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Matching individual goals to company objectives crux of successful bonus plan

INDIVIDUALS win prizes, teams win championships. In business, once your headcount grows beyond the founder, success by default comes down to team performance.

In sport, the objective is simple: win the championship and beat the competition by being the best.

The better the team perform, the more reward their club and they enjoy. Everyone is working toward the same goal and share of the spoils. This is the crux of setting up a good bonus scheme for your leadership team.

In business, where you are free to set your own objectives and it is not always clear who you are up against, setting out a framework is much harder than in sport. If the business and its employees are not in sync, you end up rowing out of alignment and the boat goes around in circles.

Here are my top tips for designing a good bonus scheme for senior management.

Set SMART company and individual objectives:

They should be:

Specific: eg Open New York office, not open new office somewhere -- too vague.

Measurable: eg First sale in new office by Jun 31, 2011 -- ie quantify it.

Achievable: eg Open New York office by Mar 31, 2011, not by next Friday -- ie tough but doable.

Realistic: Apply judgment; can this really be done or are we setting the company up to fail?

Timely: Set a clear timeframe to achieve the objective.

Instil consistency into the scheme:

Every member of the leadership team should have the same company objectives. There should be no more than a handful of clear objectives for the company and for each individual. The individual objectives should tie in to the company objectives, ie if the individual achieves his or her objectives, then collectively the company will achieve its objectives.

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Be transparent:

The scheme should be published to the members and it should be made clear the team must deliver the company objectives as a priority and all individual objectives are designed to help achieve this as well as develop the individual.

Pay out quarterly, not annually:

Objectives do not have to be reviewed quarterly but cash flow permitting, they should be paid out quarterly. The prospect of a quarterly bonus is far more motivating than having to wait for it once a year.

Communicate results:

It is vital to keep the team informed on whether results have been achieved or not. Celebrate the wins and work as a team to fix problems when they arrive.

Map roles to job levels to determine size of payout:

For example, the CEO could be designated level A, director level B, senior manager level C etc. For each level set a percentage of salary payout. Level A could be 30pc, B 25pc etc. Although different skill sets command different salaries, most people accept a percentage payout based on their level of seniority as fair.

Weight the payout more to the company objective, not the individual:

For example, if the individual hits his/her objectives but the company achieves none, then I would recommend only paying out 25pc of the bonus as this gives the clear message you are part of a team and if the team collectively fails, you do not get the 75pc payout allocated to the company objective despite achieving individual success.

David Bloom is co-founder of and chief executive of FD Unlimited. If you would like a simple Excel template to help set out your bonus scheme and/or a Word template to document your scheme, please email support@financegofer.com

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