Once seen as an incentive primarily for sales staff, bonuses are now given much more widely to reward everything from attendance and service to performance and company profitability.
Duncan Brown, director of HR services at PricewaterhouseCoopers, says: “About 90% of organisations have some form of bonus scheme. Employers like the concept of variable pay. When they are doing well, employees do well too and when times are bad, the employer gets the benefit of reduced costs.”
But although the concept is popular, many employers are currently looking at restructuring their bonus schemes. Brown adds 40% of delegates at an event earlier this year indicated they were in the process of changing schemes. “Economic conditions are driving people to change [them]. Conditions have changed so much that with some schemes, an employee won’t get anything, so it’s not worth having at all,” he explains.
Where this is the case, a restructuring can help to incentivise employees. Karen Thompson, director of policy and research at the Institute of Payroll Professionals, says: “This is happening in the retail sector at the moment. As spending has dipped, it is no longer fair to give a bonus based on sales, so many retailers are moving to schemes that are based on customer service and satisfaction instead.”
Regulatory change can also force employers to alter what they offer. Many employers in the financial services sector, for example, are finding this is currently the case as the Financial Services Authority’s initiative, Treating Customers Fairly, is influencing companies to move away from sales-focused bonus schemes to ones that incorporate customer service measures.
A change in organisational structure can also trigger the need for a new bonus arrangement. For example, if a call centre has been restructured so staff work in a team, it may be appropriate to introduce team bonuses to supplement individual awards. Paul Bissell, managing director of Strategic Reward Solutions, says: “A balance between individual and team bonuses can help to create better teamwork.”
In some cases, staff pressure could also prompt the need for a revamp, particularly if employees are aware of how other similar organisations structure their schemes. Here, offering a competitive bonus can help with recruitment and retention, says Thompson. “Within a sector, employers will operate very similar bonus schemes. Therefore, if one company improves its bonus package, others will follow or risk losing staff to the competition,” she adds.
Sometimes the need for change may be simply because the old scheme is set to expire. New Star Asset Management initially incentivised all staff with shares when it launched in 2001, then offered subsequent joiners options. The original scheme is set to expire at the end of 2009, so a replacement is now being put together.
Whatever the reason for a restructure, employers must be careful about what they do and how they do it. Stuart Dawkins, director of corporate communications at Alliance & Leicester, says: “A bonus scheme has to be a reward for strong performance. As such, it needs to be aspirational and motivational, but also achievable.”
A good bonus scheme can also help to focus employees on the factors that are important to the business, for example, within the retail sector this includes customer service as well as sales. But Rupert Merson, a partner at BDO Stoy Hayward, warns that if a scheme is structured incorrectly, it can lead to dysfunctional behaviour. “It is difficult to reward every aspect of a person’s role and highlighting certain areas through the bonus scheme can force them to focus on these,” he says.
Employers should also consider what objectives they want a new bonus arrangement to achieve. “There will be employees who are worse off under the new scheme, as well as some who are better off. Think about whether these are the outcomes you want from the scheme,” says Merson.
Including some flexibility in a scheme can enable employers to reward employees who merit it or those that they are particularly keen to retain.
Consultation with staff about changes to schemes is essential, and employers should bear in mind they are legally required to do so under the Information and Consultation of Employees Regulations, which apply to all organisations with more than 50 staff.
Thompson says: “This can help employers find out what sort of bonus will motivate [staff] but will also make them feel engaged.”
How easy it is to change a bonus structure will depend on the type of scheme. Mark Taylor, a partner with law firm Jones Day, says: “A pure discretionary bonus will state that the employee is entitled to a bonus at the employer’s discretion, and it is often linked to the organisation’s performance. Contractual bonuses, which are written into the contract, are much harder to change and will require the employee’s agreement.”
In some cases, even if a scheme is intended to be discretionary, it may come to be regarded as contractual. “A manager may have innocently written a bonus letter, which becomes a supplement to the employment contract. Ideally, employers need a hybrid scheme, which states they have the contractual right to withdraw it if necessary,” says Taylor.
Even if a bonus scheme is not contractual, replacing it can still cause problems. “There is active case law regarding variable pay. If someone has had a regular discretionary bonus for a number of years and it is taken away, they could have a case against their employer,” says Brown.
Getting it wrong can have serious implications. If an employee is still working, they could bring a claim against their employer for deductions from pay or for a declaration as to entitlement. “If they are no longer working for an employer, for instance if they have been made redundant, they could claim breach of contract,” says Taylor.
But he adds some employers will try to get away with making changes without proper consultation. “It takes a brave person to bring a claim against their employer while they are still employed, especially when it is a tough job market. However, employers need to be pretty confident about doing this because they could lose out in terms of productivity due to lower morale.”
It is also important to consider how the bonus interacts with other parts of the reward package. Currently, paying a bonus will often be cheaper than paying base pay because it is not included in the calculations for any pension contribution. But this is set to change with the introduction of personal accounts in 2012.
Bonus plans can have knock-on effects in other areas, says Thompson. “If a bonus is contractual, it will form part of average earnings for maternity pay. There is no cap on statutory maternity pay, so if a woman receives a £1 million bonus, this will be factored into maternity pay.”
Although many organisations have to restructure schemes due to changes in circumstances, Bissell recommends that they are also reviewed regularly. “Regular maintenance to ensure it is still relevant and motivational can be very beneficial,” he says EB Bonus restructure five-point plan 1. Get a team together to review the implications of different bonus structures. This will help employers determine who they particularly want to motivate. 2. Consult employees and trade unions on changes if necessary. Even if employers have a small organisation of less than 50 employees that isn’t covered by the Information and Consultation of Employees Regulations, good communication can improve the success of a scheme. 3. Give employees notice of the changes. This will enable them to get used to the new structure and undertake any necessary training. 4. Monitor the performance of the scheme regularly to ensure that it is still achieving its original objectives. 5. Tweak the scheme every year or two. This will keep it fresh and enable both the employer and employees to adapt to different challenges and market conditions.
case studyHouse of Fraser extends bonus scheme Earlier this year, high-street retailer House of Fraser began a major investment programme, refurbishing its existing stores, building its online presence and opening four new stores.
To help incentivise employees, it has also restructured its bonus scheme, extending it to all 6,000 staff. Mark Gifford, chief financial officer, says: “In the past, we offered bonuses to store support centre staff, head office staff and store managers, but we wanted everyone to benefit under the new scheme.” The new scheme, which is based on store profitability, also reflects the business’s new structure. In November 2006, it was acquired by Highland Acquisitions and became a private company. “Our employees are integral to the continuing success of the business. The extension of the bonus to all employees allows senior management to reward staff for their performance and the contribution they make,” says Gifford.
Before the new scheme was introduced, staff were sent a letter outlining the deal and store managers also explained how it would work. Gifford says that employees have reacted positively to the change by stating that the bonus scheme shows their contribution to the company is valued.