According to a report from Hewitt & Associates, 2009 had the lowest average salary increases (2.5%) in recent memory, and the forecast for 2010 (2.7%) doesn’t look much better. Yet even when money is tight there are some key people on your team who really create value. People that would be hard, if not impossible to replace. How can you reward and motivate your high performers without giving them raises?

More and more companies are adopting variable pay programs to try to do just that. 90% of US companies have some variable pay in 2009, and more of those programs are reaching down into lower and lower levels of the corporation. Bonus programs provide a way to recognize those exceptional individuals on your team without permanently adding to the overhead of your business. But setting up and administering a bonus program can be tricky.

Here are a few DO’s and DON’Ts that I have observed through the work with my clients.

DON’T make it discretionary. It’s way too easy to reward people for things you “like” versus things that really drive the business. When it’s discretionary team members tend to treat it more like a lottery ticket then a reward. DO make it “formula” driven. Define a formula at the beginning of the year and keep people updated to where they stand throughout the year. Make sure people feel like they have the ability to “move the needle” on the numbers they are tied to.

DON’T spring things on people at year end. In order to drive consistent behavior DO make a plan at the beginning of the year and stick to it. This is a lot easier if you create a budget at the start of the year and use budget numbers to drive the bonus.

DON’T make a different plan for everyone. It’s so hard to make a plan that’s fair and drives consistent behavior when you figure one out you want to use it as broadly as possible. DO vary the goals for different people and departments so that what you are measuring is meaningful to them.

DON’T promise fixed dollar amounts. When you set a bonus of say $5000 if our numbers are above budget, it means you have to renegotiate it year after year, or risk it falling out of relevance. DO set it as a percentage of salary, this way it always stays a relevant component of the employee’s compensation as their salary changes.

Bonus plans give you a terrific opportunity to recognize & reward your exceptional team members without adding overhead to your business. Who are you thinking about right now who needs a bonus plan?