Making Management Bonuses Work
Written by Andrew Johnson - Thu 16th Jan 2020
Just before Christmas a friend of mine was complaining about the fact that his company had just announced that they would not be paying the company bonus to employees this year. The CEO had penned an email explaining how the cost of opening an office in China and the poor performance of the European Division had meant the Company had not achieved its profit target. The CEO went on to thank everybody for their hard work and wished them a Merry Christmas. “A Merry Christmas, my friend said, hah hah, I was relying on that bonus to pay for Christmas. My Division achieved its sales and profit targets, so why should we be punished for something out of my control.”
What aggrieved him the most was that this was the first he had heard the Company was not going to achieve meet it profit target. The Company had not tracked or reported its performance against bonus target all year. He was so disillusioned he told me he was considering looking for a new job in the New Year. Somewhere he might feel valued and fairly rewarded.
Company bonuses schemes when designed well can be motivational, align everyone in the organisation to the Company Targets and drive individual and team performance, releasing the discretionary effort in everyone to stretch their performance. When they are designed badly, they can be damaging to morale, drive away high potential individuals and damage motivation and engagement.
Most importantly, if you don’t regularly communicate where individuals and teams are against their bonus targets it is a pointless, valueless waste of money. As my friend said, “At least if I had known I wasn’t going to get my bonus this year, I could have prepared for it.”
Designing a good bonus scheme that delivers the right outcomes is as much an art as it is a science.
Here are some important factors to consider when putting a bonus scheme together:
1. Have a bonus scheme policy which provides clear details of the rules and procedures relating to the scheme.
2. Align the bonus structure to any existing pay bands or pay grades so there is consistency and fairness to the scheme.
3. Ensure the scheme bonus targets are aligned to the overall annual business goals. It is useful to ensure the sum of the individual targets exceed the overall company target by a small margin.
4. Cascade targets down from the top so all goals and objectives are owned by a functional leader or manager and there is clear responsibility and accountability for all sales or profit contribution. This also ensures there is a clear line of sight between the overall company annual objectives and the part everyone has to play to contribute to the overall success of the organisation.
5. Design the scheme so that a proportion of everyone’s bonus rewards specific goals and targets they are individually responsible for, that are in their sphere of control. This way they can take ownership, influence and actively deliver a reasonable proportion of their bonus. There is a direct correlation between the effort they put in with the reward they get. Build this proportion of the bonus scheme into the organisation’s annual budget as a cost
6. Have a proportion of the bonus that goes beyond budget. This will encourage all individuals and teams to stretch themselves, to be resourceful and creative. This element of the budget will be self-funding since it comes from profit beyond budget and allows you to share some of this hard earned additional profit with everyone.
Communicate, Communicate, Communicate…
1. Give one individual the responsibility for owning and communicating the Company performance against bonus targets. This is often a shared role between Finance, HR and Internal Communications.
2. Ensure the upcoming years budgeted targets are published at least 3 months before the beginning of the new financial year so Senior Managers can develop and sign off clear, joined up targets for the coming year. There is nothing worse than being given your bonusable objectives two or 3 months into the year, you are already behind in trying to achieve them.
3. Train every Line Manager to write clear, measurable, robust performance targets. Audit the quality of all Bonusable objectives and have them signed off by a senior manager.
4. Provide a paper or electronic system for Line Managers to monitor and measure performance by individual and team against bonusable objectives.
5. Report on Company, Divisional, Team and Individual performance versus bonus every month. Cascade this down the Organisation through Company Briefings, Team Meetings and 1 to 1s. Give all Managers the presentation or individual report in order to brief performance.
6. Ensure all Leaders devote an element of their monthly team meetings to review performance against bonus targets. Encourage them to work with their teams to achieve targets, overcome obstacles and share best practice.
7. Provide specific quarterly updates indicating where the company is achieving its bonusable objectives and where it is not. That way, people can refocus and adjust their efforts to address any shortfall. I even have one client who will let teams share resources to support one another to reach the overall company target.
8. Make it competitive – Some Companies publish league tables, make it a competition, it all depends on the culture of the Company.
9. Finally, celebrate when bonusable objectives have been achieved, acknowledge and recognise high performers. Pay the bonus as close to the year end as possible so people associate the reward with the effort.
Managing a successful, well designed bonus scheme is not easy, but when done well it will bring a magnitude of benefits beyond the investment.