How to build a transparent and fair bonus policy
Getting value from your bonus scheme is just as important as any other investment you make. For me, it is all about developing a better understanding of business measures, financials and results and, more importantly, what the business is looking to achieve – ensuring that reward decisions can be more informed and based on evidence.
Once you have a constructed bonus scheme that is fair, it is important that it is supported by ‘rules’ and a robust bonus scheme policy, focused around the purpose and the principles. Ongoing tracking is equally important, to ensure that the bonus scheme’s principles are still being met and that no changes have been undertaken to the scheme that have had a detrimental impact on fairness and consistency.
Both business leaders and employees need to be clear of who is eligible and who can influence the metrics within the bonus scheme. The targets, hurdles and caps must be consistent across roles and not have any inherent bias. This ensures that all eligible participants have the same opportunity to earn, taking account of location, products, accounts, economic challenges, working patterns and hours.
It goes without saying (but not appropriate in all circumstances), that any bonus or incentive scheme needs to be self-funding, transparent and fair. But how can you build a bonus policy that adheres to this? These are the three fundamental steps I undertake with clients.
Get underneath the success metrics. What does the business want to drive and where are its areas of focus? For commercial, is it revenue, margin or a combination? If company-wide, is it profit, sustainability, growth, customer satisfaction or a combination?
Get beneath the financials. For commercial, how much does £1 of sale cost? What do the product or service margins look like? For company-wide, where are they against their targets currently? What does employee performance look like, and what are the significant and marginal differences in employees’ performance that can drive that additional success?
Get an understanding of the financing. For commercial, how much are they prepared to give away? Have they already accounted for incentive/commission costs? How does that stack up? For company-wide, how much more will the business have to do, over and above current achievement, to fund a bonus scheme?
Test the current scheme for fairness and equity. Identify where money is being spent and the net result. Understand the impact of the scheme on equity, for example: differentials, peer-to-peer, levels and gender. Identify the fairness of the scheme, for example: bias in terms of product, function and location.
Test the current percentage bonus opportunity and payments against the market. Is the ratio of base to variable typical of the sector? How does ‘total cash’ stack up against the market? What trends in scheme approaches are out there? What do companies at a similar point in their lifecycle do?
Test the current scheme against productivity and performance. Can the business effectively measure performance? Does it know the function of roles, levels and business unit? On the commercial side, where do sales happen without trying? What are the more challenging areas? For company-wide, how can they align each role and individual motivations to business goals to achieve business success?
Design principles. Having done the exploration and understood the ideal, the principles should be easy enough to articulate. Ensure they stay true to what the business is looking to achieve. Senior leaders’ engagement and agreement in these are critical.
Design metrics. Employees, whether in commercial or support functions, need to have a line of sight and understanding of how they can make a difference; how their performance and/or competency can impact business success.
Design mechanics. The bonus pot triggers and targets must be clear and developed with logic in mind. It is important to ensure there is no confusion or conflicting elements within the scheme and that the right behaviours are encouraged. Does the scheme achieve what it needs to achieve, and does not disadvantage high performers?
Design communications. The scheme can only be effective if it is delivered with considered and clear communications. The communications need to be inspiring and provide clarity around expectations and what success looks like as a whole and as an individual.
The author is Sarah Lardner, client director at Innecto.
This article was provided by Innecto.
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