Bonus programs can really suck.  Whether you want to call them bonus or incentive programs almost every company has them, but if they are not administered properly they can really rip at the fabric of a company.  As subcontractors we are in the service business and that service requires great people.  Poorly run bonus programs can have you paying bonuses to individuals who are not satisfied with them and leave.  And let's face it, you wouldn't be paying them anything if they were not the cream of the crop.

So what causes a program to go bad?  Changing the rules, that is it.  Every problem I have seen around bonus programs has been caused by a changing the rules (or a perception of changing the rules).  You cannot mess with people's money and if you change the rules or they perceive you are changing the rules then you will lose more than their drive to work hard for you, you will lose their trust.

Let me give you an example.  With each employee you come up with a labor contract either verbally or written.  Let's say it is to pay that employee $1,000 a week for 40 hours of work.  Every week they deliver on their end of the bargain, so you had better come up with $1,000 per week to pay them.  If you arbitrarily pay them $800 some week, you will have major issues on your hands.  A bonus is exactly the same thing from the employees perspective.  If your program says: save me $100 and I will pay you 10% of those savings, you had better come up with the $10.

One conversation that I typically have is: "no matter how much I pay them, they won't be happy".  If it is 10% they will think their efforts demand more.  Maybe so and SO WHAT.  If you come to the agreement early on they may think they deserve more.  They have two choices to agree to it or find another job.  Just like the salary, they may believe they are under paid (and aren't we all), but if they agree to $1,000 per week they won't be pissed every week they get their check, since they agreed to it.  The only times I have seen an employee voice frustration is when it goes against what they believe they should have received.

So how do you prevent paying someone a bonus and it not becoming negative?

1. Write down your program.  Spend some time and write it down.  Put constraints to it that you may utilize in the future.  I am not going to advocate a profit sharing, discretionary, or job performance program because they each have merits, but you have to put a box around it so everyone understands the rules.
2. Ensure the program metrics mirror the behaviors that you want to promote.  Be specific like tying safety performance to payout.  I would never pay someone a bonus if they had someone seriously injured on their job, so I would always add that as a qualifier to the program.  Use metrics not politics.  If the entire program is paid to "those thatmake us money", you will have problems.  Even if you select theemployees that made the impact, the perception can be something youcan't get away from.
3. In defining the program, have a distribution guideline.  The most important thing to the employee in the rules is, how much will I get?  You should define this so they understand their distribution.  The breakdown of how the program gets funded along with where that money will go (how much to a PM, super, etc).
   
4. When bonuses are paid (or not paid), sit down with every employee in the program and walk them through their payout and why.  Giving someone a check for $5,000 and they believe they should have gotten $10,000 can be solved with a simple discussion.  But leave that employee alone for a weekend and the performance for the next two months can be the horrible.
5. Don't change the rules!  If you have to change or modify the program do it at the start or end of program (i.e. project or year).  When you do, make sure you talk to everyone about the changes and the reasons for changing the program.  You cannot be too open in these discussions.
   

As an employer this is a difficult issue since sharing the profits of company is a decision that not many make and when that turns negative it is frustrating.  If you set-up a program right you can drive results that are far superior, but if you don't, the people who earn you the money will leave the company on the grounds of ethics as they will feel betrayed by the system.

Good luck and hopefully this year will yield bonuses for everyone!