Bonuses – a good ideal?

Bonus schemes aim to allow staff to share in the success of a business with greater success translating to greater bonuses. The question often asked is should innovation be rewarded, surely the jobs it creates and secure should be reward enough? But does this inspire innovation?

Interestingly, one of the major banks in Singapore has a KPI on all senior managers that 10 per cent of each successive year’s revenue shall come from innovated products. They offer this, staff receive bonuses for successes and it works. They are indeed most innovative.

A further question asked is just which people should be rewarded? Just top managers, the CEO, line managers or all staff? It would seem obvious that if you consider all staff as part of a “team”, then all staff should share in rewards. Unfortunately, too few companies do this. In effect they snub their noses at the lowly ranked whilst the top managers often revel in obscene bonuses.

Below are three bonus schemes. The first is somewhat dated, the last is by far preferred.

Traditional bonus schemes

These reward people for years of service with perhaps a one per cent pay bonus for each year of service. The aim of this is to encourage good people to stay with the business.

There are a number of problems with this:

  • It also encourages poor performing staff to stay.
  • It does not reward endeavor, just longevity.
  • It must be paid even in times of bad business outcomes.
  • Staff come to expect it, so it is not really seen as a bonus. In effect it fails to “incentivise”.
  • It can be a very costly bonus for a staff member with many years of service.

KPIs based incentives

Schemes that reward people who meet certain agreed KPIs are very common but less than ideal for a number of reasons:

  • Meaningful KPIs are hard to set for certain job functions.
  • Clever operators can manipulate KPI outcomes to achieve rewards.
  • It does not align all key positions as one key position may be motivated to achieve a KPI by working to erode another department managers KPI (there are numerous examples of this).
  • Such schemes seldom trickle down to the bottom rung of workers.
  • Often one senior manager many have a KPI that has a dependence on the performance of another senior manager. For example, a sales manger’s bonus may be dependent on the performance of a marketing manager.

Performance against forecast EBIT

This approach seems to be the most equitable. With this scheme a target EBIT (Earnings Before Interest & Tax) is set for the forthcoming year. The staff do not necessarily need to know the forecast actual dollar EBIT figure, perhaps instead just a mark on a barometer graph updated monthly to show progress.

If the target EBIT is met then all staff receive a bonus payment dependent on their seniority or rank. For example a senior or “C” level executive may receive a 25 per cent salary bonus for meeting the EBIT target, the next level down perhaps 10 per cent, the next lower level five per cent, down to the bottom level of perhaps three per cent. This way, all staff are engaged with the business and are incentivized to work towards ever better EBIT outcomes.

The percentage payments as bonuses can also be linearly linked to the business performance against the target EBIT. For example if the EBIT actually achieved is double the target, then bonuses are accordingly doubled.

Such a scheme is easy to implement as well as incentivising and rewarding everybody.

Roger La Salle,

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