One of the most effective tools to attract and retain employees is cash or stock bonus distributions of firm profits for individual, team, or firm-wide accomplishments. But it can be quite a challenge to devise a bonus plan that is fair to all individuals, is effective in motivating people, and is acceptable to owners. And a plan that made sense 10 years ago may be inadequate for today’s labor market.

“There is an extraordinarily competitive labor market today,” says Ray Kogan of Kogan & Company, an AEC-focused strategic planning and consulting firm. “There’s no doubt in my view that being able to tout a progressive and generous profit distribution plan is a big recruiting plus. You need every edge you can get.”

Many firms should take a long look at their incentive packages and consider revising them to improve recruiting, retention, and even spur employees to fulfill goals set out in strategic plans. Here are some important factors to keep in mind when devising bonus plans:

What are you trying to accomplish?
There is no one-size-fits-all plan for incentive plans. The criteria for disbursing bonuses should stem from what the firm is trying to accomplish over the next few years.

“How you incent people should be part of the strategic plan,” says Kathryn Sprankle of Sprankle Leadership, a San Francisco-based management consulting firm. “That may mean basing bonuses on sales growth, or opening new markets, or increasing utilization.”

It’s important to reexamine bonus criteria at least annually because firms change over time, and incentives should too. Some firms are becoming more flexible and innovative with their incentive plans as they align them with strategic goals.

“One of my clients recently revised how it compensates its president,” Sprankle says. “After studying the situation, they decided that they were overly incenting him on the bottom line. That really should be more in the purview of line managers. The firm decided to boost his salary and base his bonus on increasing shareholder value, improving employee satisfaction based on surveys, and on how well he mentored and developed future firm leaders.”

Who should be rewarded?
Ideally, everybody in the firm should have an incentive plan. That helps foster high firm-wide morale. Not every firm follows this policy, though.

“Many firms tend to reward people at the top handsomely and under-reward those at the bottom,” Kogan says. Of course, those who contribute most to the firm’s success should be rewarded more, but there are plenty of deserving unsung heroes at the lower rungs of the ladder at many firms, as well.

Generally speaking, it’s easier to quantify achievements of upper managers by looking at things like unit sales, profits, and number of new clients acquired. But everybody in the firm contributes to those results, and by spreading the rewards generously, it’s much easier to retain promising young staffers and develop them into tomorrow’s leaders. Remember, it’s easier and more cost effective to develop talent in-house rather than recruit from outside the firm.

It’s very important to clearly explain the bonus formula to the whole firm, Kogan says, so that everyone understands how their efforts will pay off. In addition, recruits scrutinize bonus plans closely while mulling a job offer, so they too will want a clear explanation of how the plans are structured.

How often should bonuses be awarded?
Kogan believes firms should minimize the lag time between achievements and rewards. This makes perfect sense, as the link between top performance and incentives is most obvious when bonuses closely follow achievements. But many firms have annual bonuses, often distributed around the holidays, which are too far removed from the work performed in the first half of the year.

Quarterly distributions are ideal, Kogan says. That’s frequent enough, and the payouts can still be substantial. “If you go monthly,” he says, “the checks may be fairly small for some employees.”

Consider adding a financial planning benefit
Providing financial planning services for employees is becoming a popular new benefit for many firms. While any firm can find these services beneficial, firms that have stock distribution incentives, in particular, stand to benefit greatly, as financial planners can help employees better understand how stock holdings fit into their long-range financial goals. For example, tax ramifications of stock ownership can be complicated, and professional advice makes this easier to understand.

Having a professional analyze that issue and an employee’s overall financial status, and devise a financial plan to meet future goals helps set employee’s minds at ease. Typically, the firm pays for this service for senior level executives. (Sometimes firms also sponsor financial planning seminars for all workers.)

“You want your senior managers focused on their work, and not concerned about their financial situation,” says Kerri Sullivan-Kreiss, president of SullivanKreiss Financial, an independent financial planning firm. “A Certified Financial Planner helps them choose the most appropriate investments for their financial goals, including how to allocate their bonuses.”

Bottom line
In summary, bonus plans with incentives to meet strategic goals contribute to better recruiting and retention, improve firm-wide focus on achieving key objectives, and boost morale. Are you getting the most out of your bonus plan? It just may be a good time to revise it.

What do you think? Let us know.

Justin Roy is a SullivanKreiss market sector leader focused on Engineering, Environmental and Construction. He can be reached at jroy@sullivankreiss.com.