27 Jun 2009, 3:46 p.m.

Bonus Schemes Should Be Handled with Care

I was recently chatting with a colleague about bonus schemes, and it occurred to me that every single company I've worked for (that's four, if we're counting) has implemented at least one such scheme, and the outcome is always the same: pissed-off employees.

There seems to be a kind of unquestioned assumption that employees want bonus schemes, and that employers are being good employers by introducing them. Such schemes are, without exception, described as being a "benefit". After all, who doesn't enjoy receiving a bonus with their pay cheque? What could possibly go wrong?

I'd like to argue that bonus schemes can go wrong. In fact, they are harmful more often than not, and should be handled with care.

Bonus Schemes

I should clarify that I'm not talking about the multi-million pound payouts enjoyed by captains of industry or those in the banking sector, nor am I talking about sales-type roles where numbers are everything, and remuneration reflects that. I'm talking about bonus schemes for normal, salaried office-based workers, such as - you may not be surprised to learn - computer programmers.

The crux of the matter is that once you introduce a bonus scheme, the bonus becomes expected. Anything other than the bonus being paid in full, on time is a bitter disappointment to the worker. It's not that we're selfish: we simply have rent and bills to pay, or a family to support.

That disappointment seems to be the rule, rather than the exception. Every single bonus scheme I've ever experienced has ended in at least one of the four following ways. The scheme either:

  • does not pay out
  • pays out less than was expected
  • pays out much later than was expected
  • pays out just fine once or twice, and then is cancelled

Needless to say, each of those outcomes represents a way in which you've just disappointed your staff.

Outcome: Negative.

Profit-Related Schemes

Profit-related schemes are especially debilitating. This is primarily due to the fact that, unless your company employs less than ten people, the majority of your staff have absolutely no way to influence the profitability of the company: profit is a matter that is in the hands of other people. For all of the "we're all part of a team here" platitudes you can muster, that's a simple fact of work life.

Like any bonus, if it does arrive, there is no feeling of achievement, since it was expected and budgetted for. Moreover, you open yourself up to the risk that maybe you don't make those profits after all. When the bonus doesn't arrive, what message have you just sent to your staff? You've told them, loud and clear, that the company they work for isn't actually doing so well; worse than expected, in fact.

Furthermore, to really bring the point home to them, you've penalised them financially as a result. That's not going to be terribly good for morale.

The next thing that happens is inevitably that the finger-pointing begins. Those in the trenches will be looking long and hard at certain high-up individuals whose roles do influence profitability, and assuming that they aren't performing well at all. If you're the one making the bonus policies, chances are that you're among the select group that's in the firing line for the blame and the bitterness.

Outcome: Negative.

Performance-Related Schemes

This is such a major can of worms that I don't know where to start. How on earth do you measure the productivity of, say, a programmer? That's probably a whole blog post in itself, but it's actually irrelevant anyway. This is because no matter how much thought and planning you put into the scheme, when it comes to the crunch, you're left with two options:

  1. Pay everyone the bonus, in full
  2. Make the decision that certain individuals will not receive the bonus

Can you see where this is likely to fail? If you opt for the former case, then there simply is no point in jumping through the hoops of putting a complex process in place, and making everyone go through possibly the most stressful part of any job - the performance review.

If people know they will receive the bonus regardless, then this isn't performance related anyway. Nobody gets a warm feeling of achievement when the bonus arrives, because it was going to happen anyway. It was expected. (Can you see a theme emerging here?).

So you're left with the latter case, whereby a percentage of your staff will receive the bonus, and the remainder will not. Congratulations, but you've just told half of your employees that they're failing at their jobs, and again you've penalised them financially because of it. You can probably work out what kind of feelings that will engender.

And yet the half that do get their bonus still don't get the warm fuzzies, since all they've actually achieved is to escape being told that they don't suck at their jobs, which isn't much in the way of validation.

Outcome: Negative.

Hints of a Deeper Problem

Call me old-fashioned, but surely the whole point of employing someone to do a job is that you pay them a fair salary, and they do the best job they can? If your workforce are holding back and not giving 100%, then you probably have bigger problems than can be solved by waving bonuses around.

Maybe they're lacking motivation because they don't feel that their salaries represent their true value. Maybe they haven't been given the training they need, or maybe you just hired the wrong people. Bonus schemes, even if implemented with the best will in the world, tend to make things worse.

So all I can say to employers is put the bonus schemes to one side for a moment and look at the bigger picture. Have you got good staff? Are they challenged, motivated and rewarded accordingly? (and yes, I'm partly talking about salary here).

Foster that kind of environment, and you won't need to waste your time with bonus schemes.

Outcome: Positive.

Further Reading

Posted by Simon at 01:53:00 PM
28 Dec 2011, 10:21 a.m.

Nikolaj Bomann

Awesome blogpost. I'm about to develop our new strategy for Bonus Schemes, and reading this was really an inspiration :-)