In the last 2 parts of this series we talked about how to build bonus plans around key performance indicators (KPIs), and used a random consultancy as an example.

If you don't want people awarding themselves their own bonuses (obviously a bad idea) you need a system of checks and balances to prevent this.

Seperation of Duties

If you place an employee on an incentive system and delegate the awarding of those bonuses to a manager or the employee himself you will often find that this doesn't work well. Accountants have known for centuries that processes are safer when duties are sparated. For example, the person who deposits daily sales into the bank at a restaurant should be the same person who records those sales in the accounting system. Separating these duties increases accuracy and eliminates fraud.

Likewise, the process for awarding KPI-based bonuses should have duties separated. The person who calculates metrics should be different from the person who collects the data for those metrics. The award of the bonus should be a separate duty as well. Automated approval systems for the input of the data, with an audit trail, are required. Otherwise companies soon fall into a pattern of awarding certain people the max bonus every quarter regardless of how successful they were on their KPI objectives. Big mistake. Very common.

Curt Finch is CEO of a project accounting software company and author of a time tracking book.