Spring Time Bonuses !

 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