For some, it’s the annual payday that will buy that flashy new car or shrink the mortgage. For most, it’s a nice little extra that could fund a holiday or at least reduce your overdraft. Either way, everyone likes a bonus – but how do you make sure this handout makes a positive contribution towards your business?
WORK OUT WHAT YOU’RE REWARDING
First, decide whether you’re rewarding what’s already been achieved or you’re incentivising future behaviour. HR consultancy Mercer explains: ‘Look at what your business objectives are and what behaviours you need to achieve going forward, in order to see whether a bonus scheme is appropriate.’ Objectives may vary from year to year, or even during the year. And ensure that short-term gains are not being encouraged at long-term cost.
KEEP IT BROAD
Many companies are extending their bonus schemes to cover a wider range of factors, which reflects a broader set of business objectives, according to UK pay and reward specialist Ashworth Black. ‘This can help avoid the potentially distorting effect of focusing too much on a single measure,’ the company explains. As well as financial and output targets, bonus schemes can include factors such as attendance, customer service, quality, safety, team and individual performance or various HR-related measures – depending on the nature of the business.
FIXED OR NOT?
There are two basic types of bonus: discretionary and non-discretionary. The former isn’t written into employees’ contracts and, as the name suggests, it’s awarded at the discretion of management, so the performance required can be flexible. Non-discretionary bonuses are based on achieving clearly set out criteria that may be contractual and subject to legal enforcement if the company tries to wriggle out of paying. The important issue, says software and support provider Bright HR, is that ‘for discretionary bonuses to create an incentive, employees must trust they will receive a bonus for good performance’.
SET HURDLES
There’s no point in everybody getting fat bonuses if the company is about to go down the pan. You could set a threshold profit for the business as a whole, which has to be achieved before anybody gets a payout. You should also set minimum targets for each bonus factor and reserve the right to withhold bonuses in special unforeseen circumstances.
CATER FOR INDIVIDUALS AND TEAMS
It’s not unusual to start off with a bonus for the wider group based on company performance, then move on to assessment and reward on an individual basis. The buzzphrase is ‘line of sight’ – can each individual clearly see the actions they can take that will make a difference? If some people work entirely in teams, set team targets and assess the bonus for them as a group.
PAY MOST, BUT NOT EVERYONE
There’s an element of psychology to getting the distribution of bonuses right. Those who don’t get at least the average bonus may feel like losers, which can be bad for morale, but if someone is a poor performer, you shouldn’t pay them. It sends a powerful message that they need to improve.
KEEP IT UNDER YOUR HAT
Posting up the annual bonuses on the company noticeboard might seem like a good idea, but it will almost certainly result in resentment. What should be transparent is the reason bonuses are paid, and what people have to do to earn them.
GET THE TIMING RIGHT
Most companies tend to pay bonuses annually because they are linked to annual profit targets. But in some contexts, shorter measurement periods and regular bonus payments may have a greater motivational impact, according to Ashworth Black. The impact of a big one-off payment should be weighed up against the motivation provided by an ongoing incentive. If you pay your big-hitters their bonus all in one go, there is always a danger they’ll be on the phone to headhunters the following day.
CONSIDER OTHER REWARDS
There’s quite a bit of evidence that cash bonuses are not the best way to motivate and incentivise people – in some cases they may come to be seen as an expected part of pay. Share options are ideal for those in leadership positions who can influence the overall fortunes of the business. But there are many other ways of rewarding staff – time off, days out, vouchers, offering fresh food in the workplace or simply saying thank you.