Many SMEs face difficulties in optimum management of their resources, build the right performance culture, keeping employees happy and retention. We are sharing some thoughts to trigger a deeper thinking on the issues around performance appraisal, annual bonuses and salary increases. Firstly they are not the same. Performance appraisals, annual bonuses and salary increase are not the same. They are interconnected, but they need to be seen as different processes and enough thought needs to go in to customize them for each company.

BONUS & SALARY INCREASE CALCULATION CRITERIA

Bonus is predominantly an important reward for performance and salary increase is an important retention tool.

Criteria for Bonus Calculation:

Profit made by the companyGuiding Factor
Individual Performance (KPI)50%
Team Performance (Team or Dept. Scorecard)20%
Individual Competency10%
360-degree feedback / employee feedback/supervisor feedback10%
Demonstration of Company Values5%
Initiative taken & Leadership Provided5%

Based on the above scores all employees can be put into 5 categories:

  1. Green
  2. Blue
  3. Yellow
  4. Brown
  5. Red

Bonus formula can be as follows:

  1. Green: 1.5 times the standard bonus amount
  2. Blue: 1.25 times the standard bonus amount
  3. Yellow: Standard bonus amount
  4. Brown: No Bonus. Consider verbal warning
  5. Red: No Bonus. Consider written warning.

Salary increase criteria:

CRITERIAWEIGHTAGE
Expected Company Performance in the financial year.Act as guiding factor
Individual Performance (last financial year)50%
Expected Individual Performance in the financial year. (KPI Targets)10%
Expected Team Performance in the financial year. (Scorecard Targets)10%
Individual Competency10%
Demonstration of Company Values10%
Feedback10%

Other criteria to be kept in mind are:

  1. Current Salary
  2. Tenure (Length of Service)
  3. Retention
  4. Industry Salary standards

(Special increments can be given based on MD Scores and above criteria)

Based on the above scores all employees can be put into 5 categories:

  • Green
  • Blue
  • Yellow
  • Brown
  • Red

Salary increase formula can be as follows:

  • Green: 1.5 times the standard salary increase amount (in %)
  • Blue: 1.25 times the standard increase amount (in %)
  • Yellow: Standard salary increase amount (in %)
  • Brown: No salary increase. Consider verbal warning
  • Red: No salary increase. Consider Written Warning.

Additional topics that are relevant here: 1. How to conduct Performance Appraisals 2. How to create IDP – Individual Development Plans 3. How do design KPIs / KRAs/ OKRs 4. How to design company and department scorecards 5.How to design Competency Frameworks 6. Coaching and Mentoring skills for supervisors and managers.

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Manoj Onkar, MANAGEMENT INNOVATIONS, manoj@managementinnovations.co.in

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