Frank Hobson Consulting

practical human resources support

Reviewing a Staff Bonus Scheme

 

This topic guide is intended to help you form an initial view of the need to revise or review an existing bonus. It covers the three commonest types of staff bonus scheme. Read through the points, think about your scheme and use these questions to decide how healthy you think your scheme is.

 

1) What type of scheme.

 

First be clear about the type of scheme you are considering. Most fall into one of these categories:  

 

(A) Individual or team incentive plans: typically designed to provide a direct financial reward for meeting specified, measured objectives or targets. Normally based on a formula and often paid monthly or quarterly.

 

(B) Annual profit share or Company bonus: intended to improve overall motivation and retention. Not normally linked to personal performance (except possibly for poor performers).  

 

(C) Annual personal performance bonus designed to reflect individual overall performance (sometimes linked to a pot based on company profit). Often used as an equality-safe PRP scheme.

 

2) What were the original objectives for the scheme?

 

Did you choose the right type of scheme (A, B or C) for those objectives?  

 

3) How long since the scheme was set up or last revised?

 

< 2 years: everything should be fine, if not review original design or communications.

 

2 - 5 years: may be getting near the time for a revision if problems are occurring.

 

> 5 years: most schemes will need an overhaul by now.   

 

4) Payments from the scheme - do the payments match the type of scheme?       

 

4.1 What % of basic pay is typically paid out? Is it appropriate?

 

< 2%: probably not going to have any realistic effect.

 

2% - 5%: typical for B schemes and some C schemes.

 

5% - 10%: also OK for B & C schemes but may be getting expensive.

 

> 10%: high for B & C schemes. For A schemes, depends on the nature of the targets and the sector.  

 

 

4.2 Is there too much, or too little variation, in the average yearly cost?

 

A schemes: either the payments or the targets will normally vary to provide sufficient stretch.

 

B schemes: may vary to reflect business performance but greater volatility calls for transparency in calculation.

 

C schemes: average payments would not typically vary much.  

 

4.3 Is there too much, or too little, variation in payments between individuals?

 

A schemes: would normally have significant variation between individuals or teams.

 

B schemes: typically do not have variation between individuals performing at standard or better.

 

C schemes: the variation depends on the nature of the performance assessment mechanism. Watch out for schemes that flatten out performance differences or over-state the accuracy of the rating system.  

 

5)  Are the measures used to determine payments appropriate?                             

 

A schemes: staff must be able to link personal actions to £s and understand what they themselves have to do. In these schemes it is important to keep the targets or criteria under review to avoid rewarding the wrong priorities.

 

B schemes: staff should broadly understand how the payment is determined and, if possible, it should be based on company activities they can affect (eg, exclude effects of capital funds if possible).

 

C schemes: if personal payments are based are on appraisal ratings how sensitive are they? Schemes fall into disrepute when the ratings are not seen as accurate or not fairly applied. It is easy for these schemes to degenerate into an all-are-equal one that produces little value for money.

 

All schemes: do the measures still align with organisational objectives and success criteria?     

 

6)  Does the scheme help you compete in your pay market?

 

Whatever the type of scheme, do you know how it compares with others competing for the same staff?

 

The more your competitors have similar systems the more you can take yours into account in setting salaries and vice versa.  

  

7) Acceptance: good schemes run smoothly with few complaints

 

7.1 Are there too many complaints from managers or staff?

 

In a long established scheme this is a sure sign of the need for renewal. In a newer scheme this may reflect poor design or, possibly, insufficient communication.   

 

7.2 Does it take up too much HR or Accounts time?

 

There should be little need to answer frequent queries about calculations, entitlement etc.  

 

7.3 Cost

 

Are you happy with the cost of the bonus? Is it the best use of the money?  

 

8) Overall

 

Thinking about all the questions above about your scheme:

 

8.1 Does the scheme fit the culture and ethos of the organisation?

 

8.2 Does it help meet organisation objectives?

 

8.3 Does it still meet the scheme's design criteria?

 

8.4 If you were starting now, how much would be different?

 

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