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Despite the variety of employee perks available today, for the vast majority of companies, the most popular part of the reward package for employees is the bonus scheme.

In fact, according to data from the Office for National Statistics (ONS), total bonus payments reached a record £46.4 billion in the UK in the 2016-2017 financial year; an increase of 6.5 per cent on the previous financial year and surpassing the figures from before the economic shutdown.

With uncertain times ahead amid Brexit, we have noticed that employers are increasingly looking at reviewing their bonus schemes.

So, what is a bonus scheme, what do you need to consider when setting up a new scheme, and what are your options?

What are bonus schemes?

Bonus schemes are a type of reward tool that involves giving high achievers a lump sum payment for reaching a (usually) predetermined set of objectives. By design, bonus schemes offer rewards that are proportional to the value of the employee’s activity. Through this, the schemes are able to finance themselves because the work being rewarded is producing revenue or profit for the business.

The targets set in a bonus scheme can vary from single, focused goals like increasing sales figures to a mixture of different targets, whether they are revenue, profit, customer service or service speed based. Whatever the goals of the scheme, they are almost always measurable and quantifiable as this allows for accurate progress tracking.

It’s important to keep in mind that depending on how the bonus scheme is implemented in your business, it can affect the weekly pay calculations and in turn, employee’s statutory rights. Similarly, it’s important to keep in mind that bonus schemes are also applicable under UK equal pay legislation, and the gender pay reporting requirements.

Having covered what makes up a performance related bonus scheme, we can move onto why you would consider implementing one in your own business.

Why should you introduce a bonus scheme?

As with almost all business decisions, it is essential to formulate a goal before implementing a new system, otherwise it becomes impossible to measure the impact or benefit of your changes.

The core purpose of any bonus scheme is to push and motivate staff so that they increase efficiency and achieve business objectives simultaneously. The targets set for the employees can vary, whether they are focused on individual performance, team performance or business-wide performance. Below are some common goals which can be targeted and achieved using a bonus scheme:

  • l Improving monetary business performance through increasing profits or revenue;
  • l Improving business practices such as speed or customer service;
  • l Increasing employee retention and motivation by linking effort and contribution with pay;
  • l Improving alignment of shareholders and employees by benefitting all through overall business success;
  • l Supporting organisational change through encouraging new procedures and behaviours;
  • l Rewarding staff for successful business performance without permanently increasing salaries.

Through the platform of an annual or quarterly performance-linked bonus scheme, it becomes easy to target specific business goals and encourage staff to become more efficient in specific areas. Regardless of what your business is seeking to achieve, a well-designed bonus scheme has the power to mobilise your workforce and drive improvement wherever you need it.

The types of bonus scheme

Discretionary and Non-Discretionary Bonus Schemes

There are multiple ways of categorising performance-related bonus schemes. The broadest of the categories is the different discretionary and non-discretionary systems.

Discretionary bonus schemes reward employees at the discretion of the employer. Usually, this means that the bonus entitlement isn’t featured in the employees’ contracts and there is flexibility in what warrants and receives a reward. Primarily, this system works if there is a strong level of trust between employees and the employer, where staff feel confident that they will be given a bonus when they perform well.

On the flip side, non-discretionary bonuses look at predefined performance criteria. This works by giving staff distinguishable targets and clear goals to reach, upon which the employer is legally bound to pay the bonuses. These schemes are almost always written into employee contracts, meaning that regardless of the business’ finances, they must be paid when agreed.

Individual and broad bonus schemes

Another method of separating and categorising bonus schemes is based on who they focus on within the employee base. These are split into four distinct types:

  • l Individual;
  • l Team;
  • l Business Unit; and
  • l Hybrid, e.g. individual plus business unit.

Individual bonus schemes focus on specific employees and their personal goals. These systems tend to be used commonly for sales staff, where the number of sales made is tracked, and each individual employee is given a bonus depending on their performance.

Team bonus schemes work best in businesses where the labour force is split into groups with distinct goals. For example, a call centre might host a complaints team, a sales team and a customer service team; each team may be given flat bonuses based on the number of calls they answer, or the number of issues they resolve.

Business unit bonus schemes centre around broader business goals and reward the entire company for an organisation’s success in a specific field. This bonus scheme could be dependent on anything from revenue figures to customer service reviews, it all depends on what you would like your business to focus on.

Schemes can also be either single-factor or multi-factor. Single factor schemes revolve around a single goal, for example, revenue, profit or sales; on the flip side, multi-factor schemes are broader in their goal selection, combining multiple targets to try and improve a variety of factors across the business.

The most effective choice of bonus scheme for your organisation will differ depending on your sector, size, finances and more, so be sure to take your time in deciding what will work best for you.

Creating an effective bonus scheme

The paper talk

There are multiple points to consider when trying to create performance related bonus schemes, though the most challenging aspect is the issue of consistency.

All fair bonus schemes seek to reward employees in the same way for the same level of performance; however, this can be difficult to achieve depending on whether your scheme is focused on individual performance, team achievement or company-wide growth. For some employees, depending on their role in the company, it may be more challenging to reach specific goals compared to a different member of staff. With this in mind, scheme design must be adaptable and consider not just the achievements of employees but how difficult those targets are to reach.

Besides the problem of consistency, the other major point to consider is always keeping your business’ goals in mind. A bonus scheme must benefit both employer and employee, so deciding where you would like employees to improve and focusing the new scheme on these objectives is essential for success. A great example of this is if you’re struggling with employee retention; setting bonuses for loyalty is a brilliantly simple way of starting to address this problem, though other rewards would be needed to effectively address this concern.

There are plenty of fine details to consider when creating an impactful bonus scheme, particularly if you are trying to build a cohesive reward strategy for your business. For this brief guide, we will conclude here and move onto other common questions about bonus schemes but if you have any further questions, do not hesitate to get in touch.

How to fund the bonus scheme?

The majority of bonus schemes make use of a bonus pool system. Usually, the pool’s funds are raised through the achievement of the goals encased within the bonus scheme, whether they are increased sales and revenue or reduced costs. Through this method, well-designed schemes are self-financing and never cost the business more than they are worth.

Performance above and below the preferred level will obviously have an effect on the bonus pool and the funds within it, making the relationship between performance and bonus funding essential. Therefore, the shape of the line that relates bonus to performance is a key design decision. The choices are between a straight line, where bonus and performance are directly proportional; a curve, where the bonus funding (and in turn, rewards) are lowered at the extremes of the spectrum; or an s-curve, where the effects of the two curve options are combined. These all create different performance messages for employees and in turn, different funding needs for the scheme.

In the case where performance is being tracked in one business year and bonus rewards are being distributed in the next, common practice is to store the cost of the bonus scheme in the company accounts for release when necessary.

Making bonus payments

Bonus schemes usually offer cash as payment. Some organisations choose to defer their bonus payments to later in the year, during which they will often include shares as part of the payment system. This is particularly common for bonus schemes at the executive and management levels. Occasionally, luxurious or desirable items can be included in the bonus payment too, though this is uncommon.

Usually, the size of a bonus payment is decided using one of the following systems:

  • Flat payments agreed previously;
  • A percentage of the employees’ annual salary;
  • A varying size of payment depending on role or seniority;
  • A varying size of payment depending on the employee or team’s contribution to the completion of objectives.

The option that is best for you depends on your business, it’s size, industry and structure.

When should bonus payments be made?

Primarily, this depends on the goals of the bonus scheme. Schemes with overarching business objectives like boosting revenue or profit usually feature annual payments, simply because annual figures will indicate the success of these goals. On the flip side, schemes with role-focused targets like service delivery could use payments at shorter intervals.

The frequency of the bonus payments and the value of the bonus paid are usually related. The more common the payment intervals, the lower the individual payments are so finding a balance between regular rewards and impactful ones is challenging but important.

Regardless of whether you opt for a quarterly performance-linked bonus scheme, or an annual pay-out option, understanding your staff, what they do and what they like is key to a scheme’s success.

Equality Concerns

It is illegal to discriminate on pay under current equal pay legislation, the Race Relations Act and the Disability Discrimination Act. This affects bonus schemes too, so it is essential to keep in mind that your scheme must comply with this legislation and be fair, both in the size of the targets and in who it applies too. After designing a compliant bonus scheme, it’s also important to track bonus payments and ensure that they are also fair to all. Keeping these factors in mind, you should avoid any future equality issues.

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To find out about the comprehensive bonus and commission scheme design solutions available from Paydata, please get in touch - call +44(0)1733 391 377 and we will be happy to discuss your individual requirements.

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