How to assess the pros and cons of a bonus culture
The pure definition of a bonus is “something in addition to what is expected, or strictly due”. In remuneration terms, it is defined as “an extra amount of money to what is normally expected for additional effort or exceptional performance”.
The problems start where organisations do not clearly communicate with employees the objectives of its bonus policy. Where pay is performance related, maybe this should be used to reflect extra payment for additional effort and exceptional performance rather than bonuses. Lack of clarity and potential overlap between the two confuses employees and they also question eligibility.
The bonus culture
To put this into context, the Office for National Statistics reported in its Bonus Payments in Great Britain 2017: Statistical Bulletin that £46.4billion in bonuses were paid (+6.5 per cent compared with 2016) at an average of just over £1,600 or 6.2 per cent of total average annual pay. This average ranged at just under £14,770 per employee in the Financial and Insurance Services sector to practically nothing for those working in Health and Social Care.
Xpert HR’s Bonus Payments for Professional Staff Survey (2017) found that, while almost three quarters of organisations in Great Britain had made bonus payments in the last year, these only covered an average of 15 per cent of the employees working in these organisations – and focussed much more on professionals, managers and senior executives and directors. The value of bonuses increased with seniority, although at some senior levels proportionally fewer individuals received a bonus payment because they receive other financial incentives. Functional Heads were the group most likely to receive a bonus (63 per cent received a payment averaging £17,402 each). The highest average payment of £89,855 was made to Chief Executives.
More than two-third (70 per cent) of those working in sales and marketing received a bonus compared with just 14 per cent of those working in contact centres. 64 per cent of those “exceeding expectations” and 56 per cent of those who “meeting expectations” in their performance appraisal/review received a bonus, although 18 per cent of those who did not meet expectations also received one.
More than half of organisations operate a bonus scheme based on a mix of organisational and personal performance, and 19 per cent on personal performance alone. However, the presence of a bonus scheme is not a guarantee of a payment.
Alternative bonus structures
Having worked for John Lewis & Partners for seven years there was much to admire in their partnership bonus scheme. The bonus budget was a percentage of the profit generated during the year and was shared among every partner (employee) from the Chairman through to supermarket assistants.
Everybody received the same percentage of their annual salary as a bonus. This reinforced that everybody individually and collectively contributes to the success of the organisation. There is no judgement made on the value of that contribution, just a reinforcement that everybody has played their part. It creates a sense of belonging and teamwork in ensuring that everybody is working to the same goal. Individual performance is reflected in pay awards and not in bonusing. It isn’t a perfect system, but there is no such thing. However, it works for John Lewis & Partners and that is the important thing. It has to work in the right way and reflect the changing employment trends that are affecting your organisation moving forward.
How to evaluate your own scheme
This may be a good time to stop, press the reset button on your bonus scheme and consider the following:
- Do you need a bonus scheme, or would it better to absorb this budget into enhancing pay or other employee benefits?
- Have you clearly defined and communicated policy objectives that differentiate between pay and bonus awards?
- Is there clarity about the purpose and objectives of your bonus scheme and how its success is measured?
- Consider how the payment of bonuses links to organisational/business performance. Is it based on achieving revenue, profit contribution, growth targets etc, or a combination of these? Are you rewarding success?
- Clearly communicate how the bonus scheme works and how it is triggered based on its purpose and objectives. In traditionally lower paid industry roles, employees may be using a bonus as a salary top-up. They will look for some kind of assurance that receiving a bonus is a realistic ambition.
- Examine the extent to which individual performance is taken into account alongside organisational/business performance when deciding on bonus distribution.
- Decide who is eligible to receive a bonus, because you risk disengaging and demotivating those who aren’t. For example, if your scheme is based on organisational/business performance and only open to senior level people, you are effectively sending a message that it is only those people who have contributed to that success.
- If you use your bonus scheme as a way of attracting and retaining top talent, remember that this talent will work at all levels within your organisation and not just at a senior level.
Remember that fundamentally, a successful employer and employee relationship is based around the fair generation and sharing of effort and value – and that includes bonuses.
The author is Peter Meyler, head of workplace consultancy at Barnett Waddingham.
This article was provided by Barnett Waddingham.
In partnership with Barnett Waddingham
Everything we stand for at Barnett Waddingham is embedded in our promise – to do the right thing. We’ve applied this meaningful principle across all aspects of our business with continued success.
