Why Most Bonus Schemes are a Waste of Money

Why Most Bonus Schemes are a Waste of Money

April 8, 2016 Remuneration

The topic of bonus and incentive schemes and how they apply to employee behaviour is a complex one. To understand this fully, it is important to consider the impact of individual preferences, individual needs, company cultures and the mechanics of the schemes themselves.

I get really disheartened when I talk to CEOs and business owners who every year, give generously to their staff through discretionary bonus payments and variations of profit sharing schemes. They know only too well from experience that most staff won’t appreciate what they receive, a good percentage will be disappointed with the amount they receive and very few will take the time to say “thanks”.

The disappointing part of the whole situation is that in return for their generosity, businesses receive less than one pay cycle of increased effort and productivity from their staff. Worse still, if employees have come to expect a bonus every year, and subsequently view the bonus as an entitlement, they will be putting in less effort than when they did not expect a bonus!

Having researched this topic for many years and discussed the impact of bonus payments on productivity and performance with hundreds of businesses, here are the key pitfalls to avoid if you don’t want your bonus scheme to be a complete waste of money:

Pitfall # 1: Lack of Clarity

Ask your staff “do you know what you need to do to get a bonus?” If they can’t answer you or worse still, describe the minimum expectations of their job, they won’t be focused on doing the things you want them to do to drive the business forward. Bonus schemes fail when there is no clarity around what people need to do to receive them.

Be crystal clear about what is expected if you want to drive productivity and performance.

Pitfall #2: Paying Bonuses to Staff for “Doing Their Job”

Ask yourself what you expect from each of your employees in return for the salary and benefits that they receive from the business. Once you are clear on this, ask yourself what results and deliverables you would be prepared to pay more for. The later defines what “great” looks like and is what bonuses should be paid for if you want to drive a high performance workforce. Paying bonuses to employees for “doing their job” creates a sense of entitlement – you might as well just give them a salary increase!

Link bonus payments to “great results” not “good results” if you want to drive productivity and performance.

Pitfall #3: Treating Everyone Equally

When it comes to incentives the worse thing you can do it treat everyone the same. Imagine this, both your top Project Manager and your worse Project Manager receive the same “Christmas Bonus” as a thank you for being part of the team. Regardless of how you position the money, your top Project Manager will feel cheated – after all, they contributed so much more than their poor performing colleague. This will result in your top performer being disengaged and feeling negative about the business. On the other hand, your poor performing Project Manager has just had their bad behaviour reinforced!

Differentiate bonus payments based on contribution or you will disengage your top people!

Designed well, bonus and incentive schemes are a critical part of a high performance work culture. They will keep your fixed costs down, create greater earning capacity for employees, improve retention and focus behaviour on the results the business needs to succeed.

For a free consultation or review of your bonus or incentive schemes contact Talent Code at info@talentcode.com.au or 1300 559585.

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