Bonus & Incentive Plans – Motivators of Future Performance or Rewards for Past Performance?

According to the 2006 CIPD Reward Management survey, the use of bonus and incentive plans continues to grow in the UK. For example, 85% of private sector employers use cash-based bonus or incentive plans for some or all of their employees. As you might expect, this use varies by sector - 22% in the voluntary sector and 88% in private sector services offer this type of variable pay. Size also matters - 75% of businesses with 5,000 or more employees offer bonus and incentive plans; this number decreases to 62% for organisations with less than 50 people.

How do Incentive and Bonus Plans differ?

A bonus typically provides a recognition payment related to past performance such as results achieved or skills gained. In contrast, incentives aim to motivate people to achieve a set of performance goals or priorities where targets are usually set in advance. Incentives and bonuses play an important role in ‘variable pay’ and while they should not be seen as a panacea, there is evidence that they drive increased performance when used appropriately.

Bonus and Incentive Plans - What is out there and are they right for you?

• Profit-sharing – typically operating at corporate level for all staff, using financial measures
• Individual incentive – common in sales where direct financial measures are used
• Team incentive – reinforce teamwork; used in situations such as call centres
• Gain-sharing – common in decentralized ‘units’ and based on operational measures
• Combination plan – a range of measures for different job levels; often complex to operate.

From this you can see that selecting the most appropriate bonuses or incentives depends on a range of factors including culture and values, size and what you want to achieve for your organisation. While bonuses and incentives work effectively for many, they are not right for some - for example the charity sector and creativity-based job roles.

To help you decide on the most suitable bonus and incentive plan for your business, see the Tips section below for seven steps that will hep you design your plan.

Just News

Women managers more likely to resign despite higher pay increases: Findings of the 32nd National Management Salary Survey, published this month by the Chartered Management Institute (CMI) and Remuneration Economics shows an average movement in earnings of 6.7% for women in the year to January 2006. The figure for men is 5.6%. While this represents the highest earnings movement for 5 years, female managers still earn 11.8% less than male managers.

Bonuses are increasingly becoming a more important part of the package with nearly 80% of companies giving bonuses. Again, female managers fared better with 71% of women earning a bonus compared to 58% of men. Yet despite higher pay awards and bonuses, female resignations stand at 5.7% compared to 4% for men. Age is a feature too where female mangers aged 29 or under occupy 55% of all management roles. This decreases to one third for 35 to 39 year olds.

US bill requires employers to increase pension contributions: Under the United States’ Pension Protection Act 2006, private employers who offer traditional pension schemes will be forced to increase their contributions. The reforms, described as "the most sweeping reform of America's pension laws in over 30 years",  are part of the US government plans to combat a $23 billion deficit at the Pension Benefit Guaranty Corporation, the federal insurer for Defined Benefit pensions.

Website of the Month

While Nationwide has been in the news for the planned acquisition of Portman Building Society, I'd like to introduce you to a part of their website which is about something quite different. It features the long term ‘Genome’ project which looks at whether committed employees led to committed customers and whether committed customers generated more business.

As overall winner of the Sunday Times ‘Best big company to work for’ last year, this ‘micro site’ offers an insight into the study’s findings on the relationship between employees, members and business performance.

The Nationwide study identifies five business drivers that need to be met to raise commitment levels, such as pay where employees seek fairness and transparency. Take a further look at how Nationwide has calculated a monetary value for increasing employee commitment and the effect this has on member commitment and business performance.

While it is still uncommon for companies to feature this level of employee information, the people and reward practices shown here may go some way to explain Nationwide’s business success over the past decade.

Click here to visit the site.

7 Steps to Help You Design your Bonus or Incentive Plan

Step 1: Establish rationale for introducing the plan. Be clear on how it will benefit your organisation and employees. How does it fit with HR and business strategies and your existing reward package? How effectively does the chosen plan manage your objective to either reward past achievement or offer incentives for future performance?

Step 2: Determine who will be included. Identify which employees the plan will cover and why. Does it apply only to some types of employees or everyone? Determine the qualifying conditions for eligibility of employees on entering or leaving the plan.

Step 3: Select the right performance measures. Select performance measures that are both achievable for employees and meet your strategic business goals. Decide what specific financial and non-financial measures will be used and how these can be measured. Avoid making measures too complex or employees will not understand them; avoid choosing too few measures where some participating employees could lose out.

Step 4: Select performance targets. Once performance measures have been selected, determine the basis on which targets will be set. For example, on financial measures will there be a range of targets or just one target that may be narrowly missed? Targets should strike a balance to ensure they are not too easy or too difficult to achieve. Ensure that the approving people or group is established at the outset.

Step 5: Establish the duration of the plan cycle. Determining the duration of the cycle relies on achieving the right balance between motivating performance over set time periods and long term affordability. Targets should always be in place from the start of the plan. While some organisations struggle to achieve this objective, the incentive or bonus plan needs to be aligned to the financial budgeting cycle as a starting point.

Step 6: Payments from the plan. Decide whether payments from the plan will be self funded or partly funded by the business. Other factors that need to be determined are whether awards are presented as a percentage of base pay or a cash amount. Will there be a capping of payments above a certain level and/or a minimum payment? Will employees be rewarded on an equal basis or will individual measures apply?

Step 7: Running and managing the plan. Communication plays a key role in helping employees understand the plan and how their contribution may increase the opportunity for success. Make sure you establish a communications plan which incorporates regular dialogue on tracking against targets.

Follow these steps and you will be on your way to establishing a bonus or incentive plan that really works to raise performance within your business. Pease note that this advice is provided as guidance only. If you need specific advice relating to your business, please call+ 44 (0) 1367 710 618.