Bonuses spreading, but do they work?

Looking at effectiveness of variable pay programs

There is a clear trend in compensation surveys — employers are moving towards a risk/reward culture. There is an increasing emphasis on pay tied to results, with fewer positions offering only guaranteed pay.

Not surprisingly, variable pay is most common at the executive level. But what is surprising is the extent to which the use of bonuses and incentives is spreading throughout organizations, to all levels of staff. Also surprising, and challenging, is the de rigueur nature of payouts of executive bonuses.

These trends raise important questions for HR professionals. How well are current variable pay programs working? Are they worth the work that goes into their design and implementation? What are the implications for expanding them beyond the executive suites? How must they change in the future?

Executive bonuses: Incentive or entitlement?

In looking at bonuses for executives, it’s important to note incentives are not only commonly offered, they are now almost always paid out.

The Toronto Board of Trade’s annual surveys, and other market surveys, confirm the majority of employers now offer executives some type of bonus or incentive. Our surveys found two-thirds of Toronto-region employers provide variable pay to executive and management employees.

Nationally, the numbers may be even higher, with 89 per cent of Watson Wyatt respondents reporting they provide incentives for at least one employee group. Mercer tells us payment for management performance made up 17 per cent of average salary costs last year.

As these numbers increase year after year, so does the reported percentage of payouts. This year, our surveys found nearly every executive entitled to a bonus, 91 per cent, actually received one. Watson Wyatt and Mercer studies produced similar figures for 2007.

Does this mean virtually all executives are meeting or exceeding their organizational goals? Or, are organizations setting relatively low standards so executives can expect bonuses for something less than excellence?

Both explanations likely have some truth to them. The Toronto region is doing well economically, so it stands to reason many organizations and executives are hitting targets.

However, the use of bonuses has become so common that this extra payment may now be seen as more of an entitlement than an incentive. If this is the case, how much longer will such bonus programs act as effective performance enhancers? If bonuses are losing their punch, what will replace them? And, if they are perceived as entitlements, will it be possible to replace or remove bonuses without lowering the perceived value for a given position?

Employers may soon be turning to HR professionals for innovative answers to these challenges.

Non-executive bonuses: Driver or demotivator?

Our 2007 surveys show incentive programs are spreading through the ranks, all the way to administrative and support staff. Nearly one-half of the organizations surveyed, covering 50,000 employees, now offer bonuses at these levels.

However, some surveys are also showing that, implemented incorrectly at these levels, incentive programs can actually have a negative effect on performance. This danger is particularly high when employees don’t see a connection between their activities, business outcomes and rewards. Without that “clear line of sight,” staff may be left feeling they have more at risk, but lack the control to turn that risk into opportunity and action.

Of course, bonuses at this or any level will act as a disincentive to performance if they rarely pay out. Picture a labourer in the company warehouse hearing he will not get his bonus again this year because the executive team took a chance on a new technology that didn’t work out. His hard work, he might feel, makes no difference and goes unrewarded.

Variable pay: Just one more tool

Employee satisfaction and engagement are essential criteria to drive business performance. Variable pay schemes can be useful in tying those two concepts together.

However, like any other HR tool, such plans must be thoughtfully designed, carefully targeted and properly implemented. They are not magic bullets for driving performance and can backfire. Here are five ways to make sure organizations get it right:

• design a plan in support of the organization’s strategic objectives;

• ensure clear line of sight between employee performance and rewards;

• communicate the plan until there is common understanding;

• implement the plan with continuous training and feedback opportunities; and

• ensure transparency and integrity of the plan.

Mary de Reus is a vice-president of the Toronto Board of Trade, which surveys hundreds of Toronto-based organizations, associations and governments every year. For more information visit www.bot.com/compsurveys.

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