Encourage Employees to Think Like Owners

A common mistake in designing bonuses is basing a bonus on ameasurement that the employees can't affect. If your bonusesare based on overall company performance, make sure your employeeshave the ability to affect overall company policies. Involve themin decision-making, strategy, cost-cutting and so on so they canhave a real connection between their work and reward. Also, makesure they have the information and training to help the overallbusiness. For example, if your managers understand basic financeand you give them the business's financial information, theywill be able to be part of the overall business strategizing. Hereare some other ways of giving people a piece of the pie:

• Give them stock that vests over time or vests when certainmilestones are hit.
• Establish a phantom stock-tracking fund and issue"shares" in the fund tied to performance targets. Theshares in the fund can later be used as the basis for distributingbonuses, can be converted to real stock and so on.
• Give them royalties tied to a specific product line or revenuestream. This is routinely done with creative types (such asrecording artists and actors), and your ability to do it depends onwhether that product line can support an ongoing expense toearnings. Be careful when setting royalty rates, though--ifyou're paying too much in royalties, you can hurt thebusiness's ability to grow by paying out all your profitsbefore any has come to the business for reinvestment.