New Year Bonuses

Bonuses - Incentive or Just a Routine Procedure

A real and transparent link between employee performance and bonus payout can make all the difference when using performance pay as an incentive.

Too often, a bonus is paid out at the conclusion of the year, because "that's just the way we do it". This, in fact, breaks the link with outcomes and does nothing for the process of alignment between corporate and individual goals.

In EMD's view, bonuses are there to generate alignment between individual performance and corporate operational and strategic outcomes. If bonuses are not being paid out with the explicit goal in mind to have an effect on performance and morale, what is the purpose?

From our work in the areas of scorecards and performance pay, we find that the quality of scorecards and the process of target setting sometimes leave a lot to be desired. The key challenges with performance linked incentives are:

1. Alignment with company strategy and performance.

Scorecards or performance agreements are tools to spell out each individual's part in making the company strategy manifest. Typically, they contain clear goals, timeframes and an evaluation process. Scorecard outcomes are tied to performance pay, so that each individual knows exactly what their input is to merit the bonus they are being paid. The greater the transparency, the greater the effect of the bonus.

2. Clear link to long- and medium-term goals.

Scorecards usually reflect only short-term goals at the expense of long- and medium-term objectives. Long-term goals are usually tied to the share price (if applicable), EVA (economic value added, long-term profit projections and contain clear triggers for specific payouts. Medium-term goals also need to be very clear and measurable and have triggers to assess performance. Performance payouts operate most effectively when goals with different time-frames are fully reflected.

3. Meaningful incentives to make a real difference.

For a performance bonus to have the desired effect of lighting the fire to work towards certain goals, it needs to be of a size that will make a difference to the individual. We sometimes see companies promising a high bonus in percentage terms (i.e. 30%, only to cap the dollar amount, effectively arriving at a much smaller percentage). This is not a way to encourage above-average performance!

In cases where the possible payouts would offend people rather than motivate them, donating to a charity, possibly of the employee's choice, could be a better option.

EMD's 2001 winning anecdote of how not to do it, is when a leading retail store decided to give bonuses between $4.40-$300 per person. This amounts to a $4.5 mill. insult and a gross waste of funds. Pay amounts that matter.

4. Effective performance management culture.

An outcomes focused culture relies on effective performance management. The elements of an effective performance management process are timely, accurate performance data, regular reviews (monthly) of performance and trends, improvement process to overcome barriers and capitalise on opportunities and an active feedback loop to staff. An annual review of performance does not meet many of the above criteria.

In summary, the keys to making bonuses work towards boosting performance and morale (instead of just being a "thank you and have a happy holiday") are obtaining alignment between individuals and corporate goals in a transparent way that makes it well worth the effort.

What Next?

If you are interested in more information please give us a call on +61 2 8399 0011 and ask to speak to one of our consultants. 

Alternatively e-mail us at info@emdgroup.com.au or use the form on our Contact Us page.

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