Bonus schemes can be a powerful and cost-effective mechanism to keep your employees engaged in their work and motivated to complete their roles to a high standard.
However, they are often ineffective for a whole range of reasons – too complicated, unrealistic targets, unfair or opaque processes, and generally too distant from an employee’s role.
So, is it worth having a bonus scheme for the employees within your organisation?
In short, yes! Created properly, a bonus scheme can bring immense benefit to your business both in terms of overall achievement and your teams’ morale.
Let’s explore how a good bonus scheme design can benefit your business and how you can go about setting it up effectively.
Could a Bonus Scheme Benefit Your Business?
The Four Main Functions of a Bonus Scheme
A well thought out bonus scheme can help your business to:
Be Market Competitive
In most cases, its primary function is to ensure the total remuneration remains competitive to market, while retaining some level of flexibility and affordability. When designed well, bonuses will only pay when business performance can fund this, enabling companies to flex their total pay spend according to in-year performance. Companies that have little or no bonus tend to need to inflate base pay to compensate, driving up fixed costs and on-costs (employer taxes, pension, future increases etc).
Drive and Deliver Results
While clear cascaded objectives are the mechanism to ensure the business delivers results, attaching a monetary value strengthens the system and sharpens everyone’s focus. These might be company, team or individual results.
Individual & Team Motivation
Most people are intrinsically motivated to do a good job, however, adding a monetary bonus can provide an extrinsic motivator that can prompt additional effort. For this to work, the targets need to be reasonable and clear, and the reward needs to be substantial enough to make a material difference.
Reward Top Talent (Individual Performance)
The most flexible and affordable way to reward top talent on an individual basis is through variable pay, allowing organisations to differentiate reward based on individual performance. For this to work, systems to assess individual performance need to be robust and transparent, respected by employees, and the quantum of bonus needs to be substantial enough that the differentiator between ‘good’ and great’ can be material enough to make a difference. Without ALL of these factors, this type of bonus can be more divisive than effective.
One thing an annual bonus most definitely WON’T do, is manage performance. While it might inspire people to perform, it won’t correct poor performance.
Creating a Good Bonus Scheme Design
A good bonus scheme needs to be clear and attainable, so when determining your bonus scheme you need to make sure that it is:
Worthwhile – the bonus needs to be something that makes a difference and that employees feel is worth having.
Easy to understand – if your bonus structure is too complicated or opaque, your employees will find it hard to understand and will lose interest. It also makes it more complex for the people administering it.
Realistic to achieve – bonus targets should be realistic. Graduated schemes where the lower levels are relatively easy to achieve but the stretch targets are harder, offer employees both the chance to get a bonus often, and something else to strive for.
Regular – many companies offer an annual bonus, primarily to ensure affordability. Consider whether a more regular bonus payment structure might better suit certain (generally lower-paid) employees.
Objective – if you are rewarding employees, the way the payment is determined needs to be fair and objective. Where possible, measure your bonuses on objective results, not subjective decisions that are open to interpretation.
How to Create Your Bonus Scheme Structure
Define
Before you start designing the detail of your bonus scheme, you need to define why you are doing it in the first place. This is the most common cause of poor bonus design, in my experience. Often a bonus is trying to achieve too much, which can lead to a very complex scheme design that misses one basic principle – simplicity and ease of understanding.
Think about the primary aims of the scheme you need:
- Do you want to improve performance against a set of defined goals?
- Do you want to improve motivation among your workforce?
- Do you want to reward employees who go above and beyond (effort)?
- Do you want to reward employees who are ‘top talent’?
Knowing these key goals will help you determine the best structure for your programme.
Remember that there are other components to your reward package – maybe recognition can reward effort and behaviours, and career progression can reward skills (through base pay), allowing you to focus the annual bonus on key business or individual KPI achievement.
Plan
The next step is for your leadership group to agree on the bonus amounts and what measurable goals they will be tied to.
If you are designing a bonus scheme for the first time, consider getting some input from your employees about what would motivate them. You may not be able to fulfil all their wishes, but it will help align your scheme with their thinking. Many employees, for example, prefer bonuses tied to individual performance rather than group targets because they have more control over their own output and standards.
Overall, your plan should establish:
- Who is eligible
- What needs to be done to achieve the bonus
- How much the bonus is and whether there are different levels
- When it will be paid and how
Communicate
Once your bonus scheme structure is defined you need to communicate it to your employees clearly. They will need to understand how it works, and crucially how their behaviour or performance will directly impact the payment they might potentially receive. You also need to ensure there are regular and ongoing communications planned throughout the year to keep people informed and updated on business performance and how this might impact the bonus.
Review
Once the scheme is in place, it should be reviewed regularly to ensure it meets the company’s needs and has the desired effect on motivation levels and results. For example, one drawback of a fixed monetary bonus can be a reduction in effect if the employee remains on the same bonus for a number of years. The scheme may need to be reviewed to ensure it grows appropriately.
You may also wish to incorporate one-off bonuses in addition to a regular scheme, such as bonuses for referring new staff or clients or a signing bonus for new hires.
Setting Up Your Bonus Scheme
Not sure where to get started or what might be appropriate for your company bonuses?
If you would like some advice on setting up a reward scheme for employees, reach out for advice and take a look at my Total Reward Strategies. I can help you determine the best type of bonus scheme and define your metrics, and advise you on how to align the bonus scheme with your broader pay structure.
Get in touch to schedule a no-obligation first consultation.
