How to create a high-value bonus scheme
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As consumers we strive to achieve value from the money we spend, whether it’s through the satisfaction of a good meal or a quality piece of furniture that will last years.
Getting value doesn’t mean being cheap – it’s about maximising the impact of every pound spent to improve productivity and/or performance in a way that is right for the business.
Getting value is about being clever with the distribution of that spend, focusing on aspects that can make the biggest difference.
Getting value is about the less tangible elements in terms of employer brand, improved attrition and employee morale.
Getting value from your bonus scheme is just as important as any other investment you make. For me, it is all about developing a better understanding of business measures, financials and results and more importantly what the business is looking to achieve – ensuring that reward decisions can be more informed and based on evidence. It goes without saying (but not appropriate in all circumstances), that any bonus or incentive scheme needs to be self-funding. To guarantee this, there are fundamental steps I undertake with clients:
Get underneath the success metrics. What does the business want to drive and where are its areas of focus? For Commercial, is it revenue, margin or a combination? If company-wide, is it profit, sustainability, growth, customer satisfaction or a combination?
Get beneath the financials. For Commercial, how much does £1 of sale cost? What do the product or service margins look like? For company-wide, where are they against their targets currently? What does employee performance look like at the moment and what are the significant and marginal differences in employees’ performance that can drive that additional success?
Get an understanding of the financing. For Commercial, how much are they prepared to give away? Have they already accounted for incentive/commission costs? How does that stack up? For company-wide, how much more will the business have to do, over and above current achievement, to fund a bonus scheme?
Test the current scheme for fairness and equity. Identify where money is being spent and the impact. Understand the impact of the scheme on equity, for example; differentials, peer to peer, levels and gender. Identify the fairness of the scheme, for example; bias in terms of product, function and location.
Test current % bonus opportunity and payments against the market. Is the ratio of base to variable typical of the sector? How does ‘total cash’ stack up against the market? What trends in scheme approaches are out there? What do companies at a similar point in their life cycle do?
Test the current scheme against productivity and performance. Can the business effectively measure performance? Does it know the function of roles, levels and business unit? On the Commercial side, where do sales happen without trying? What are the more challenging areas? For company-wide, how can they align each role and individual motivations to business goals to achieve business success?
Design principles. Having done the exploration and understood the ideal, the principles should be easy enough to articulate. Ensure they stay true to what the business is looking to achieve. Senior leaders’ engagement and agreement in these are critical.
Design metrics. Employees, whether in Commercial or Support functions, need to have a line of sight and understanding of how they can make a difference; how their performance and/or competency can impact business success.
Design mechanics. The bonus pot triggers and targets have to be clear and developed with logic in mind. It is important to ensure there is no confusion or conflicting elements within the scheme and that the right behaviours are encouraged. Does the scheme achieve what it needs to achieve and doesn’t disadvantage already high performers?
Design communications. The scheme can only be effective if it is delivered with considered and clear communications. The communications need to be inspiring and provide clarity around expectations and what success looks like as a whole and as an individual.
I hope this blog provides the tools and practical ideas you need to challenge your current schemes, helping you test the effectiveness of the tangible, and equally important, less tangible measurements of success. If you need help designing a smarter bonus or incentive scheme that your business will get value from, please get in touch: 020 3457 0894.