Does your organisation pay a Christmas bonus or an end of year bonus to employees? And if so, on what basis do you pay it? Just because? To everyone? Now is the time make sure the benefits and intentions of your bonus system are not lost through lack of communication or because of historical trends.
It is not unusual for businesses to want to link performance to bonuses – this seems quite logical. There is a desire to reward good employees and avoid paying too much to under performers. However, this is an area where the results wanted are not often achieved. After examining reasons for wanting to pay bonuses, many businesses are able to introduce a well designed incentive plan that is linked to business objectives and rewards the right people together with a salary system and performance management system to ensure equitable pay and a methodology for managing individuals’ performance.
Let’s just clarify some terms. Incentives and bonuses are often used synonymously, which can be misleading as their purpose and impact can be quite different. An incentive is something agreed in advance – if a specific action or result is delivered then a specific reward or payment will be made. A bonus, on the other hand, is something discretionary given in addition to the normal salary after an event which may not even be directly related to an individual’s performance.
Jim Collins in his well researched book “Good to Great”, where he reports on the factors that transformed good companies to great companies, found “the right people will do the right things and deliver the best results they’re capable of, regardless of the incentive system“. He goes on to say “Yes, compensation and incentives are important, but for very different reasons in good–to–great companies. The purpose of a compensation system should not be to get the right behaviours from the wrong people, but to get the right people on the bus in the first place, and to keep them there“……..“Once you’ve structured something that makes basic sense, executive compensation falls away as a distinguishing variable in moving an organisation from good to great.”
In addition to an effective base pay system, if an incentive plan is being considered a number of factors must be taken into account. Sometimes you may find incentives are not required or not appropriate.
What are we trying to achieve?
Who are we trying to influence?
What behaviours are we trying to change or maintain?
How much should we pay and how often?
How do we measure performance for the incentive?
Who should be eligible for incentives?
Incentive plans can become complex and can end up causing friction, increasing costs and not achieving what they were designed for. The following general principles should be considered when thinking of implementing incentives.
- Participants must be able to understand the measures and what they have to do to earn an incentive.
- Participants must be able to control the factors that influence the measures, e.g. can they control costs, if profit is to be a measure?
- The measures must link to the corporate objectives. The best incentive plans are those that align with the corporate direction e.g. growth through sales or quality improvement.
- The incentive paid must be meaningful to the employee. It should be a reasonable financial reward that relates to their salary. An incentive that is a percentage of salary is usually best as it can be the same relative importance for all eligible employees (on the basis your salary system is right in the first place). Non-financial incentives such as trips may have a different appeal for individual employees.
- It must be challenging but achievable. A number of periods where no, or little, incentive is paid will quickly be no incentive at all. An easy incentive target will quickly become expected each year and any downturn will create dissatisfaction.
- It should encourage high performers to stay with the Company. It should be rewarding with the chance of it being even more rewarding in the future. Long-term incentive plans can be designed to achieve this more easily than short-term plans.
- The incentive must be within budget constraints. The organisation must be able to pay what was promised without undue hardship.
The business benefits
While this may all sound more complicated than just handing out a bonus at the end of the year it is important to get it right and then keep monitoring results and talking to people. A well designed incentive program will attract the right people and keep them and can impact on delivering planned business results as well as reinforcing desired employee behaviours. An ill-conceived program may be seen as unfair, unprofessional or as rewarding the wrong people. It can drive people away and have no positive impact on business results.
So what did you do this year?
While your incentive program may already be in place, is there still time to review how you calculate, communicate and pay your bonuses?
Is there an expectation from under performers that they’re going to get it anyway?
When you give it to your high performers, do they know why? Do they think even the under performers are receiving the same amount or the same amount relative to their salary? And if so, what message is that sending?
You all worked hard for whatever profits you have to share with your team this year. Don’t waste them by distributing them badly or allowing poor managers to take away from the intentions of the organisation by not communicating to their people what they did to deserve them (or not) or how to do it again next year.