This week, I had a series of conversations with both Books & Benchmarks clients and bookkeepers about employee bonuses. In light of those conversations, let’s answer a few questions about bonuses this week and next:
- Do they work?
- What are common structures for bonuses?
- What are the best practices for accounting for bonuses?
First off, I want to mention that bonuses aren’t a major focus for Books & Benchmarks. But if you’ll let me put on my management consultant hat for a week, next week we will discuss some best practices related to taxing and accounting for bonuses.
Does more money move the needle?
The general philosophy of bonuses is that dangling a carrot (an incentive) in front of a team member will influence or coax them into changing their behavior. Because owners are acutely aware of how their behavior impacts their income, they often assume that their employees have (or at least ought to have) a similar sense of motivation around money.
The science around this is less clear. Let me paraphrase the findings of Drive, by Daniel Pink to address this, and I recommend you read the whole book. It’s one of four books that sit on my desk because I often reference them.
When it comes to bonuses, there’s strong evidence that bonuses can improve performance for rote, repetitive tasks like widget-making or edging lenses for instance. You pay more for every lens that gets cut; what do you know, your optician edges more lenses.
Where does deep motivation come from?
But for any task that requires creativity, like dealing with a patient’s wants and budget, bonuses can limit an employee’s problem-solving or listening skills by narrowing their perspective on potential solutions.
The reality, according to Daniel Pink, is that once employees make enough to meet their baseline economic needs, more money doesn’t impact motivation. The three things that do are:
- Autonomy: Am I trusted to make my own choices about how to do my job?
- Mastery: Am I getting better at my craft and profession?
- Purpose: We’re in the business of helping people see; this should be a no-brainer.
Again, this assumes your baseline compensation meets your employees’ needs.
Are you skeptical? Consider this thought experiment: pick any employee and imagine you gave them a concrete set of credentials they could attain or responsibilities they could shoulder. If they do, they are guaranteed a raise. How many of your team members would go the extra mile to earn more? (How great would it be if all of them did?)
The real reason bonuses work (and where they go wrong).
I believe that non-OD staff bonuses work not because money changes motivation, but because it’s the first time practice owners and managers introduce clear, measurable goals to their teams. They could probably have set concrete, measurable goals without bonuses and gotten similar results.
But sometimes bonuses go awry. I see two main areas where they fail:
- The bonus is tied to the wrong metric. Peter Drucker, the legendary business consultant, once wrote, “What is measured, improves.” Sometimes, though, practices construct bonuses around the wrong measurement. Two quick examples:
- A practice sets an optical bonus around second pair sales. Over time, opticians under-sell the first pair to get to a second pair sale.
- A practice owner bonuses an associate on each comprehensive exam over fourteen performed in a single day. And then wonders why the associate doesn’t seem to put any effort into what they prescribe and their revenue per exam.
- The fixed threshold for triggering a bonus is too low. The associate bonus above also relates to this issue. Often, it will take the form of “monthly revenue is more than $180,000” (that was this week’s example). That practice now averages well over $200,000 per month in revenue.
For this reason, I can’t state enough how bad it is to use thresholds for bonuses. Time and time again, I’ve seen thresholds that guarantee the bonus will always be paid.
Even if thresholds are acceptable at first, few practices are disciplined enough to raise them every year. And when they do, staff often complain that the owner is “moving the goalposts.” The one exception to this is when a growth percentage over the prior year sets the threshold for bonusing.
Bonuses are a common question for owners across the industry. Next week, we’ll tackle some of the tactical questions around deploying them, focusing on business accounting and tax considerations.
For now, if you want to understand how your payroll compares to other practices around the country (which can potentially shape decisions like opting for bonuses instead of raises), contact us to find out how our automated reporting can give you clarity and insight into managing your team’s compensation.
