Encourage Employees to Think Like Owners
A common mistake in designing bonuses is basing a bonus on a measurement that the employees can't affect. If your bonuses are based on overall company performance, make sure your employees have the ability to affect overall company policies. Involve them in decision-making, strategy, cost-cutting and so on so they can have a real connection between their work and reward. Also, make sure they have the information and training to help the overall business. For example, if your managers understand basic finance and you give them the business's financial information, they will be able to be part of the overall business strategizing. Here are some other ways of giving people a piece of the pie:
- Give them stock that vests over time or vests when certain milestones are hit.
- Establish a phantom stock-tracking fund and issue "shares" in the fund tied to performance targets. The shares in the fund can later be used as the basis for distributing bonuses, can be converted to real stock and so on.
- Give them royalties tied to a specific product line or revenue stream. This is routinely done with creative types (such as recording artists and actors), and your ability to do it depends on whether that product line can support an ongoing expense to earnings. Be careful when setting royalty rates, though--if you're paying too much in royalties, you can hurt the business's ability to grow by paying out all your profits before any has come to the business for reinvestment.