Pay always eclipses all other concerns when it comes to employee priorities, but well thought-out bonus schemes can really aid performance and retention, says Peta Hodge
If you are looking to recruit, you can’t avoid the issue of pay. The Employee Benefits Research 2008 found that when employees were asked which factors would influence their decision to change jobs, a massive 74% put pay in their top three. By comparison, the next most important factor, location, was cited by just 27%.
Whereas the importance of pay is obvious, the impact of bonuses on recruitment is less clear cut and tends to vary according to business sector and even the specific job on offer, says Anne Fairweather, external relations manager at the Recruitment and Employment Confederation. “If you are looking at a sector such as sales, bonuses are going to be quite a large driver, [however] if you’re going for a job in the public sector, you may be more motivated by things such as holiday entitlement,” she suggests.
Even so, when it comes to recruitment, money matters. Annual research published by the Chartered Institute of Personnel and Development (CIPD) in June this year on Recruitment, Retention and Turnover, found that of the 86% of employers reporting recruitment difficulties, getting on for half (44%), cited “higher pay expectations” of candidates as a reason.
That said, Nicola Monson, a research associate at the CIPD, says that the importance of pay as a barrier to recruitment, shouldn’t be overstated: “70% [of our respondents] cited ‘lack of necessary specialist skills’ – [making it] the key recruitment issue for most employers.” She adds that when analysing the impact of pay as a recruitment tool, it should not be considered in isolation: “You have to look at the package as a whole [and include] things like flexible working, learning and development opportunities.”
Justine Woolf, senior consultant with reward consultancy firm Innecto, takes a similar view, and highlights the importance of looking beyond recruitment, to staff retention. “It’s not always just about money. An employee might go for a headline salary but then find the company is not all it’s cracked up to be. Whenever I analyse exit interviews, I find that enjoyment of the job and opportunities for growing [the employee’s] career are top priorities,” she says.
That said, rolling research by consultants Mercer called What’s Working, based on the workplace experiences of 3,000 organisations worldwide, suggests that pay has more of a motivational impact long term than many theorists have previously believed.
Patrick Gilbert, principal at Mercer, says the findings are based on a more rounded definition of pay that takes into account relative pay, the clarity of the pay structure and the individual’s perception of pay, among other things. “For many employees, pay is a way of determining how they are regarded within the organisation. Even if someone is paid above market rate, they may still feel hard done by if their pay level is low [relative to others] within the organisation.”
Mercer’s findings also suggest that, overall, pay is a more effective motivational tool than bonuses, often seen as the motivator’s motivator. This could simply be because, in most cases, pay is worth more than bonuses, suggests Gilbert.
However, going forward, employers’ approaches to using pay and bonuses to help recruit and motivate staff may change. With the credit crunch and rising unemployment, it is unlikely that pay and bonuses will remain immune to the toughening economic climate for long. Many employers have already decided to follow government warnings to resist inflationary pressures when negotiating new pay deals.
Although Woolf says she has yet to see any evidence that employers are changing their approach to pay and bonuses in light of the credit crunch, she adds: “Organisations that aren’t doing so well may look to single out the high perfomers they want to retain rather than rewarding across the board.”
Professor Shaun Tyson, emeritus professor of human resource management at Cranfield School of Management, adds: “Pay is rigid downwards – employers can’t reduce pay, but they will start to look at pay increases, particularly managerial increases. There will be emphasis on performance-related pay for managers and I can see productivity schemes coming in, where employers will be looking for increases in productivity for the same cost.”
The increasing interest in performance-related pay highlighted by Tyson is a mere continuation of a well-established trend. The CIPD’s Reward Management Survey Report 2008 shows 70% of employers use some kind of variable pay.
However, Mercer’s Gilbert warns: “Most organisations do a poor job of linking incentive pay to performance, too often bonuses are treated as an entitlement rather than incentive schemes.”
Most UK employers review their bonus schemes for sales staff on a regular basis. However, bonus schemes for support staff, where measures of success may be less clear cut, are often left to fester.
Given the economic slowdown employers should ensure that the bonus structures that are in place attract and retain key talent. The targets that are set should be aligned with business goals. Many organisations, including Lloyds Pharmacy and Friends Provident (see case study), have reviewed their structures in recent years, resulting in a move away from purely financial measures of success to incorporate targets such as improved customer service and staff innovation.
Whatever targets are set, however, success must be measurable as well as achievable. Woolf says: “I go into companies that are offering bonuses worth 30% of salary and I say, ‘Have you ever paid out?’ and they say, ‘No’. A bonus scheme that doesn’t pay out is not worth having.”
The effectiveness of a bonus scheme is also severely undermined if targets are met but bonuses are not paid out in a timely fashion.
Bonus schemes should also be simple and well communicated. “People need to understand why they are getting their bonuses or they will be bemused when they don’t get paid [out]. People are easily confused – avoid tinkering [with the bonus scheme] if it’s not going to deliver significant improvements. It is also important to look at market data. Your bonus scheme may have been relevant two years ago when you set it up, but things may have moved on. You need to decide whether you want to be a median or upper quartile payer. For the best people, you probably do have to pay top rates,” adds Woolf.
Case study: Friends Provident
The approach to bonuses at financial services company Friends Provident has changed quite markedly over recent years.
Having previously introduced a scheme based on individual performance to run alongside its existing corporate performance-based scheme, it has now introduced a third element, based on delivery of key corporate objectives, following the company’s announcement of a major strategic review on 31 January 2008.
For 2008 the company’s objectives include making savings of £40 million by the end of 2009 and meeting the Treating Customers Fairly requirements of the Financial Services Authority.
Pete Harris, reward and benefits manager, admits that the shift away from purely financial targets can feel counter-intuitive at times. “You can get into the strange position of paying out a fair amount when [financial] performance is not good,” he says.
However, on the other hand, he says bonus schemes are designed to motivate. “It is important to recognise when people are working hard. OK, the economic climate may be tough, but you don’t want to be in the position of saying ‘your performance has been outstanding, but sorry, you’re not getting a bonus’.
As far as recruitment is concerned, Harris is in no doubt about the importance of the bonus structure for senior managers. “It’s still critical. The trend has been to base a larger percentage of salary on performance. Shareholders want to see senior managers delivering,” he says.