This is one of the busiest and most exciting periods for business owners. Many close their financial books for the year, determine their profits and losses, and work out performance bonuses for their employees.
It is quite interesting to learn that many business owners do not have a proper guide or way of measuring performance bonus distribution and pay increment.
From a sample size of 10 businesses when asked how they determine which employee deserves more monetary rewards, the common responses have been:
• ‘It’s in my head. I feel that this staff is more hardworking than the other.’
• ‘This staff works longer hours than the rest and hence deserves more.’
• ‘This staff is difficult to handle. The other staff has better attitude, so deserves more.’
This is a very common practice amongst small and medium enterprises (SMEs). How bonuses and pay increments are decided is very much based on gut feel. Business owners have to remember that their employees have slogged days and nights for the business to succeed. Some employees have gone the extra mile and others, even further.
Employees have their individual strengths and flaws. For example, a staff that is rewarded with more bonuses for being more hardworking than his or her peers may not necessarily be more competent than those who are less hardworking.
Likewise, the staff who is difficult to handle may be a lot more competent than the rest, and feels that the pace and way of work may be too easy for him. These are also people more likely to voice their opinions for changes within the organization for the better.
A business owner who takes this defensively may not see this positive quality of the staff, but rather take it personally that the staff is challenging him/her authority and hence a lower bonus payout is given to this staff compared to the rest.
It is thus not surprising to see why many employees job-hop looking for greener pastures after a bonus payout (apart from other work related reasons).
It is a vicious cycle. Employees move as they feel unappreciated, and business owners perpetually complain that it is difficult to find good and dependable employees. Business owners must realize that one of the key reasons why employees leave is unjustified monetary rewards for performance.
Let us look at how the basic cycle of a business works:
Business owners support the team by giving directions, leadership, remunerative rewards, encouragement, building systems etc. This support keeps the team happy.
A happy team supports the customers with great service, ethical and excellent sales consultation and other means necessary to keep customers satisfied and impressed.
Customers support the business by coming back more often, for repeated purchases and spending more per receipt per visit, as well as telling their family, friends and acquaintances about the business.
Business owners then become happy as their business and their profit margins grow.
The cycle repeats.
As a business thrives, the business owner should never forget about rewarding his/her staff. It can mean rewarding them monetarily, or through other means, and motivating them by giving them further encouragement and acknowledgement, etc. When a team is happy its members continue to stay on the job, providing good service to clients.
It is key to be fair and justify the adjustments of monetary rewards given to staff. Although this is a hard task to do, there are ways of ensuring that an employee does know how his/her performance is measured.
Here is a simple guide for measurement of performance:
• Business owners have to set individual goals and Key Performance Indicators (KPIs) clearly for each staff. They can be qualitative and quantitative, depending on the nature of their work. Example: targeted revenue to be delivered for the year. The staff is held responsible for delivering or exceeding certain targets set for the year.
• Business owners need to explain to their staff in detail what constitutes a higher performance bonus or pay increment - for example consistently ‘exceeding’ expectations over a period of 3 months. If a staff achieves less than 70% of the target, no additional performance bonus will be given. Be clear on what you expect from your staff and what they can expect from you when they achieve more.
• Business owners need to review their employees work done regularly. It would be helpful to at least review it monthly so the staff is made aware of what needs to be improved and what they are good at. Such documentation also serves as evidential records in the event of staff termination and/or staff dispute/labor court case appeals. Different countries have different criteria for what constitutes sufficient notice and fairness of staff dismissal.
Staff may dispute, for example, that there are only 2 reviews done throughout the year, and that neither warning nor guidance was given to improve on their area of weaknesses and that dismissal is too harsh. No business owner wants to be caught in such situations. Hence, there needs to be consistent reviews and for these reviews to be documented and filed carefully.
• It is useful to create a simple work performance appraisal report. It should cover the achievements and areas of improvement for individual staff. Very often, all these are ‘in the head’ of business owners. However, when it is officially documented down, it helps in making an unbiased decision based on the various performance criteria measured. Again, all these reports need to be documented and filed.
• Other performance measurements could also include ranking in terms of teamwork, planning and timelines, and leadership (depending on the role a staff plays). Example, if the staff plays a key role in managing a team of members, leadership is key. His good or poor leadership management skills can have an impact on high staff turnover, productivity and internal staff morale.
Ideally after closing the financial books, business owners should start putting down their strategic plans for the next year. One of the strategic business planning workshops that I conduct, “GrowthClub”, teaches business owners how to do a full strategic business plan covering all aspects of their businesses, from goal setting to marketing and increasing cash flow with various strategies. After proper planning, business owners would have their various targets ready, such as sales targets, and they should incorporate the guide of performance measurement with their staff on next year’s expectations.