6-Step Guide: How to Design a Performance-Driven Employee Bonus Strategy

Increase the performance and productivity of your people.
After surveying >1,500 SMEs between $500k - $230m revenue in SE Asia and working directly with 34 SMEs and Startups since 2018, I discovered 9 out of 10 SMEs don’t have an Employee Bonus Strategy that aligns people to objectives to drive organisational performance.

Instead, I know of an SME who didn’t achieve their annual performance goals, but still paid all employees a 2-month bonus.

What kind of signal do you think this gives their employees?

Especially the poor performers - the management are basically telling them to continue doing what they’re doing!

Most SMEs find it challenging to work with their Heads of HR and Finance to develop an Employee Bonus Strategy that meets these 4 criteria:

① Alignment with Company Goals
② Balancing Fairness and Motivation
③ Measurement of Performance
④ Cultural Fit
Here’s a Bonus Strategy Framework that I have designed that works for nearly all types of businesses and will align your entire team on what matters most.

This is based on my personal experience building a performance-driven organisation that could achieve $300m revenue with just 100 employees.

This bonus strategy that I developed played a big part to contribute to this high level of productivity for a relatively lean team.

This Bonus Strategy has two variables that are based on individual performance and organisational performance.

It ensures your team is rewarded based on achieving organisational goals and performance metrics. This is sustainable year on year, and consequently, this will also reward your top performers what they deserve.

Step 1: Determine Bonus Payout

Replace AWS or 13-month bonus with a performance-driven bonus where every employee gets a bonus based on performance on top of their salary.

Total Compensation = Base Salary + Bonus

Base salary is guaranteed monthly, bonuses are not.

This is how you could split the bonus payout:

Bonus = 50% Organisational Performance + 50% Individual Performance

This aligns with the Playing to Win™ Strategy to Execution framework. Your clients must WIN, your company must WIN, and your employees must WIN too. When all vectors align, all three parties WIN together. This momentum will continue to grow and generate positive outcomes without needing you to drive the team.

To do this, you first need to forecast the budget to allocate as a bonus when your organisational goals are achieved for the year.

The Bonus Plan must be approved by the Managing Director and Board of Directors. This is one example of a Bonus Plan:

• Achieve X Objective + $X profit, pay out 1-2 month bonus
• Achieve Y Objective + $Y profit, pay out 3-4 month bonus
• Achieve Z Objective + $Z profit, pay up to 6 month bonus

For the employee to receive their full bonus, the Company must achieve its Organisational Performance (OKRs), AND the employee must achieve their Individual Performance goals.

Step 2: Grade Organisational Performance

Organisational Performance is graded according to the Company’s top three Objectives for the year.

These must be established at the beginning of the year and must be converted into Specific, Measurable, Achievable, Realistic and Time-bound (S.M.A.R.T.) Objectives to everyone on the team.

Each organisational Objective gets a weightage % based on priority of the year, which is dictated by the Playing to Win™ Strategy.

This allows you to allocate more of the bonus to the most important Objective for the year.

Here’s an example:

Step 3: Determine Payout per Objective

Next, for all 3 Objectives, you will need to determine the payout tiers.

You only payout when 70% of each Objective is achieved.

This protects the Organisation and ensures we are only paying bonuses for good performance.

(Otherwise, why would we want to reward poor performance?)

When >70% of the Objective is achieved, a portion of the bonus is unlocked.

Similarly, when 100% of the Objective is achieved, 100% of the bonus is paid out.

This image shows what the tiering can look like:
For example, your Organisation might set these 3 Objectives:

#1: Leverage Emerging Market Trends to Launch New Products
This is measured by a 15% revenue increase through new product offerings

#2: Promote a High-Performance Culture
This is measured by a 20% increase in overall employee performance ratings

#3: Improve Team Collaboration and Communication
This is measured by a 25% reduction in rework caused by poor communication

Here’s an example of what the payout might look like at the end of the year, after the performance review.

Presume the allocated bonus is $10,000 per employee:
◦ $5,000 determined by Organisational Objectives
◦ $5,000 determined by Individual Objectives

Here’s how the Organisational Bonus payout is calculated:
% Objective Weightage $ Objective Weightage Objective Met % Payout Unlocked $ Payout Unlocked
Objective #1 50% $2,500 85% 66% $1,650
Objective #2 25% $1,250 95% 100% $1,250
Objective #3 25% $1,250 90% 100% $1,250
Organisational Payout unlocked: $4,150
Example Calculations for Objective #1:
50% x $5,000 = $2,500
66% x $2,500 = $1,650

Step 4: Grade Individual Performance

Similar to the Organisation, each individual must have their own top 3 Objectives for the year.

These need to be S.M.A.R.T., challenging and realistic, and aligned with Organisational Objectives.

These 3 Objectives are set by their manager, tailored to each individual in the team. It’s very important that the manager also signs off on these at the beginning of the year for alignment and accountability and file it with the Human Capital/Org. Development team.
For example, an individual might have these 3 Objectives:

#1: Improve communications using S.M.A.R.T. (35% weightage)
#2: Improve delegation using RACI (35% weightage)
#3: Attend Scrum certification training and apply it within 90 days effectively (30% weightage)

At the end of the year, the manager has the discretion to adjust the payout for each Objective based on factors like effective communications, core values, culture code, teamwork, leadership, and so on.

Here’s an example of what the payout might look like at the end of the year, after the performance review.

Again presume the allocated bonus is $10,000 per employee:
◦ $5,000 determined by Organisational Objectives
◦ $5,000 determined by Individual Objectives

Based on the manager’s scoring, the individual has achieved these payouts:
% Objective Weightage $ Objective Weightage Manager’s scoring $ Payout Unlocked
Objective #1 35% $1,750 80% $1,400
Objective #2 35% $1,750 70% $1,225
Objective #3 30% $1,500 90% $1,350
Individual Payout unlocked: $3,975
Example Calculations for Objective #1:
35% x $5,000 = $1,750
80% x $1,750 = $1,400

Step 5: Bringing It All Together

Simply add the two payout amounts for Organisational Performance and Individual Performance, and you get the total Bonus Payout for that employee.

Taking the payout calculations from the previous examples:

Individual Bonus Payout
= Organisational Performance Payout + Individual Performance Payout
= $4,150 + $3,975
= $8,125

The average person typically earns ~80% of the allocated bonus.

Top performers earn more.

There you go! This is how you design an Employee Bonus Strategy that achieves our criteria:

? Alignment with Company Goals
? Balancing Fairness and Motivation
? Measurement of Performance
? Cultural Fit

Step 6: Bonus Allocation Guidelines

1/ Sales representatives receive a lesser proportion of the Individual Bonus component. Instead, their compensation includes sales commissions, which most other employees don’t receive.

2/ Sales leadership bonuses are tied to Organisational performance, where:
◦ Sales team must sell.
◦ Marketing must perform.
◦ Both marketing and sales must align to attract and acquire right-fit customers (if not, production team or service delivery team will suffer).

3/ Typically, Recruitment and Marketing functions also receive a lesser proportion of the Individual Bonus component. Their compensation includes a performance variable. You can see a sample compensation breakdown by business function in the table below.

4/ New employees’ bonus payouts are prorated according to the date they joined the company.

5/ The Board of Directors has ultimate discretion on the bonus payouts.
*Note: The base-bonus split depends on the Organisational Goals & Strategy for the year. This is done at the same time that the Managing Director and Board of Directors set the Bonus Plan, as mentioned in Step 1.

Have any Clarifying Questions?

There are many Bonus Strategies out there for businesses to choose from. I’ve found that this is the most effective framework to cultivate high performing teams, for SMEs of all sizes in SE Asia.

You may encounter Problems, Challenges, Issues, Blockers or Friction while applying this for your company, due to specific circumstances in your HR, Human Capital/Org. Development, Finance or other business functions.

If you have any clarifying questions, send it to us by submitting them below.