How are you and your colleagues compensated? Do you get bonuses? How are those bonuses calculated?
Bonuses are becoming a more popular form of compensation. According to a report by Aon Hewitt, raises are not being given to employees as often because:
1) Companies are closely watching their recurring expenses
2) Bonuses can be directly tied to performance
The goal of any incentive plan is to get what you pay for, however, according to a Towers Watson study cited here by SHRM, less than half of employees see a clear link between their pay and their performance. It’s not unusual for employees to recieve their bonus checks and say something like, “Nice. Not sure what this is for, but I’m happy to receive a little extra cash.” If this is the case, companies are not getting what they’re paying for.
Bonuses are based on the metrics that leadership believes will drive the organization’s strategy and usually focus on 3-5 of them. They could be based on profitability, cost control, top line growth, EPS, cash flow, etc. In order for employees to understand how they can impact these measures, they first need to understand them.
For example, one of our clients is adding a cash flow component to their bonus plan. We’re going to train their managers to understand the big picture of business, with a specific focus on inventory levels, collections terms, cash flow, and working capital. They’ll also learn the difference between cash and profit.
Once employees understand how their every day decisions impact the 3-5 metrics they’re bonused on, they will make better decisions that drive the organization’s strategy. And by tracking employees’ action plans, our client will be able to measure the impact of the training on their cash flow. More cash could mean paying down debt, acquiring a company, paying out bonuses, building reserves, investing in new property, plant and equipment, funding research and development, etc. Basically, more cash means more freedom.
See how a better understanding of these metrics can impact your organization in our eBook, Business Acumen Anecdotes.