11 Top Tips for Bonus Scheme Arrangements

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It is very common for a business to have various bonus scheme arrangements and these will vary from very ad hoc, unstructured and informal schemes to highly measurable schemes with clear criteria for payment. So, if you’re thinking about introducing a Bonus scheme, what should you consider – here are our 11 top tips.

  1. Decide whether the scheme is based on revenue or profit? No right or wrong answer and it will depend on a multiple number of factors for the business at the time but if you base it on “profit” – be clear what “profit” is defined as – eg EBITDA, gross, net etc. However, if the criteria is “profit” – can the people covered by the scheme influence or control the criteria. Nothing is more de-motivating than a person covered by a bonus scheme and they don’t believe that they can control the criteria – for instance central overheads, property/premises costs etc.
  2. How much can be earned through bonus and is there a ceiling? Invariably, it makes sense for people to earn bonus as a % of basic salary. If the individuals covered by the scheme are on different basic salaries, a % of salary is the fairest way to do this.
  3. What is the period covered by the scheme? Often this will be January to December or related to the business financial year – it is important that there is a reference period.
  4. Decide when and how often you want the scheme to pay out. If you want the scheme to pay out annually, the normal procedure is to make the payment a few months after the end of the reference period and if the criteria are related to year end financial performance, it is quite common for payment to be made after the audit process.
  5. Psychologically, a bonus should be something that the employee looks forward to so if the scheme pays out monthly, it doesn’t have the same impact as a one off payment once a year. Incentive schemes related to Sales that pay out monthly are more typically commission schemes – think carefully about whether your scheme is a commission or bonus scheme (the language is important).
  6. What criteria do you want to use? The criteria may be related to business performance or specific to a business unit/region/area/division etc. Schemes should be designed so that they are self-funding and also only pay out when the business reaches its budget level of performance. Does it feel right that employees are earning bonus if budget performance is not achieved? Some schemes also have specific individual objectives which trigger pay out – maybe related to system or process implementation, projects, re-structure etc.
  7. Bonus is meant to reward individual performance that goes above and beyond the call of duty so ensure that you do not pay bonus to an employee for merely doing the “day job” for which they get basic salary. As an example, a Management Accountant is paid to get a set of accounts out every month so that’s the day job. But, incentivise the Accountant to streamline the reporting process which gets the results out to the business 2 working days sooner.
  8. Don’t pay put bonus more than twice a year otherwise the bonus ceases to have any long term impact – you can use the bonus to help with retention. If the bonus is paid out every month, it becomes too much of an expectation and part of the norm and over time loses its attraction.
  9. How do you treat leavers half way through the scheme reference period? You want to reward people who stay with the business so why pay out bonus on a pro-rata basis to leavers?
  10. Be clear whether the bonus scheme is discretionary or contractual? There is a subtle difference and making the scheme discretionary gives the business greater flexibility and the likelihood is that you will want to amend the criteria for the scheme every year as the business dynamics change.
  11. Avoid making random subjective payments – ie you want to reward John because he has worked hard this year. Bonus payments that are based on subjectivity can be divisive and can fuel calls of favouritism as well as potentially being discriminatory.

 

Always document the scheme and ensure that there is a “write up” (or a set of rules) for the scheme and apply the criteria fairly. Before issue, sense check the scheme and run a quick model to see the possible effect under different scenarios.

Finally, whilst bonus schemes can be motivational for those that are included, they can be de-motivating for the people who are excluded. Similarly, incentive schemes can drive different behaviours in individuals and if the business is under performing and your Sales team are bragging about their levels of commission but the Management team are not earning bonus, it seems as if something is not quite right and your incentive scheme arrangements are probably no longer “fit for purpose”.

If you want help with the development of bonus scheme arrangements, Adrian Berwick of AB HR Solutions gives practical advice and support – either call 07885 714771 or e-mail – adrian@abhrsolutions.co.uk

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