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Don't Waste That Bonus - Give Them a Reason to Stay, Well Designed Incentives Can Make a Difference

Aug 17, 2007
We are often approached by clients wanting to link performance to bonuses - an apparently quite logical request. There is a desire to reward good employees and avoid paying too much to under performers.

However, this is an area where the results wanted are not often achieved. After examining reasons for wanting to pay bonuses, many clients have been able to introduce a well designed incentive plan that is linked to business objectives and rewards the right people together with a salary system and performance management system to ensure equitable pay and a methodology for managing individuals' performance.

Let's just clarify some terms. Incentives and bonuses are often used synonymously, which can be misleading as their purpose and impact can be quite different. An incentive is something agreed in advance - if a specific action or result is delivered then a specific reward or payment will be made. A bonus, on the other hand, is something discretionary given in addition to the normal salary after an event which and may not even be directly related to an individual's performance.

Jim Collins in his well researched book "Good to Great", where he reports on the factors that transformed good companies to great companies, found "the right people will do the right things and deliver the best results they're capable of, regardless of the incentive system". He goes on to say "Yes, compensation and incentives are important, but for very different reasons in good-to-great companies. The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there" - "Once you've structured something that makes basic sense, executive compensation falls away as a distinguishing variable in moving an organization from good to great."

In previous articles we have discussed implementing a base pay system that makes sense and linking it to performance. If an incentive plan is being considered a number of factors must be taken into account. Sometimes incentives are not required or not appropriate.

Objectives
What are we trying to achieve?
Who are we trying to influence?
What behaviours are we trying to change or maintain?

How much?
How much should we pay and how often?

Measures
How do we measure performance for the incentive?

Eligibility
Who should be eligible for incentives?

General principles
Incentive plans can become complex and can end up causing friction, increasing costs and not achieving what they were designed for.

The following general principles should be considered when thinking of implementing incentives.

Participants must be able to understand the measures and what they have to do to earn an incentive.

Participants must be able to control the factors that influence the measures, e.g. can they control costs, if profit is to be a measure?

The measures must link to the corporate objectives. The best incentive plans are those that align with the corporate direction e.g. growth through sales or quality improvement.

The incentive paid must be meaningful to the employee. It should be a reasonable financial reward that relates to their salary. An incentive that is a percentage of salary is usually best as it can be the same relative importance for all eligible employees. Non-financial incentives such as trips may have a different appeal for individual employees.

It must be challenging but achievable. A number of periods where no, or little, incentive is paid will quickly be no incentive at all. An easy incentive target will quickly become expected each year and any downturn will create dissatisfaction.

It should encourage high performers to stay with the Company. It should be rewarding with the chance of it being even more rewarding in the future. Long-term incentive plans can be designed to achieve this more easily than short-term plans.

The incentive must be within budget constraints. The organization must be able to pay what was promised without undue hardship.

The business benefits
While this may all sound more complicated than just handing out a bonus at the end of the year it is important to get it right and then keep monitoring results and talking to people.

A well designed incentive program will attract the right people and keep them and can impact on delivering planned business results as well as reinforcing desired employee behaviours. An ill-conceived program may be seen as unfair, unprofessional or as rewarding the wrong people. It can drive people away and have no positive impact on business results.
About the Author
Paul Phillips is a Director of Horizon Management Group; a specialist human resource management consulting firm. He has over 30 years experience in HR and, while based in Australia, has worked in a number of overseas locations. www.horizonmg.com
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