Guest opinion: Duncan Brown, assistant director general CIPD on bonuses

Duncan Brown from the Chartered Institute of Personnel and Development talks about bonuses

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UK average earnings growth resembles a cardiogram: steady flat periods followed by regular, short jumps. The upsurge each spring is explained by bonus payments, which accounted for 0.6% of the 4.6% earnings increase last year.

Some 52% of organisations in the CIPD’s Annual Reward Management Survey operate schemes and one-in-seven staff received a bonus in 2004.

But bonuses are not new. Amid an 11% profits rise, John Lewis paid 63,000 staff a bonus of seven weeks’ salary earlier this year. Its scheme dates back to the 1920s. Other big retailers such as Tesco, which made a record payout of £220 million to 150,000 staff, have also run schemes for years.

What is new is the expansion in application and amounts, with an additional £1.5 billion pumped into UK schemes in 2004. Traffic wardens, cabin crew, drivers, job centre staff, even your local GP are all now likely to have cash incentives.

The Royal Mail, for example, has received considerable publicity for two such schemes. Postal staff received an annual Share in Success payment of £1,074 each after record annual profits and an attendance bonus lottery scheme helped to reduce absenteeism by 11% with 37 staff winning new cars.

Bonuses look great when things are going well, and who would turn down a payment? But they appear less attractive when the economy and payouts take a dip, and there is a strong undercurrent of criticism. Some claim, including writer Will Hutton, that money doesn’t motivate and that they can cause “low morale, weaken(ed) workers’ commitment and’…high labour turnover”. And shouldn’t postal workers be coming to work anyway, without needing extra incentives?

Research in the CIPD’s Guide to Bonus and Incentive Plans suggests schemes do affect employee behaviour, though this tends to lessen over time. So the Royal Mail may need to change its attendance scheme next year.

The chief problems tend to be negative effects on unmeasured performance and game-playing by employees to maximise payments. Postal regulator Postwatch complained of Royal Mail focusing reward bonuses on financial results rather than customer service.

Press allegations in autumn 2003 suggested that dozens of employees at directory enquiry company, The Number UK, which owns the 118 118 service, meanwhile, may have been giving out incorrect numbers in order to speed up responses and maximise bonuses. The firm, however, reported that just one staff member was sacked for carrying out the practice.

Correspondingly, the top-performing organisations in the CIPD study Rewarding Service operated performance pay schemes, but always incorporated customer service measures.

So how do you decide whether and how to use bonus plans? Firstly, a thorough review of performance requirements and reward arrangements is required, to clarify what bonuses can achieve, and how they can be designed to achieve it.

Key requirements include: using a few, customised performance measures, with a clear line-of-sight between employee actions and payments; giving as many participants as possible a chance to ‘win’ early and often; and extensive employee communication and involvement.

Asda, for example, has operated the All-Colleague Bonus Scheme since 2000. It pays out against store profit targets, and represents part of a wider effort, with regular Colleague Circles in each location, to listen and engage employees in improving performance. The latest multi-million pound payout from Asda’s scheme may induce heart palpitations among some chief executives. But in our hyper-competitive environment, more of them should be considering both how to use bonus schemes, and using them more effectively beyond the confines of the boardroom, to involve employees in driving up performance.