Bonuses and incentives: how they can benefit firms and their workers by Charles Cotton, Senior Performance and Reward Adviser, CIPD.
What are bonuses and incentives?
Bonuses and incentives are interlinked and are often used interchangeably, but there’s an important distinction.
Incentives influence future employee behaviour or performance, while bonuses reward the past achievements. Incentives typically use formulas – if you sell this amount your commission will be this.
By contrast, the size of a bonus is often discretionary.
If you are thinking of introducing a bonus or incentive scheme, it is important to consider whether you want to recognise what people have accomplished over the past year, or what you want them to achieve in the coming 12 months.
Both bonuses and incentives are often linked to individual, team or company performance and paid in cash. However, these payments are not part of wages. Though in certain situations, such as when money is limited, employers may give employees a bonus instead of a pay rise.
It is also important to recognise that bonuses and incentives do not necessarily have to be paid in cash. Some can be paid in company shares. They can also be paid in goods. For instance, your sales incentive scheme could use prizes, such as holidays, laptops, mobile phones etc, to motivate employees.
How can they benefit your business?
Because bonuses and incentives are variable, they don’t increase your fixed costs. Also, since they’re only paid out if employees and the firm are successful, then they should be self-funding.
Similarly, these payments should fall if there is an economic downturn, allowing you to cut your wage bill without needing to make many redundancies.
Compared to a salary rise, giving a bonus or incentive should have less of an impact on some of your on-costs that are linked to salary levels, such as overtime rates.
Finally, since they must be re-earned each year, this can motivate employees to hit their targets so they can get the cash.
How do they benefit employees?
Bonuses and incentives can help motivate employees: if they perform, then they get rewarded.
How to design an effective bonus and incentive scheme
Despite the many advantages of bonus and incentive schemes, CIPD research finds that most employers don’t use them. Even those that do, may not cover all employees. This is because there are many factors to consider before you can introduce a bonus or incentive scheme.
Firstly, you must define the performance that you need from your people, such as number of sales, level of customer service, etc. Also, should you ask your employees or your customers about what they think ‘good’ looks like, if so, how will you do this?
Once you’ve defined what you need, how will you measure or assess it? Outputs can be relatively easy to measure, such as the number of repairs or calls made, but the employee’s behaviours needed to achieve these outcomes can be harder to assess, such as being a team player.
How will you then explain and communicate the performance you require to your people? Will it be HR or managers doing the communication? If it is managers, do they have the skills needed? What support in terms of coaching, checklists or training do they need? If they have the skills, is there the opportunity for them to talk to their staff about what’s needed, do they have dedicated time, or will they have to slot it in around their other tasks? How will employees be able to communicate with HR if they don’t understand what’s being communicated to them, or have suggestions for how the way that performance is assessed can be improved?
Finally, issues can arise if incentives are non-discretionary. For instance, the incentive may encourage so many sales that you are then unable to meet your orders and customer service suffers.
One way to get around this is to cap the incentive at a certain level. Another is to have variable incentive. For instance, the incentive on the first 100 sales would be 10%, the next 100 at 7% and then 4% after that.
Do bonuses and incentives work?
While there are many arguments for the use of bonuses and incentives, the evidence that they work is mixed.
Research suggests that they work best for jobs where the tasks are relatively straightforward, repetitive and manual. Where they aren’t, the findings are opaque. In part, this is due to it being more difficult to define, communicate and measure the performance that the bonuses or incentives use. Partly it is also how people react to money.
Employees thinking about how fair their bonus is will be influenced by how much effort they put in to getting it and what other employees got and how hard they worked for their bonus.
Research shows that people tend to think they are better than they are and so react badly if they think that their contributions have not been rewarded appropriately.
Another danger is that the cash on offer can encourage employees to manipulate the targets, or to focus only on those tasks that are rewarded.
Charles Cotton will be talking about reward and benefits at the CIPD NI Annual Conference in Belfast on 28 November. nijobfinder is delighted to be Media Partner for the conference.
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