Are Discretionary Bonus Plans Good or Bad?

The most common bonus plan is also the least effective!

Discretionary bonus plans are probably the most commonly used bonus plans by contractors, yet they rarely improve the performance of the employees.

Why is the discretionary plan so popular? There are three main reasons.

1. Owners want to do something positive for employees by sharing profits.
2. The Discretionary Plans protect the company’s profitability. If there are no profits, there are no bonuses.
3. A discretionary plan doesn’t require any real planning.

The objective of a bonus plan should be to motivate employees to find ways to improve their overall performance. Improved employee performance maximizes benefits to the company. The discretionary bonus plan fails to accomplish this because:

1. It is based purely on trust—”If the company does well, so will employees.”
2. There is no connection between individual reward and performance.
3. The employee does not know specifically what they have to do in order to
   earn a larger bonus.
4. The lack of defined goals and benchmarks does not allow employees to
   measure success at any given time.
5. Generally management does not communicate “how are we doing”.

Are you using a Discretionary Plan and hoping it will work?

The only gain that the company makes on with a Discretionary Plan is employee goodwill. And that comes only from those who are genuinely grateful. While the company is attempting to reward and do something positive, many employees are disappointed. They either think that the company had

• more profit or
• that the company should have given them a bigger bonus. There is also always management’s struggle deciding “who gets how much “ from the bonus pot.

Discretionary bonus plans simply don’t motivate or help you achieve profitability goals. So why would you continue trying to make them work?

There’s a better way that creates a WIN for you AND a WIN for your employees.

The objective of any bonus program should drive team performance to continually strive for better efficiency. That efficency translates to MORE PROFIT and allows the company’s projects to be MORE COMPETITIVELY priced.

The JUST REWARDS BONUS PROGRAM from Management Consultants for Contractors is based on a time-tested, absolutely proven approach to growing your company and rewarding your employees.

1. JUST REWARDS is designed to PROTECT the company’s profitability.
   Bonuses simply are NOT paid unless the company has reached a minimum profit goal.
2. JUST REWARDS emphasizes TEAM PERFORMANCE to encourage sharing knowledge and company resources, while still recognizing individual contributions.
3. JUST REWARDS performance objectives are CLEARLY DEFINED and understood. The employees know how they personally can affect the company’s ability to reach profitability goals.
4. JUST REWARDS outlines company goals that are based on what the employees are able to most control and influence (such as gross margin contribution (gross profit), which is driven by MINIMIZING direct and indirect job costs.)
5. JUST REWARDS PRE-DEFINES AND COMMUNICATES bonus amounts so that there is a direct connection between reward and performance.
6. JUST REWARDS BONUS PLANS are supported by WRITTEN GUIDLINES to give it CREDIBILITY.
7. Performance numbers with JUST REWARDS are shared periodically with the employees. They will “KNOW THE SCORE” during the course of the year so that they can change strategies if needed.

ARE YOU READY TO MAKE THE CHANGE THAT DELIVERS A BETTER BOTTOM LINE…FOR YOU AND FOR YOUR EMPLOYEES?

Contact Doug Phelps, President of Management Consultants for Contractors, at 215-882-2963. It’s the one phone call that can change your company and change your profitability. Be sure and ask us how so many other companies have made the change!