In every company, at some point in time, a discussion will start whether to have 100% of the salary fixed or to choose a combination of fixed and variable elements. It is complicated to introduce a variable component where only the fixed part works, because employees fear that the change will serve to reduce their monthly salary. Yet this is the way to make companies and their employees richer, if everything is set up fairly and correctly.
I’ve implemented bonus system in companies several times and it has been always complicated -> one man’s opinion. In one company, it took me more than 10 rounds of negotiations with management to introduce the bonus system because we wanted to set the system fairly for both 2 parties and yet some members of management were afraid that the employees would benefit too much. Oh man.
Below is my top 10 guidelines for setting up a successful bonus system:
1) Establish a bonus system for employees such that they must have a chance to improve financially. If I divide 100% into 80% fix and 20%, it will be demotivating for employees. If the 20% is added to the 100% base, again, not economically profitable. My recommendation is 80% fix + 25-30% variable components. The 5-10% pay increase should be tied to the employee bringing at least 15-20% profit to the company. The employee will get better and the company will get better too.
2) Link the variable component to measurable goals according to the SMART principle (KPI – performance, scrap rate, audit results, 5S – order in the workplace…).
3) Link the variable component to KPIs that the employee is able to influence.
4) Set the variable component also for office workers – e.g. completion of tasks, project actions in time, 5S – tidiness in the workplace… (If production is well organized, why should the offices be a mess 🙂👍
5) Set goals as a team and agree them across the whole management team and communicate them clearly to all departments in advance – e.g. management meeting with all staff in the canteen.
6) Set individual department goals so that they do not go against the goals of other departments.
7) Create a system for transparent evaluation and visualize the results e.g. on whiteboards, bulletin boards, screens in production, in the cafeteria, etc…
8) Test the goal setting and compare with the KPI results for the last 3 months at least – this will give you verification that the goals are realistically achievable.
9) Establish a 2-3 month trial period to fine tune the system and KPI evaluation functionality.
10) Communicate intensively and openly with employees, and communicate and communicate every month after the evaluation.
So hopefully the 10 things have helped and you won’t be afraid of setting up a bonus system in companies. And if you want help, feel free to contact me.