay & bonuses, raises, and internal rewards programs to retain their current employees. For insights on how to approach this strategy, we turned to our partners to ask for best practices and advice when it comes to setting policies around compensation and bonus structures. Here’s what they had to say.

I facilitate peer groups where we bring non-competing contractors together from around the country to share best practices and work on common problems. The question of bonuses and raises often comes up and I find no general consensus on how to do these things, other than most feel that if their company does well, they need to share that with the employees through bonuses and similar rewards.

Greg Hayne, Hayne Coaching Group

Any bonus, profit sharing, or pay for performance should be done carefully. These should only be paid out when a company is financially healthy. Oftentimes businesses make most of their decisions based on the profit and loss statement. However, doing an aggressive profit share with employees (based on the profit and loss statement) paired with a weak balance sheet and cash flow position could put you in an even bigger hole. As for frequency, quarterly is a good frequency to pay these out.

Carla Policastro, Cycle CPA

Keep it simple. Complex incentive plans are hard to track, understand and communicate. The intent is to drive behaviors; making it vague or difficult will not drive behavior.

Ben Gandy, Envisor Consulting

For raises, I recommend not tying them strictly to annual reviews. I advise my clients to tie raises to skill performance for their field workforce. If you expect a new hire to learn additional skills, they should see a pay increase based on skill level and performance, not the length of employment.
Performance-based incentive plans work very well for production and service crews in the roofing industry. They should be clear and easy to understand for your crews to follow. They should not only include a positive reward for achieving better performance and quality but should also include a penalty system for crew underperformance. These plans should be tied to three factors: safety, quality, and productivity.

John Kenney, Cotney Consulting Group

Performance-based bonuses are great if there are clear monthly metrics that can be tracked. Oftentimes I see clients offer a performance-based bonus structure with no visibility on how to achieve this on a monthly or quarterly basis. This applies to both raises and rewards programs. One way this could be achieved is by tying client feedback (such as survey responses) to raises or bonuses using net promoter scores or some other survey metric system.
Ultimately, service-based industries rely on the performance or quality of service to clients, and their feedback is imperative to client retention and potential referrals. Utilizing this feedback can provide employees a higher sense of buy-in and accountability while providing a clearer path to additional incentives.

Tito Caceres, Bloom Partners Talent Solutions

I encourage employers to determine what their annual budgetary goal is, then go beyond that with a stretch goal. When the stretch goal is met, the extra income is split equally among all employees. Paying these bonuses quarterly keeps the rewards fresh in people's minds.
If the company is in need of extra capital to expand or maintain equipment, then a portion can be reserved for that - but they must use it for that and not salaries or bonuses, or employees will feel betrayed.

Bart Gragg, Blue Collar University

Tying performance-based bonuses to clearly identified expectations such as individual key performance metrics is great, but even more powerful for both the employee and the company is tying the bonus or raise to company-wide metrics like hitting profit margins.

Linda Ratner, Ratner Consulting

Performance based bonuses should be simple, and test them first. Take an idea for the monthly or quarterly bonus and introduce it as a one time thing so you can determine if it works. Then institute it for the rest of the year, and let the team know it will be evaluated the next year. Too often bonus programs are way too complicated, so team members aren't clear how to get them. Or the time period is too short, so not enough value accumulates to matter to them.
We are also huge fans of rewards and recognition that goes beyond money and that are fun for the team. We've had teams create specific parking spots for awards, hang huge gold chains with a plaque over employees’ doors and lockers, and create peer core values awards that get the rest of the team involved. There is so much opportunity to be creative here and so many miss the mark. It is fine to include a financial component, but it is also great when there is something valuable shared with the team member's family.

Cullen Talley, Exit Momentum

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