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Welcome to my blog for all things related to business quality (processes, systems and ways of working), products and product quality, manufacturing and operations management.

This blog is a mixture of real-world experience, ideas, comments and observations that I hope you'll find interesting.

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March 2009
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When to pay bonuses

Staff bonus payments are back in the news again today, and it seems to me that many of the companies who are attracting bad press are missing the point of bonuses.

Performance-related pay is not a bad idea, although it's by no means the best instrument for incentivising staff. Nonetheless, many of the companies that I've worked for, or clients that I've worked with, over the last 30 years have paid an annual bonus to staff that is based on performance. But the key factor that was common to all of them is they didn't just pay bonuses based on personal performance – the company itself had to meet its performance targets for anyone to be paid anything. It had to pass a line in the sand, failing which no bonuses would be paid however well an individual performed.

So individuals would be paid a bonus, up to x% of their salary, proportionate to their meeting objective, measurable targets… IF – and only if – the company met specific targets for (for example) EBITDA**.

This doesn't eliminate the risk of 'rogue traders' but it helps ensure that organisations which are abject failures don't pay bonuses that they can't afford. Staff need to be rewarded for ensuring their employer succeeds; without this clause, corporate success is made irrelevant and the bonus is merely a salary in disguise.

**Earnings before interest, taxes, depreciation and amortisation

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