The Good, the bad and the ugly of bonus schemes

Bonuses have come under intense scrutiny since the recession, particularly in the banking sector where they have generated public outcry. But despite being viewed as excessive and unnecessary by media commentators, the truth is the majority of businesses continue to value bonuses as a way of encouraging better performance and motivating their employees to boost profits – not just in the financial services industry.

For a bonus scheme to be effective, businesses need to design their system carefully to ensure they achieve their objectives. A poorly prepared bonus package can have the opposite effect of your intentions and serve to de-motivate and devalue staff rather than inspire them. This is often the case when the bonus is unobtainable and unachieved, causing employees to lose faith in the system. In these circumstances, teams tend to start blaming each other for the failure to meet performance targets generating a mood of unrest.

Businesses considering implementing a bonus scheme should introduce quarterly rather than annual bonuses as this provides a greater degree of flexibility. This allows business owners to modify goals every three months to fit the business’ needs and will draw more enthusiasm from staff who can see results quicker.

When setting bonus schemes, business owners need to decide whether staff should receive a percentage of the bonus even if they don’t achieve every target and whether to include a range of goals rather than just a single, annual financial target. Profit-related schemes don’t work unless you have less than 10 employees because otherwise the majority of your staff have no way of influencing profitability. On the other hand, if the bonus scheme is to be performance-related, senior management needs to agree whether it rewards everyone or just certain individuals.

It is estimated that 80% of businesses use bonus schemes yet often the outcome is disgruntled employees. Once introduced, the bonus scheme becomes expected and anything other than the bonus being paid is a bitter disappointment.
Schemes either

A) Don’t pay out

B) Pay out less than what was expected

C) Pay out much later or

D) Pay out once or twice before being cancelled.

What message does this convey? That the company is not performing very well.

There’s no evidence to support the lasting effects of bonuses yet 64% of companies believe them to be effective in helping to meet organisational objectives. The most popular reasons for introducing bonus schemes include:

  • To improve business performance
  • To focus employee efforts
  • To increase staff motivation
  • To allow employees to share in the success of the business
  • To encourage change
  • As a way of rewarding staff without permanently increasing the wage bill

Bonus schemes can be a double edged sword!

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