Managing Employee Bonus Schemes

The Benefits of Bonus Schemes

Well managed bonus schemes will positively affect employee’s behaviour, improve productivity by increasing motivation and help businesses meet their overall objectives.

Through the use of bonus schemes employees are rewarded for good behaviour and meeting or even exceeding targets. However, poorly designed bonus schemes can become less effective over time and leave employees perceiving the bonus payments as their normal salary instead of an incentive, costing the business money without reaping the rewards.

Employee bonus schemes

Setting up new bonus schemes

Bonus schemes can be based on individual performance, team performance, overall business performance or a combination of these factors. If bonus schemes are based on both individual and team performance we speak of multi-factor or multi-layered bonus schemes.

Setting up these schemes can be much more complex than businesses often realise as they need to consider all aspects of employment pay and reward.

It is important to note that bonus schemes MUST include clear rules on what bonuses are paid during notice periods, garden leave, probation periods, maternity leave, when holiday leave is taken and during disciplinary processes. Businesses also MUST ensure they continue to fully adhere to the Equal Pay Act 2010.

How to measure the performance of employees

When setting up a new bonus scheme the business needs to decide which performance indicators the bonus will be based on.

Individual performance indicators are often just set around the number of sales and the value of each sale or overall generated revenue created by the employee. However, other factors can also be included, such as:

  • Attendance levels, lateness and number of unplanned absences
  • Outstanding disciplinary processes
  • Work attitude and performance as part of a team
  • Overall quality of work

In a multi-layered approach, team indicators can be added and focus on the overall business outcome including:

  • Level of customer satisfaction
  • Overall productivity visible in the total number of sales
  • Team projects finished in a timely manner

Targets should be realistic but challenging and motivate individuals to not only improve their total sales but also better the quality of their work and behaviour.Bonus schemes

Bonus scheme timescales

It needs to be decided prior to implementation over which exact dates employees can earn their bonus by achieving their targets. Most often businesses choose to set these per calendar month, quarter or year, depending on their overall objectives.

Furthermore, timeframes in which bonuses are paid should be stated clearly so employees are never left feeling confused or even worse; feeling tricked.

Generally businesses benefit from paying bonuses the payment-cycle straight after the close of the bonus period. This, however, could prove tricky in cases where bonus schemes are more complex or where trigger points are set over a longer period than the bonus period.

Bonus trigger points

Companies can put in place additional bonus trigger points to ensure minimum company-wide standards are met before committing to paying out bonuses. Such trigger points can include reaching minimum profits, a minimum level of service quality or meeting other objectives such as absence and lateness targets.

Additionally, to set trigger points businesses are advised to include a possibility of management discretion within their bonus payment scheme terms. This can protect the employer in case an employee has met their targets, however, behaved poorly in other areas.

Bonus payments and employment law

Bonuses are known as an employee’s variable income and can be either discretionary or guaranteed.

Guaranteed bonus schemes will have the terms and payment structure included within the employment contract and businesses are legally obliged to pay the bonus if the set targets have been met, even if other areas of the business are underperforming.

Discretionary bonus schemes offer more flexibility for employers; however are often seen as less effective in creating motivation and increasing productivity.

With discretionary schemes, the employee needs to have a certain level of trust in their employer in order for the scheme to be effective. If employees do not believe they will be treated fairly and do not believe they will be given the bonus they have been promised it could cause dissatisfaction in the workplace.

However, be aware, if an employee has received a discretionary bonus for a number of years that employee may in some cases be able to argue that they have an implied contractual right to their bonus.Bonus schemes

HR bonus solutions

Businesses need to ensure they are compliant with all UK employment legislation when implementing bonus schemes and can, therefore, be easily discouraged from doing so. Our HR support services and outsourcing solutions can assist and guide businesses of any size create the bonus scheme that will help their business grow and leave their employees satisfied.