Like many people, I have been exposed to various kinds of "bonus plans" over the years. As luck would have it, my first exposure was a sobering experience that caused me to wonder about employers and their motives, but I learned some valuable lessons, so I will share it here. I was working 3rd shift in a box factory during a summer break during college, along with seven or eight of my high school friends. We comprised the entire crew, along with a supervisor named Frank. Our job consisted of coating cardboard boxes with wax so that they could be used for transporting vegetables. This was done with an assembly line of racks hanging from an overhead chain-drive system that went in a circle, stopping to dip each rack of boxes into a vat of hot molten wax. While the rack was submerged, we would either be at the loading station placing boxes into the racks before the tank, or at the unloading station removing coated boxes from the racks after the tank. This was all we did from 11:00 P.M until 7:00 A.M.

One day we got wind of a new bonus program. There was a production goal set in the form of boxes coated per shift per week, and there would be a bonus for every box above a certain amount that would be paid to each person on the shift. Management posted the production rates for the three shifts over the past several months, showing first shift consistently in the lead, with second shift a close second and third shift trailing a distant third. We put our heads together on third shift and decided that we would try to beat the production goal and earn some extra money.

Saving the discussion regarding what we learned about throughput, level loading, Kan-Bans and cycle time reduction for another time, in short order we were outperforming the other two shifts and consistently beating the production goal. Imagine our surprise when we learned after a couple of paychecks with no bonus money that the bonus plan was being discontinued and we would not be seeing any of the bonus money we had earned. Apparently there had been complaints from the other shifts (we were not unionized on third shift), and this kind of performance improvement would not be tolerated. As you might have predicted, that very night our production rate went back to the old low numbers, and we started to experience mysterious problems with the overhead drive system that would require many hours lounging around on skids of boxes while one of our guys would climb a ladder and eventually replace the link in the chain.

I have more recently been exposed to bonus plans where the amounts are based on profit (a nebulous concept) which is calculated in a secret counting room by priests with power ties, who use white or black smoke to signal whether there will be a bonus that quarter. Based on these and other experiences I have learned that: a) bonus plans can be dangerous, and b) properly used, bonus systems can be effective tools for motivating employees, improving performance and controlling costs. Here are the 10 keys.

1. Pay a bonus on more than one goal.

Your employees are going to focus on the performance that earns them a bonus. Anything without a bonus attached will be less important. So unless you want high quality and low production rates, or short cycle time and low quality, or any one element at the expense of all others, you must design a set of interdependent goals that prevent the exclusion of important performance objectives. I use Productivity, Yield, and Cycle Time.

2. Make sure the goals complement one another, and pay additional bonus if all are met.

You may have heard the urban legend about the crafty employee who always earned a bonus while working to the detriment of the company; the more money the company lost, the more bonuses he (she) earned. Face it---your employees are not stupid, especially when it comes to their own income. Design your goals so that they make the same hard choices you would make when faced with a dilemma. For example, when a board is rejected in-process, should it be scrapped or reworked? If you bonus only for yield, they will rework every board as many times as necessary. If you bonus only for production rate or cycle time, they will scrap boards even if they can be reworked. Although my employees often ask "Should I scrap these or rework them?" I never give a direct answer. I merely point to the complementary goals and advise them to use their best judgement. This is true empowerment, and adds efficiency to the organization exponentially.

The reason that you should pay an additional bonus if all goals are met is to prevent people from giving up on a goal. If for instance you have a large scrap problem early in the period, the tendency will be to give up on quality levels for the rest of the period and focus on other goals. Of course you never want this type of behavior, so you must bonus against it.

3. Choose performance goals that are employee-controlled.

Why pay a bonus to someone who played no part in reaching the goal? By the same token, why withhold a bonus from someone for events out of their control? For these reasons you must select goals where the employees can control their own destiny. This is why you shouldn't pay a bonus based on profit; there are too many variables that are either out of their control or manipulated by the suits. I don't even use sales, shipments, or production rate as a goal; it depends on having enough customer orders and employees in place to do the job. Why should I punish the employees I have because of the ones I don't have? Instead, I use a productivity measurement like "panels per person per day," adjusted for product complexity.

4. Include everyone who has a responsibility.

Don't forget to include everyone who will help you make or break your goals. As an example, if you run out of supplies, that will invariably have a negative effect on productivity as well as cycle time. Therefore you had better include your purchasing people in these two bonuses. I strongly recommend a team-based bonus, where everyone gets the same amount or percent of earnings (look into local labor law on how bonus money is counted as straight-time earnings in overtime calculations). If you're looking to promote competition between shifts or departments, you could also use a bonus plan to foster that behavior. Be aware that you get what you pay for. I prefer to encourage cooperation, and structure my bonus systems accordingly, with everybody on the same team.

5. Set the goals to pay.

A goal that is never achieved and never pays out puts a huge drag on the organization. It calls into question your competence and your integrity. Think of bonus money as a form of flexible compensation and plan for it. Decide how much of your employee's compensation you want to come from bonus money. I recommend no less than 5%. This means setting the goals so that when performance is good a bonus is paid. If performance is poor a bonus is not paid, but this should be infrequent. This gives your employees an additional feeling of accomplishment when goals are regularly met, and more control over their own income.

6. Set multiple levels for the goals.

If you pay a bonus for 50 widgets per day, what about 60? You don't want people to ever stop working on improving performance. Otherwise they will stop when they get to 50, and work on the other goals or start sandbagging for the next bonus period. What you want instead is for them to work on improving all aspects of performance all the time. So therefore open up the top end.

7. Adjust the goals.

Keep in mind that you want the goals set to pay some amount of money most of the time. You will need to adjust the goals periodically to make this happen. A change in customer requirements, for instance, could increase your scrap level. You had best lower the quality goal commensurately. On the other hand, my experience is that measuring and paying for performance improves performance, and you will need to constantly raise the goals as you go. Periodically check the amount of bonus money as a percentage of labor cost, total cost, profit, sales, or whatever metric you think is important, and adjust accordingly. Be up front about doing this, both raising and lowering goals. So long as bonus money is consistently paid out, I have never experienced a problem with adjusting goals.

8. Measure and report performance within the bonus period.

Don't wait until the bonus is calculated to let people know how they're doing. It will look like a secret that you've been keeping, and it doesn't show them where to improve. If you're going to pay a bonus monthly, then report and review performance weekly. Keep the ongoing results posted in a prominent location, and entice people to selectively improve performance in order to earn more bonus money. This gets people's attention where improvement is needed, and it keeps them interested in implementing any corrective actions you come up with.

9. Collect data from public records.

If possible, collect your performance data from production logs, inspection logs, or other generally accessible sources. Remind your employees that they don't have to wait for you to calculate their performance; they can access the information themselves. I don't know that I have had employees take me up on this, but it removes the suspicion that you are somehow creating or massaging the data to control the amount of bonus paid. While it's true that you control the bonus, it's by adjusting the goals between periods, not by cheating them within a period.

10. Use a short bonus period.

Don't draw out the performance/bonus cycle. What you're looking for is continuous improvement. Measure it, report it, and pay it immediately. Then do it again. And again and again. If they have a bad period, it's over quickly and you're into the next period. You don't want people to ever lose hope of earning the bonus. If they have a good period, they see the results immediately.

The Proof

I'm not suggesting that a bonus plan will make or break your company. Obviously there are a myriad of other factors, many of which will be out of your control, such as global competition or product obsolescence. But if you are serious about improving performance, then getting all of your employees mobilized and motivated will have profound effects, and a well-designed bonus plan is your single most powerful tool to make it happen. The metrics shown in the table were compiled over a 4-year period. Improvement was most dramatic in the first two years, as the low hanging fruit of ideas was plucked. In the second two years improvement slowed down, with plateau periods in some cases. Please note that each goal has been raised several times, as shown.

Summary

The end result of a well-designed bonus plan is an organization that has been turned on its head. If the corrective action you implement to solve a quality problem is ineffective, your employees will be the first to let you know. With a little help in inventory management techniques, your employees will slash your cycle time for you. If you've got some dead wood floating around the organization, you'll have a line of people at your door demanding that you do something about it; they're not going to carry the dead wood on their backs any more. In fact, it will be your employees demanding constant improvement in performance throughout the organization, so be prepared to deal effectively with that eventuality. Do not underestimate the importance of moving forward with your employees once you start this process. Otherwise, you're not really ready to improve performance, and like the box factory where I once worked, you'll not only have to go back to the old poor performance, but the employees that stay will have lost faith in you forever.