Mistake of Bonus System

Mistake #1: Equity is not a form of bonus
Many business owners often use 'equity' and 'bonus' as interchangeable terms. They want to reward their people for doing a good job, but aren't sure exactly what they want to do for them.

Equity is a share of the company, and brings with it shareholder liabilities. Most people don't want equity in their employer's business, but they do want a bonus for good performance. Bonus payments are paid out of profit and based on degree of performance.

Mistake # 2: Most bonus systems are not based on forecasts
If you don't know what your sales, margin and profit expectations are, how can you determine what amount you will allocate towards bonus payments?

Mistake # 3: Most bonus systems don't include the company's performance as well as individual performance
If the company doesn't perform according to plan (refer Mistake # 2 about forecasts...) then there won't be much excess for a bonus pool. If employees are offered bonus rewards that are contingent only upon their own performance and not the company's, there may not necessarily be excess funds in the company at the end of the year to pay individual bonuses.

Mistake # 4: Bonus systems are put in place without a process to assess individual performance
So many business owners make bonus payments on an ad hoc arbitrary basis, often to individuals who don't necessarily deserve the bonus. Without having a system in place to assess everyone's performance in a consistent and fair way, there is no way to accurately determine appropriate bonus payments.

Mistake # 5: Because of Mistakes 1-4, most bonus systems are not clearly understood by everyone in the company.
If people are unaware of potential bonus rewards, and don't take the system seriously, there is no point in having it.

Mistake # 6: Most business owners fail to implement a structured bonus system
If there's no structure and no guidelines, it won't work because it'll all be too hard. In order to act as an incentive, a bonus system must be well communicated, well thought through and well managed.