Personnel e.bulletin – October 2012

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Prepared for the PHCC Educational Foundation by TPO, Inc.

Most employers intend to use bonuses to attract and retain top talent, but whether or not this intention translates into success may very well depend on what an employer means by “bonus.” End of the year bonuses distributed by the boss while walking around like Santa Claus may have a very different result than an annual incentive bonus tied to performance.

Handing out money to employees is a motivator, right?  Not necessarily.  Consider the following disadvantages of playing Santa Claus.

– It can reinforce a sense of entitlement, resulting in employees expecting the bonus regardless of individual or organization performance.

– Playing Santa could result in unrealistic expectations. This can result in a disappointed unproductive workforce if the budget doesn’t allow for a bonus or if the bonus falls short of what employees have come to expect based on prior years.

– Employees may “pre-spend” what they believe will be their bonus and could find themselves in hot water.

Linking Bonuses to Performance
Many employers are turning away from “Santa gifts” and toward a tool that allows them to attract and retain top performers in the organization – incentives tied to measurable performance.

Employers may find that this can be quite a culture shift, but with the proper executive support, planning, communication, and execution, it can be a powerful tool that helps the organization achieve its objectives.

How Can We Afford Incentives?
Incentives are different than bonuses, as they are typically based on an employee exceeding a set goal. If the employee is simply meeting the basic expectations of the job, then they are not contributing anything more than expected to the company’s profitability and therefore there is no reason to pay any incentive.

However, by exceeding (measurable) expectations, that same employee is adding value or unexpected profits to the company. It is fair for the company to retain a portion of those profits in excess of expectations, but the rest should go back to the employee as an incentive to continue those efforts and expand on them. In this manner, the incentives are paid out only from the money the company would not have had if the employee had not done the extra work to earn it for the company.

One Approach – Individualized Goals
Consider the following when implementing an incentive program tied to measurable performance results.

Each employee and their manager should work together to set goals: Managers and their employees should work side by side to create goals that are linked to company objectives to give each employee an opportunity to contribute to organization success. Use SMART goals: goals that are Specific, Measurable, Achievable, Realistic and Time-Oriented. Whenever possible, tie individual employee goals to the organization’s strategic objectives. Getting the employee’s agreement on the goals and measurements increases buy in.

Once goals are set, talk about them: Goals discussions should not be a one-time event, discussions should happen throughout the year. Managers should set time aside at least quarterly to discuss employee progress toward goals. This is a great opportunity to offer positive as well as developmental feedback.

Communicate: Make sure employees understand the link between their performance and their incentive.

Formally review each employee’s performance against expectations and use this information to differentiate between employee bonuses: When writing a performance appraisal, managers should consider the employee’s position description and responsibilities as well as performance results relating to established goals. Managers should be sure to ask the employee to write a self-evaluation and consider it when writing the appraisal. This will offer an objective, well-rounded look at each employee’s contribution and will serve as the basis for the incentive bonus.

A Different Perspective – An Employee Created System
Another approach that may be considered is allowing the employees to create their own plan. In this scenario, the owner and employees create a system that determines how the incentive pool is funded – typically a percentage of profits beyond that which was budgeted.

Then a committee of employees creates the rules by which the overall incentive pool of money is distributed among the employees. A point system is developed where employees can earn extra “shares” of the bonus pool based on actions that funnel money into that pool – such as beating sales goals, customer compliments, beating completion deadlines, etc. At the end of the year (or quarterly), the incentive pot is paid out, with employees holding a larger number of shares receiving more cash.

Because the distribution of the incentive funds is determined by the employees themselves, it removes the “management vs. employees” feelings from the process. If someone feels the system isn’t fair, then they can get on the committee and add their input to the process.

Another advantage to this system is that this can also help employees do more peer-management. If a fellow employee is doing things that are negatively affecting the available bonus pool for everyone, chances are they will be encouraged to move along by their coworkers. This can help the company to weed out bad employees who look great in front of management, but are slacking off when they think nobody is watching.

The key here is that every factor for earning points must be examined for ways it could be manipulated or abused to rack up points while hurting the company. For example, completing a project early by working in an unsafe manner cannot be rewarded. It may take a while to work out the kinks, but this type of system can lead to better teamwork as employees pressure each other to grow the incentive pot (and thus their share of dollars) as big as possible.

While it may be more temporary fun to walk around like Santa Claus and hand out bonus checks, an effectively designed incentive bonus has the potential to have long-term individual employee and organizational performance improvement impact – the kind of positive impact even a jolly old elf would endorse.

This content was developed for the PHCC Educational Foundation by TPO, Inc. ( Please consult your HR professional or attorney for further advice, as laws may differ in each state. Laws continue to evolve; the information presented is as of September 2012. Any omission or inclusion of incorrect data is unintentional. Please note this article is not intended to provide legal advice or to substitute for supervisor employment law training.


The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace. If you found this article helpful, please consider supporting the Foundation by making a contribution at



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