It feels like Spring may finally be arriving
and at this time of year many employers face difficult decisions on whether or
not to award a pay rise to their employees.
Clearly, with the threat for business of the UK moving into a triple dip
recession this is difficult economic time and the temptation may be to leave
salaries as they are. However, many employees have seen their net disposal
incomes reduce over the last 5 years and are increasingly looking to their
employers to start to reverse this trend. Some may point out that employers are
getting the benefit of a saving in employers national insurance contributions
and therefore can afford a decent pay rise. There is an important qualification to this though;
most employees privately would agree they would be reluctant to have a higher
pay rise if it increased their job insecurity. So a careful balance has to be
struck.
So now may be a good time to
consider a bonus incentives scheme for your employees. Offering a bonus or an
increased bonus payment rather than a pay rise can be a really positive way
forward for everyone when approached in the right way.
What target should a bonus scheme be linked to?
An effective bonus scheme needs
to be linked to the outcome that shareholders or business owners desire for
that year and something that employees feel they can contribute too. For many
businesses this is likely to be a profit target but this not always the case
especially when a business is in start-up phase and not likely to be making
money in the short term.
Whatever the business decides in
terms of targets it does need to think carefully about this as the ‘law of
unintended consequences’ can apply. An example of this is where a company introduced
a bonus scheme for selling more services and winning new customers for field
based engineers providing maintenance services.
The consequence was some new business was generated but this was more
than outweighed with the negative effective on customer service! Engineers had
started to spend more time on trying to sell additional services and neglecting
the contracted maintenance services they were providing. This created a deterioration
in customer experience resulting in some moving to a new supplier.
The other temptation is to add
more and more measures and targets to a scheme to combat this. This has the
disadvantage of making to too complicated to explain and employees not able to understand
how it works. Bonuses cease to be a motivator for high performance if it’s not
clear what employees need to do to get a bonus.
Communication
Explaining to people how a scheme
works and taking time to answer their questions is always going to be more
effective than an email or letter. You can reinforce the actions you want employees
to take to help achieve the targets. Updating employees regularly during the
year is also critically important.
Consistency
Ensure that if the scheme applies
to all employees that the company targets are the same at all levels. This
sends a message that we are all in this together. Lower grade employees may assume
that management get special and preferential treatment which is often not the
case.
Affordability
The amount of a bonus has to be
significant enough for it to be meaningful to employees i.e. if they earn it,
it is sufficient to treat themselves or family. Too low and employee may take
it as an insult.
The main benefit of a bonus
scheme linked to profit is that the business knows it can afford it because it
will have hit its financial targets and therefore be able to afford to pay out.
Whereas giving an increase to base salary at the start of a year may prove to
be a costly error of judgement by year end.
If you exceed your targets at the
end of the year this does not leave you in a credible place as a leader with
your employees if you failed to give a pay rise or pay a bonus.
Employment Contracts
We would recommend that you never
make your bonus scheme a contractual term. If you do and then want to change it
in terms of targets, duration, and administration you can only do so if each
employee gives their written consent.
All bonus and incentive schemes
should be a ‘discretionary bonus scheme’ where the employer can amend and
change based on the needs of the business. This does not mean you can remove it
from employees at a whim but it does afford you flexibility to amend it from
time to time where you have a clear business reason.
Summary
Although employees would always
prefer an increase in their base salary, a well thought through bonus scheme communicated
effectively can have a really positive effect on reinforcing important targets
and a common purpose for a business. At the end of a year everybody enjoys a
bonus for a job well done and ‘a pat on the back’. If you’re a leader make sure you are visible
in giving thanks and not just leaving the payment to appear in employees bank
accounts! Money is an important motivator but it’s not the only one!!
Bradbury Associates Ltd
‘ Advisers to Business and
Entrepreneurs’
Copyright Reserved 7.04.13
