Monday, 29 March 2010

Bonus schemes

If you're going to incentivise your employees - be careful!  Think it through and make sure that a) the rewards incentivise the behaviour you want and b) that you can afford all possible outcomes.  The maximum bonus should be enough to recognise over-performance but restricted in terms of total earnings - a maximum of 50% of basic salary.  Here are some guidelines:

1.  Tie individual bonuses to overall company performance ie an overall profitability hurdle must be achieved before individual departmental performance related pay kicks in. (Downside is the fact that good performers don’t get what they might deserve but at least it avoids the situation where you can’t afford to pay – and it means under-performance gets attention sooner);

2. Bonus payments must be self-funding; that is; they must be more than covered by the improved profit delivered by the bonusable over-achievement. If the company derives no benefit from the over-achievement then why incentivise its achievement? Obviously base and bonus targets must match the business plan and budget;

3. By definition then, bonus payments must be linked to profit not turnover;

4. They should be capped – and they should be discretionary;

5. You might want to think about adding other desirable outcomes to the target. For instance, let’s say you have a problem with roles & responsibilities. You could make “100% of department having a job description and appraisal that year” a bonus hurdle. I’m sure you could think of other items.

Nick Bettes