How to Assess Employee Bonuses and Raises in a Small Company
One of the fastest ways to drive a small company out of business is through out-of-control labor and employment expenses -- particularly expenses generally left up to the discretion of company leadership, such as employee bonus payments and salary raises. Conducting periodic assessments of your company’s practices related to regular bonus payments and wage increases may keep you in the black.
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Instructions
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Review your bonus program details, how bonuses are calculated, and whether they are dependent on company or individual performance. Read your performance management guidelines regarding compensation and how performance ratings correspond to annual salary increases. Discern how much discretion supervisors and managers have in granting wage increases after they conduct performance appraisal meetings.
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Review bonus payouts and percentage of salary increases for the past three years. Three years is a reasonable period for two reasons: Employers must retain salary and wage data for three years, pursuant to the Fair Labor Standard Act, and three-year historical data usually are current enough to render comparisons that are both valid and reliable.
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Obtain your employee census to determine salaries and total compensation for individual employees. Highlight employees whose compensation records indicate they have received bonuses in the past three years. Analyze bonus recipients to determine if they share commonalities such as position, rank, salary level, department or tenure.
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Review employee census for information on annual salary raises, or whether they have received regular raises that correspond to your organization’s performance appraisal schedule. Depending on your performance management protocol, as well as your company’s ability to give regular wage increases, employees whose performance meets or exceeds the company’s expectations should be entitled to salary raises, based on the company's ability to grant them.
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Consult your organization’s finance officers, human resources or compensation specialists on matters related to projections regarding future workforce needs, budget constraints, business demand and whether bonuses and raises can be guaranteed for future years.
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Revise company bonus practices to ensure consistency and equity. Ensure your company isn’t rewarding executive or highly compensated employees more lucratively or more frequently than you are rewarding rank and file employees, supervisors and managers. Codify your bonus program guidelines for all employees, and publish the guidelines in a revised edition of your employee handbook. If your bonus program is discretionary, include language that states the bonus is discretionary and, therefore, is not a guaranteed payment and that your guidelines do not imply any sort of contract or promise.
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Review how performance appraisals determine annual salary increases. Prepare guidelines for supervisors and managers to follow during their evaluations of employees. Instruct supervisors and managers to discuss with their employees how performance determines an employee’s raise. The ability to grant salary increases may vary from year to year; therefore, you might not want to publish these guidelines in your employee handbook. Distribute guidelines for salary increases to supervisors and managers only.
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Tips & Warnings
As with any human resources issues, get a legal opinion before rolling out an incentive plan.
References
- Indiana University; Lump-Sum Discretionary Bonus Program; January 2003
- University of Missouri; The Pros and Cons of Performance-Based Compensation; Lewis C. Solomon, et al.
- Reference for Business: Performance Appraisal and Standards
- World Services Group; When Must You Include a Bonus in Calculating an Employee's Overtime Pay; Forrest T. Rhodes; July 2006
