How can bonus schemes be used as an employee benefit?

There are many ways of offering employees incentives for good performance such as bonus schemes, commission and profit sharing. Overall, the strategy is sound but there are attached pros and cons. For example, is your business right for such a scheme; how will it be received by your employees – and is it fair?

Resorting to a bonus scheme if there are serious motivational and operational problems within your company will not necessarily provide the long term answer. Communication is essential, highlighting the benefit to potential candidates and existing employees.

Bonus schemes – a brief overview
Employee bonus schemes are generally a positive strategy and can provide real motivation.

They can also serve to increase employees' identification with a company and align them with its operational objectives – giving them a vested interest.

Companies also extend their bonus-schemes to cover a wider range of factors, reflecting a broader set of business objectives. In addition to financial considerations; bonus schemes increasingly take into amount factors such as attendance, customer service, quality, safety, team and individual performance or various HR- related measures.

However, some companies operate successful schemes that focus on one particular key objective – most often profits or productivity. In difficult economic situations, for example, moving to a bonus-related pay scheme can also help reduce fixed salary overheads.

Profit sharing bonus
One of the most common forms of a bonus scheme is straight forward profit-sharing. The advantages of this are that it is relatively simple to formulate and tends to reward people equally (even if their percentage of profit is different).

It is good for promoting a sense of 'working together'. Of course, higher performers may feel that they are 'carrying' the non-contributors.

Bonuses for increased performance are very much common practice, especially in large organisations such as John Lewis, Tesco etc.

All-employee bonus schemes
One powerful advantage of an all-employee bonus scheme is the message it sends out to staff. It suggests a level of trust between employer and employee and enhances the view of a shared culture.

As such it is also a powerful communications tool for organisations. The bonus, and its allocation, can be aligned with the organisation's viewpoint.

Where collective efforts and teamwork are essential, the attraction of an all-employee bonus scheme is self-evident. Each part is dependent upon the other.

If your organisation is highly specialised where key players are vital for the good of all, perhaps a creative industry, the company-wide scheme is not always appropriate. Indeed, it can act to de-motivate the key players or workers who feel they are carrying the burden.

Too large and unwieldy
In some cases, where a company-wide scheme operates within a large workforce, the figures need to add up. Creating a bonus for 50,000 employees carries a high administrative cost, and if the actual bonus per person is quite low, it may not act as an incentive – and it will carry a high cost to administer.

Individualised bonus schemes
The classic individualized bonus is in commission-based industries, such as selling or investing, and in this case the reward is for meeting targets, mostly as an individual and sometimes as part of a small team.

The great strength of an individualised bonus is that it matches a 'performance-based culture'; the disadvantages are that it requires a high degree of management and administration.

Having an element of variable pay dependent on business performance means, of course, that the company only pays out where performance and profit has increased.

Shares and shared rewards
Operating a profit-share, rather than individualised bonus scheme really depends upon the way the organisation works. Whether the scheme is funded through lower fixed pay or by business performance, the important thing is that a scheme is affordable, deliverable and that the wider objectives and values of the business are clearly integrated.

One option is to operate a scheme that pays out in shares rather than cash. Such a scheme acts as 'the best of both worlds'. Shares can be allocated in terms of value, which the individual can then cash in, or accumulate, becoming a cash incentive or a longer term investment assuming the company is listed.