Employee Bonus Incentives

Most employers in this thread believe that bonuses for employees don't work. June 4, 2012

I would like to start a dialogue about employee incentive systems. I am hoping someone can jump in with some suggestions about how to develop one that works. I would like to begin first with what I think the landscape looks like, then I would like to discuss pros and cons to see if this is able to be done. My hunch is that it is not.

The initial premise is that workers self-select into two groups early in their work life. Some people go on to create businesses and some people just want a job. I don't think you convert an hourly guy into an entrepreneur and I don't think you can ever get an entrepreneur to be happy with wage work.

The trick is to balance competing goals. The business owner's goal is to make money now and in the future. The wage worker is more focused on the now part. They want to work for a company that will be around in the future but become quite ambivalent about what that means for right now.

Profit is not a big motivator for the average wage worker. If you offer them a 10% raise vs. a 10% cut in pay plus 10% of the profit they will take the steady money every time, then commiserate that they need more money. The avoidance of risk is a more powerful motivator than the possibility of reward for the average member of this worker group.

Profit is probably not even that big of a motivator for the average woodshop owner except as a scoreboard or a means to accomplish other goals. There are many businesses that could provide a higher return on investment than the average woodshop but that does not dissuade investment into woodshop. Having your own personal fort is probably as much reward as anything else for your average woodshop owner.

But there is still this excellence thing to strive for and how wonderful it would all be if somehow wage workers could also develop some sense of urgency as well. The drivers for your average wage worker are that they go home on time, get paid on time and keep their boss off their back. Anything else is gravy but of secondary importance. They are willing to work for less as long as they know how much less will be - specific reward for specific response. This is a time tested system that fails to motivate but seems to endure.

Profit is profit. It is measured the same way for any entrepreneur and the definition can be summed up in fewer than ten words. Profit sharing, however, involves a whole lot of agreement, sub-agreement, and definition of terms because profit sharing is an abstraction from reality.

"For purposes of this profit sharing program we define profit as.............". This definition has to include some mechanism to eliminate downside risk. As soon as "profit" also includes the possibility of less money, losing money, or having to work more hours for less more or no money then the profit sharing model breaks down and the employees flee. However, the specific reward for specific response paradigm (eight hours in the building equals money) seems to get them to show up again.

So what would be a good mechanism that links extra effort with extra money but includes no risk? Here is an idea that I think might work. I would like to hear any pros or cons about this idea. Rather than share the profit, share a specific bonus that the employees can measure. On a $20K job the bonus would be equal to 10%. For every hour that is invested in the job the company keeps $5. If the job takes 200 hours the bonus is worth $1000. This $1000 is paid on the next payroll after the customer makes their last payment.


- The carrot is easy to understand and measurable by the recipients. They know at the end of the day where they stand.

- Nobody is exposed to risk.

- Peer group pressure encourages efficiency.

- The group as a whole has an incentive to help the company sell each job for as much money as possible.

- Rework becomes a big deal instead of something to shrug your shoulders about.


- Not linked to overhead.

- Not linked to material consumption.

- No mechanism for fixing problems that show up downstream.

- Somebody will complain about relative contribution. They will somehow feel cheated that because they are more productive they should receive more of the bonus.

I think the last part could be mitigated by coupling tenure with co-worker approval. Rather than have performance be reviewed by management this should be peer based review. If your co-workers don't want you on the bus then you are gone. This part here would go a long way to freeing up management to focus on the customer rather than the crew. So where else does it break down? Can anybody else suggest a way to get people to do more than just nod their head up and down at the company meetings?

Forum Responses
(Business and Management Forum)
From contributor A:
I also believed in a good incentive system not so long ago and had a great design, etc. I found that if you dangle a carrot, many will try to game the system, and many just get de-motivated when the goal is not achieved (blame it on others, etc.) Are you willing to pay a bonus on that job, when at the end of the year/quarter you lost money in total? Where is the sense in that? "Not linked to overhead." You would take your overhead into account when you set your bonus percentage. "Somebody will complain about relative contribution." Assuming your base pay is a good relative indicator of your employee's contribution, using that for the basis of dividing a bonus is good.

"Rather than have performance be reviewed by management this should be peer based review. If your co-workers don't want you on the bus then you are gone." Receiving co-workers' input is a cornerstone in employee evaluation, and should be face-to-face for frank, unblemished input. Don't confuse that with management of your workforce. My doctor values my input, but he doesn't ask me to heal myself.

Hopefully you have studied management for years now. Don't discount what you have learned. Don't hand the reigns of your carriage to your horses. They think they can do your job, but 99% cannot. Not because I think my workers are idiots (they are not), they do their thing, I do mine - manage a business.

If co-workers don't want someone on the bus, you better be paying attention, but that is a separate issue, not related to incentive/bonuses. Hiring employees is possibly the most important aspect of management. Don't delegate that, unless your company is in excess of 75 people, or you have someone that is unusually more effective at it than you. How to have a motivated work force? Keep the motivated ones. No incentive system needed except a smile and a few friendly words or guidance occasionally required. FFF - firm, fair, and friendly.

From contributor G:
I have screwed around with this stuff for longer than I care to admit. My conclusion is that the risks far outweigh the potential benefit. Of the various schemes I have tried the one that worked the best or at all was just straight piece work. I find it interesting that this most parallels the free market in that two parties come to an agreement of what they are willing to exchange and produce to the agreed upon specifications. As in the economy, the agreements that deviate from this simple workable idea produce unintended consequences.

The UPS drivers used to get a quota for their deliveries, the driver had intent to get it done in fewer hours than the quota and it worked. About five years ago UPS started micromanaging (how long at each stop, seat belt fastened, bulk head door closed, where the truck was at all times) the drivers and reduced the number of hours to make the deliveries. It was abundantly obvious that the driver was demotivated. To find out why this was occurring UPS did endless audits (ride along inspectors) to no avail. About a month ago it was abundantly obvious that the driver was once again intent on hitting his quota. I asked the driver what had changed, and he responded that UPS had gone back to the old hours for the quota. My conclusion from this was that if you assign quotas they have to be doable otherwise they become a disincentive.

The mailman also has a quota. I notice that he gets in his truck, buckles his seat belt, starts the engine, drives 20 feet, unbuckles his seat belt, turns off the engine, and delivers the mail to the 100 units in this complex. I asked a fill-in carrier why you not just put the mail in the bag, walk it, and save a boat load of time. He responded that then the quota would then be higher. I reached the same conclusion as above.

The California government imposes that overtime starts for any hours over eight in a day. The reality of this is that 1.5x is a motivation to take as long as the incentive is huge to go slow. In the trade-show exhibit business with hard deadlines this is its own very expensive caricature. I have tried very convoluted methods using ERP software to estimate the number of hours each aspect of a project should take and bonus-ed accordingly. When the targets were accurate they worked well when they were not they became a disincentive.

I have tried the group bonus and the problem was that the fast guys say they are carrying the slow guys and the slow guys are what you call the unmotivated types. I have tried the profit sharing thing, in the workers mind there is no connection between profit and what they do and it can create a mutiny. Piece work even has problems in that some guys don't want to work with others, bottle necks, quality can be an issue.

From contributor G:
The Knowledge Base article below may offer some insight.

Incentive Pay For Workers

From contributor S:
"So what would be a good mechanism that links extra effort with extra money but includes no risk?" That is an interesting statement, but no risk for the employee or the employer? I too have spent a lot of time trying to find the best plan for motivating employees. I have tried working a partnership when we were only two employees, tried profit sharing, tried a bonus system, and too many others. One problem I found was that when some of the same methods used to motivate work in a busy market were achieving results, see what happens when there is a downturn in volume and you have to run for a while just trying to keep the doors open and your employee receiving his base pay. Most of them will walk and leave you, or stay with a poor attitude.

Like Contributor G, I find a basic employment agreement based on piece work to be the most honest and understandable agreement. Maybe it has to do with my personal politics, but I believe that I as an employer I am not responsible for providing anything to an employee beyond what he earns as a worker. I will pay him for his services based on how well he works, period. I found that motivating people to do what they should be doing in the first place is totally unrelated to why I went into business. When I hire someone, I ask them if they want to work and I mean actually do some real work. I feel it is their obligation to me to do what they agreed to. If you have a supervisor, then he will be expected to do things that will lower his work quota, but his results from being the supervisor should still be measured in terms of the work done.

I sell my product based on square footage so I may have a different situation. I find that when I sell an order, then I have a fixed amount of funds available to pay employees. We have this broken down into what is there to pay for different functions in our shop. When we provided insurance, two breaks each day and paid time off, plus a bonus, we could never break even. Actually the more we offered to get production up it seemed that the workers production saw no measurable increase. We could get little surges now and then, but the motivation was false and usually did not last.

From contributor U:

I would like to add that any rewards offered for an employee going the extra mile should also be based on the measured amount of work that was performed. As suggested, if there was a good workflow on an order, and the owner takes a share of his profit and passes it to the employee, this can work.

If this is based on a certain criteria, such as comparing the cost of labor versus the amount of square footage produced, then the employee and employer have a good understanding of what just happened. The employee will conclude that if I do this again, there will be another reward. If this is discussed and understood, then you have created an incentive for the employee to work more efficiently and to be more productive. It should be based on the actual work performed, and always paid after the work is done, not on projections.

From contributor A:
We just tried an interesting incentive program. We have yet to evaluate the results but here is how it went. A relatively new woodworker (ten months in the trade, all of them under our roof) just completed all the doors and drawer faces for a project. The doors were dead flat. He built them in about 20 minutes apiece. This fellow is in learning mode and typically requires a bit of hand holding on most projects. His base rate of pay is $12 per hour. He is pretty good on doors now and needs very little supervision.

Since he was able to produce them at a rate of three per hour with zero defects he received a $3 bonus per door. His rate of pay was now $21 per hour when he was in the groove and $12 per hour when he was still learning. I may consider bumping this bonus to $4 if he can hit these doors at four per hour. His rate of pay under this program would be $28 per hour for these glorious hours. I'm thinking about making him the door department manager and giving him a bonus for how many doors his door crew produces. The goal is to develop a paradigm where you get paid to be here then paid extra to excel.

From contributor S:
Have you searched "employee incentives", on this site? This topic has come up many times over the years and although it is good to go over it given the current conditions, you should have a look.

No matter what kind of plan you come up with, the circumstances change on a regular basis. It is hard to keep up with each individual job, let alone all the employees involved. Mix in the fact that every shop operates differently, and what works for me will not work for you.

From contributor O:
Interesting post, and I second Contributor S's recommendation to search the Knowledge Base as it is very helpful. Please tell us more about your shop/situation. What types of products do you produce (totally custom products, semi-automated products, stock stuffs, etc.)? How many employees? Do you expect your employees (or yourself, if you're the employee) to do other tasks beyond their current responsibilities (interact with customers, order materials, etc.), or are you just trying to get them to do a "better" job at their regular job duties?

I'm looking to do something similar with one of my employees but my decision is totally related to the individual skills and interests of that employee. Also, speed (finishing the job quickly to make more money in the bonus) and quality don't always go hand-in-hand. As a professional mistake maker I can attest to quickly making a lot of mistakes. Unfortunately, I'm the business owner so I’m definitely not receiving a bonus.

From contributor S:
I had a friend who owned a bicycle shop with about 25 employees, and he tried all kinds of incentives without much luck. He tried based on how long people had been there, but new staff who worked harder than some older members were miffed. If you give larger bonuses to new employees the older ones become even more miffed. He gave the same bonuses all across the board, and then half the staff was upset. If you could depend on your staff to keep things quiet then it wouldn't be an issue. If you give incentives based on specific jobs then people complain that they didn't get to work on that job, so they were not given a bonus opportunity. The politics involved in running an incentive program could drive you crazy.

From contributor Y:
On average people think they are worth about 6% more than they are currently getting. I got that from polling my crew years ago, tossed out the top and bottom figures and averaged it.

From contributor U:
It would be interesting to see that if you had awarded the employees the 6% raise straight across the board, and then waited six months and gave another poll what the results would be. I can remember thinking on my first job that if I could get my $100.00 weekly paycheck up to $120, I would be in really good shape. Of course as soon as I received my next raise, actually to $125, I immediately set my sights on $150 a week. Truth is, I don't remember, but I probably felt underpaid within weeks of receiving that first raise. After all, my employer surely recognized my potential, and he gave me the first raise. It is interesting how we think from day to day.

From contributor C:
Beer and pizza for a job well done! A pat on the back and a kind word from the management in recognition can go much further than any incentive program. At the end of the day money rules all, but be forewarned that bonuses and salary increases can be trouble! They can create the false expectation of more money, or that you were holding back on them unfairly.

A small meeting with beer and pizza once a month or weekly (if this fits your profile - perhaps on payday) is a good idea. The managers of different departments can give acknowledgement to employees who stood out for the given time period. This is usually all the incentive that is needed to further motivate employees. After all, all anyone ever wants is for others to be recognized their efforts.

From contributor Q:

People are different, and what motivates them is different. Their experiences and understanding of the business world are different, and therefore reactions to a system will be different as well. I believe that one of the keys missed here may be in educating the employee as to why. Why is the bonus system set up the way that it is? Why should they be invested on the success of the company as a whole? When you decide to go the route of an incentive program you may lose some of the benefit in it if you do not clearly educate the workers as to why it is structured in the way that it is.

I am an install only company so it is very easy to break down my work to piece work. This makes it very easy to evaluate performance because you are basing your income potential by very easy to define units. Depending on field conditions you may make $20 per hour or $60 per hour installing the same exact job. What you learn over time however is that you develop an attitude that no obstacle cannot be overcome in an efficient manner. When your income is directly affected by your output you find solutions to make your work complete with the minimum amount of effort. It is a self-motivating lean prophecy.

How you can implement this in a shop environment may be hard for me to see given the blinders that I live with having been an installer for 15 years. This system of the hourly employee seems to me to be a real hindrance to true accelerated performance and production achievement.

Could you pay an hourly base while at the same time make up the bulk of the pay with bonus payments based solely on performance? Sort of like the waitress model. Low wage and unlimited upside potential based on output? Seems like this would work well with custom work such as a reception desk where one or two people would be responsible for the whole product from start to finish.

From contributor A:
"Could you pay an hourly base while at the same time make up the bulk of the pay with bonus payments based solely on performance?" I tried to get there for ten plus years. Several things seem to have stood in the way. Subjectively, they would be profitability never being stable enough (if a restaurant's business is slow, they cut back on the number of servers, so the server still stays busy and collects their tips from the customer). We have a lot of people lower on the pay scale, and having a lower base pay with bonuses would mean gambling with their food and rent money. They want something they can budget with. This means as high a reliable income as they can garner. I would say those above are the biggest issues that led/lead me to rethink pay and motivation issues. I go to my bottleneck station and ask “what is slowing you down most right now?” I responded quickly to their answer, and along with their natural desire to excel at what they do output skyrocketed.