The Bonus Trap

Public debate about public sector bonuses has raised the age-old question about whether bonuses really work.
Most modern thinking about using incentive payments to encourage higher performance stems from Frederick Taylor’s scientific management approach in the late 19th and early 20th centuries. While much of Taylor’s thinking has been superseded, his views on bonuses still form the basis of most performance pay systems.
The form can range from organisation-wide bonuses through to individually tailored incentive schemes where most interest lies and where this article focuses.
Most organisations seem to believe bonuses have some benefit. The September 2000 PricewaterhouseCoopers remuneration report shows that about half of the organisations in the survey paid bonuses and not surprisingly, senior executives receive larger bonuses as proportion of their base salary than other employees. Other remuneration surveys confirm these trends.
While the proportion of organisations paying bonuses may appear small, many more will have schemes that did not pay any bonuses in the 12 months prior to the survey.
Others will have what is known as ?at risk’ pay. This is portion of pay that is withheld and is only paid if the employee achieves required results. In some quarters, primarily the public sector, this is not regarded as bonus although the language surrounding it is rather loose and needs to be considered carefully if it is to succeed as an incentive system.
Consider what sort of message will you be sending to employees if you include ?at risk’ pay in their remuneration. Surely their first question will be “At who’s risk?”. ?At risk’ pay suggests to employees that you do not believe that they will achieve the required results. Why else would it be withheld? It surely cannot be motivating to employees having to justify what they would regard as theirs anyway.
From an employee communication perspective, it must be better to describe any sort of ?at risk’ pay as bonus while still ensuring that the required results are still the targeted level of performance. In this way, any thoughts of entitlement by employees are removed from the outset.
Another consideration about incentives is that they must be large enough to motivate higher performance. Employees will look at what they are eligible for and draw their own conclusion about whether the effort is worth the reward.
Many organisations have bonuses of up to 10 percent of base salary, even at middle and senior management levels. Only the best performers will get the big bonuses while typical payments are more likely to be around 6-8 percent. The question is whether this will motivate employees already on relatively high salaries?
Overseas trends suggest bonuses need to be bigger to motivate and deliver higher performance. As New Zealand increasingly becomes part of the global village, expect the size of bonus payments to increase over the next few years. However there is one factor critical to the success of bonuses – an effective performance measurement and management system. How well you measure performance will be reflected in how your bonus system works.
People must know whether they have achieved the desired performance to justify the bonus. Moreover, employees must understand why they received – or did not receive – bonuses.
Performance expectations must be clear from the start so employees can concentrate on what is important. It will also enable more transparent assessment of employee performance.
However, there is an adage in remuneration: – “Be careful about what you pay for as you may end up getting it.” bonus system based on sales may increase sales at the expense of other critical success factors such as service, quality or profit. Performance expectations should be balanced so they do not work against organisational values, culture and objectives.
Too much emphasis on individual performance could work against desire to increase teamwork and cooperation. Individual performance needs to be considered against organisational performance – can one be rewarded without the other?
Bonuses may be as old as Queen Victoria but the jury is still out on whether they work. What is clear is that there are many potential pitfalls that can make bonuses an unattractive proposition.
Think ahead about what you want to pay employees for and how this can be done in manner that supports your organisational vision, values, culture and objectives. If bonuses do not fit, avoid the bonus trap and stay away from it in the first place.

Steven Young is consultant with the organisational performance consultancy, The Empower Group.

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