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The pros and cons of a bonus culture

Published by Peter Meyler on

Estimated reading time: 4 minutes


A successful relationship between employer and employees is based around the fair generation and sharing of effort and value - and that includes remuneration. Aside from pay, bonus payments are probably the biggest ‘bone of contention’ for employees in terms of who does and doesn’t receive them, and the reasons for this.
“The pure definition of a bonus is “something in addition to what is expected, or strictly due”. ”

In remuneration terms it is defined as “an extra amount of money to what is normally expected for additional effort or exceptional performance”.

The problems start where organisations do not clearly communicate with employees about the objectives of its bonus policy. Where pay is performance related, maybe this should be used to reflect extra payment for additional effort and exceptional performance rather than bonuses. Lack of clarity and potential overlap between the two confuses employees and they also question eligibility.

To put this into context the Office of National Statistics1 reported the following in 2017;

£46.4bn

in bonuses were paid in Great Britain (+6.5% v 2016) at an average of just over

£1600

or 6.2% of total average annual pay.

This average ranged at just under £14,770 per employee in the Financial and Insurance Services sector to practically nothing for those working in Health & Social Care.

Xpert HR2 reported that while almost three quarters (74%) of organisations in Great Britain had made bonus payments in the last year, these only covered an average of 15% of the employees working in these organisations - and focussed much more on professionals, managers and senior executives and directors. The value of bonuses increased with seniority, although at some senior levels proportionally fewer individuals received a bonus payment because they receive other financial incentives. Functional Heads were the group most likely to receive a bonus (63% received a payment averaging £17,402 each). The highest average payment of £89,855 was made to Chief Executives.

70% of those working in sales and marketing received a bonus compared to just 14% working in contact centres. 64% of those “exceeding expectations” and 56% of those who “meeting expectations” in their performance appraisal/review received a bonus, although 18% of those who did not meet expectations also received one.

More than half of organisations (55%) operate a bonus scheme based on a mix of organisational and personal performance, and 19% on personal performance alone. However, the presence of a bonus scheme has not guaranteed a payment.

Having worked for John Lewis & Partners for seven years there was much to admire in their partnership bonus scheme. The bonus budget was a percentage of the profit generated during the year and was shared among every partner (employee) from the chairman through to supermarket assistants. Everybody received the same % of their annual salary as a bonus. This reinforced that everybody individually and collectively contributes to the success of the organisation. There is no judgement made on the value of that contribution, just a reinforcement that everybody has played their part. It creates a sense of belonging and teamwork in ensuring that everybody is working to the same goal. Individual performance is reflected in pay awards and not in bonusing. It isn’t a perfect system, but there is no such thing. However, it works for John Lewis & Partners and that is the important thing. It has to work in the right way and reflect the changing employment trends that are affecting your organisation moving forward.

This may be a good time to stop, press the reset button on your bonus scheme and consider the following:-

  1. Do you need a bonus scheme, or would it better to absorb this budget into enhancing pay or other employee benefits?
  2. Have you clearly defined and communicated policy objectives that differentiate between pay and bonus awards?
  3. Is there clarity about the purpose and objectives of your bonus scheme and how its success is measured?
  4. Consider how the payment of bonuses links to organisational/business performance. Is it based on achieving revenue, profit contribution, growth targets etc., or a combination of these? You are rewarding success.
  5. Clearly communicate how the bonus scheme works and how it is triggered based on its purpose and objectives. In traditionally lower paid industry roles, employees may be using a bonus as a salary top up. They will look for some kind of assurance that receiving a bonus is a realistic ambition.
  6. Examine the extent to which individual performance is taken into account alongside organisational/business performance when deciding on bonus distribution.
  7. Decide who is eligible to receive a bonus, because you risk disengaging and demotivating those who aren’t. For example, if your scheme is based on organisational/business performance and only open to senior level people, you are effectively sending a message that it is only those people who have contributed to that success.
  8. If you use your bonus scheme as a way of attracting and retaining top talent, remember that this talent will work at all levels within your organisation and not just at a senior level.

Remember that fundamentally, a successful employer and employee relationship is based around the fair generation and sharing of effort and value - and that includes bonuses.


Sources

1ONS Average Weekly Earnings, Bonus Payments in Great Britain 2017: Statistical Bulletin

2XpertHR Bonus Payments for Professional Staff Survey 2017

About the author

  • Peter Meyler

    Peter uses HR strategy, analytics and insight skills to help clients identify and maximise the drivers of organisational and employee value and well-being to create a great employment experience and long term sustainable business success.

    View Biography

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