Bonus time – so how does it all break down?

HR managers take note. If you want your bonus system to motivate employees, first make sure there is a bonus scheme in place and then reward those who do the most with the most.

As we head towards the year end, our thoughts turn to the festive period and we begin to wonder what the new year might bring.

In this instance I am not waxing lyrical about peace on Earth and a cure for all that ails the human race – I am thinking about the annual countdown to bonus season.

While you are relaxing over a traditionally quiet business period, HR professionals around the Arabian Gulf are going into overdrive to work out how to balance the books by giving salary adjustments that will retain employees without denting the company’s ambitious profit targets (Predicted rises before Expo 2020 were anticipated to be around 4.5 per cent in the UAE).

However, when the books simply won’t balance, the answer may be to offer the employees “jam tomorrow”, which is a peculiarly British way of saying you cannot have it now but stick around and good things will come your way.

This is otherwise known as variable pay or the promise of something which might come to you ... if things work out. In simple terms this is the annual bonus cheque that many of us will have already spent before it hits our bank accounts.

Those of you in the public sector should probably skip to the next article as your sector focuses on work/life balance, healthy guaranteed pay levels and job security as the key retention factors that will motivate you to stay. However, if you are thinking of moving to the private sector or you are a progressive HR manager in the public sector and you believe that pay and performance should be linked, then read on.

Bonus plans are an accepted part of the employer-employee deal in most private sector companies, but the concept is used to different degrees of effectiveness. Bizarrely, we still come across “guaranteed bonuses”, which completely defeats the purpose of rewarding employees for stretching their performances – if it is coming to you anyway, why do more?

So what should a good bonus plan have in it and how does your scheme stack up against my checklist?

Good plans are based on the following check points:

• They are forward-looking, ie they tell you what you have to deliver at the start of the performance period, not at the year end. Unless you are a mind reader or you’ve mastered the art of time travel, it’s hard to hit goals and targets you didn’t know existed at the start of the year.

• The targets set are stretching but attainable. You already get paid for doing the basics at work via a salary. The bonus is used to push you into doing that little bit more which helps the company move forward beyond the target. Therefore the pay is truly “at risk” if you fail to deliver.

• It is financially worthwhile. Few of us will commit to pushing ourselves all year if the end result is an extra 2 per cent of pay (my wife’s company should please pay particular attention to this point). Typically the target should be a minimum of 10 per cent of annual pay to get people’s attention.

• It should ensure high performers have higher rewards. Bonus plans which are socialist in their design, that is to say where everyone gets the same, encourage employees to be mediocre. Why strive for greatness when the weakest link in the team gets the same bonus as you?

• The plan should be well understood and clearly defined. Often HR professionals equate complexity with great design when, in fact, the opposite is true. Employees and managers should be able to understand exactly how the plan will work.

• Lastly, the best plans create excitement in the workforce as they can see a direct correlation between pay and performance. You understand you have a collective common purpose that will hopefully ensure the company makes money and you get to share in that success.

Many of you may now be thinking that this sounds like some fanciful fairy tale as your experience is more of a haggle and a negotiation rather than a fact-based discussion – if this is the case your HR team need to up its game.

So as you move towards the year end, ask yourself this – do you know what you had to do to get your 2013 bonus, and more importantly do you know what is expected of you in 2014 to get a bigger one?

Martin McGuigan is a partner at Aon Hewitt Middle East, where he leads the reward consultancy practice