Paul Hunter offers five important considerations for businesses looking to implement a new performance bonus system
While the concept of additional pay for work well done is not entirely new, many organisations still struggle to develop and implement incentive plans that actually deliver real tangible benefits.
A bonus plan that is well designed and properly implemented will deliver benefits in three ways: improved performance; a more engaged workforce; and higher retention rates. As such, the purpose of a bonus plan is not to simply pay bonuses but rather to focus, motivate and engage colleagues in ways that ultimately lead to real improvements in business performance.
We are living through a time of significant change and the ability to re-engage people at all levels within the organisation through a performance and reward framework, to support the mission critical business objectives has never been more important.
In developing and implementing a new performance bonus plan, our experience has shown that the following five considerations are key to success:
Stakeholder involvement
To have a better chance of being accepted within the organisation it is imperative that all stakeholders be engaged early on in the project. Visible and vocal support from key stakeholders will be the cues the participants need to begin themselves engaging constructively with the new performance and reward framework.
This will ensure the project has a much better chance of landing properly in the organisation. Key stakeholders will typically include representatives from both the business, the workforce, HR as well as oversight and governance committees like the remuneration committee.
Identify the key value drivers
While reward practitioners are often competent and comfortable in most of the aspects of plan design, a critical area in which many fall short is in being able to understand the underlying business or part of the business that the plan is intended for. Without understanding the underlying value chain and key value drivers, it is impossible to guide the business appropriately in their search for the handful of performance measures that will ultimately create focus and drive value.
Another key consideration is the impact on behaviour associated with each of the different metrics selected. A structured and well facilitated approach to target setting can also not be undertaken without a thorough understanding of the value creation process and differences between different performance measures and KPIs.
Ensure the level of risk-sharing is appropriate
One of the features of a good incentive plan is that it appropriately shares risk between the participants and the organisation. This allows the organisation to reduce the total cost of employment in periods when performance is lacklustre. However, the temptation, in our experience, is to overshare the risk, especially at lower levels within the organisation, and especially in markets that are already quite volatile.
A plan with a catch-all performance gateway might be inappropriate for levels of work below senior management and will ultimately lead to disengagement and lack of motivation, especially in tough years, when the extra work and effort will ensure the preservation of value for shareholders and should still be rewarded.
Avoid complexity and ensure fair payouts
Our experience shows us that the more complex the plan is, the more the average participant will discount the potential payout, and there will be less levels of motivation and engagement. Simplicity allows the plan to be more easily understood, thus enhancing the positive impact on mindset. It also reduces the administration and reporting work and cost burden on the organisation in terms of supporting the plan. Finally, it’s important to do your benchmarking and ensure that the levels of variable pay on offer are both market related and fair.
Spend sufficient resources on implementation
Reward practitioners often work towards the goal of designing and then getting approval for the bonus plan. But this is unfortunately only half the battle. A good design can often be completely undone when not enough time and resource is spent on the implementation.
Communication, branding, education, Q&A forums and a variety of other implementation support options will ensure the plan is properly understood and well received. Without this, the positive impact can be severely blunted, leading to a situation where a good design today is seen as a ‘bad’ bonus plan by large parts of the organisation in the near future.
By ensuring that each of these five critical project areas is adequately addressed, your organisation will likely be much more successful in the design and implementation of a new incentive plan, or in the review and update of an old one. Incentive plans that retain and motivate staff and drive performance have never been more important as organisations fight to survive and look to grow market share again in the post-pandemic world.