Fat cats with the cream of the bonus crop may argue that financial carrots such as these drive performance but what about those on the minimum wage or in the rungs of middle management? Annie Hayes, HR Zone Editor talked ‘bonuses’ with members to find out if they really do drive productivity.

Do they work?
If we believe Douglas Mcgregor’s ‘theory x’ style of management in which he stipulates that workers are essentially lazy beings who will slack off at any available opportunity we can see how the bonus scheme works. In essence the promise of a cash reward will trigger a worker onto greater productivity, supposedly, then could otherwise be achieved. But is this the reality in practice?

Stephen Walker of Motivation Matters believes that it depends upon the scheme. LCA bonuses, or those that Walker terms as ‘Life Changing Amounts’, the kind that usually end in lots of zeros are according to him effective but expensive but do in Walker’s view drive people to extraordinary performance.

Whilst the ‘x percent’ (XP) bonus schemes, which whatever the percentage is based on salary with a performance related additional element are subject to more question.

“XP bonuses are more ordinary, usual and work in the short term. The game quickly becomes to do as little as possible for as much as possible. Careful design of the bonus scheme is necessary to avoid this game, the overhead to run the scheme to prevent “working for bonus” instead of “working for the results which drive the bonus” is often substantial. However the more bound the bonus scheme is with rules and exceptions the less attractive it becomes.”

Alan Barry, Personnel Officer for Devon County Council believes that the success of a bonus scheme goes beyond its structure.

“In my experience they tend to work well for short term objectives such as increasing productivity to meet short term demand, retention during reorganisations etc but they offer diminishing returns in the longer term as they become included in peoples expectations rather than a motivational force.”

And warns Barry they can even have negative effects when staff who have come to rely on them as part of their income fail to receive the payment that they expected.

“They can also be a cause of friction between staff and perceptions of unfairness can have negative effects on morale/motivation. For example if I believe that your targets are easier than mine the scheme may backfire.”

What’s the link with productivity?
Earlier this year, reward specialist Innecto People claimed that bonus schemes failed to help improve workplace performance, despite them coming top of the list of motivational incentives. Most HR Directors 82% also admitted they had no system in place to measure or evaluate how effective bonuses were.

If this is to be believed it is difficult to see how any link with productivity can be claimed. Walker believes that the link is as good as the scheme’s design. Many CEOs have come under fire for walking away with million pound bonus deals despite diminishing profit lines and generous termination bonuses for those whose performance has been questionable. In these cases there clearly has been no link with productivity and the scheme has been manipulated and worked in the favour of the under-performing employee.

Barry believes that for certain professions measuring the link with productivity is too intangible. “How do you measure a teacher’s productivity for example? Organisation culture can also play an important part in the link between bonus schemes and productivity – they tend to favour more individualistic and competitive environments such as sales where the people tend to enjoy competition but can be seen as negative influences in more unionised/public service sectors where individualism is less culturally acceptable.”

So how do you ensure that bonus schemes are fair and consistent especially for rewarding jobs that are not sales driven?

Walker suggests the following: “The best scheme I have seen, in terms of people’s interest, was based on a sizeable portion of after tax profits going into a pot of money allocated to each employee. The amounts were significant, worth a year or two of salary for most and everyone seemed to know the company’s profit and what they had in the pot themselves.” But this only seems to work well if things are going well.

Barry says that it hinges on perceptions. Openness about the criteria will help he says and Iain Young, HR Manager for Cofathec Heatsave Ltd agrees he says that regular reviews of the rules are the only way to ensure a bonus scheme is equitable.

Do they simply fuel the pay divide between the fat cats and those on the NMW?
So if context and position are all important do bonuses purely fuel the pay divide between the fat cats that can earn them even when performance is questionable and those living on the national minimum wage (NMW) where bonuses tend to be in line with a meagre salary?

HR Consultant, Sue Kingston believes they can cause a rift between different factions of the workforce if they’re not seen to be fair.

Barry agrees and says that bonus schemes for senior management are often a cause of resentment where they’re not viewed as having been fairly earned.

“Our local paper reported that a bonus was paid to the senior police officer who led the job evaluation scheme that caused major problems for the Devon and Cornwall force. The problem usually arises from the perception of large rewards being paid despite the perceived failure of those receiving them. Similarly, rewarding managers for the hard work of their staff can cause resentment if the staff feel that their own reward did not reflect the effort they made.”

But says Barry as well as fuelling the pay divide they can also work the other way, “Many workers earn more than their managers because of the bonuses they achieve or are paid via overtime.”

Are they the only way to motivate staff?
HR Consultant, Sandra Beale of SJ Beale HR Consult believes that bonuses only work if the employee is motivated by money.

“I recently worked with a client who offered their best performers the opportunity to drive a high performance car on the open road and this seemed to be very popular.” Beale believes that the key is finding out what will drive a worker to better performance.

Being creative with rewards can pay dividends adds Beale who suggests that the carrot of a financial bonus is not the only way to drive performance. “Employers need to be creative, offering the chance to win a weekend break, a holiday abroad or retail vouchers can work just as well.”

Pay and financial reward, it seems is not the only motivator but non-fiscal rewards will only work if our monetary needs are satisfied in the first instance.

Walker also says that achievement is not always denoted by the size of your pay packet: “Money can be a measure of achievement. I am old enough to remember the company car grades: 1.6L, 1.8L, 1.6GL, 1.8GL, 1.8GLX and the super deluxe. Everyone knew their rank by their car.

“Alternatively, the number of carpet squares in your office? Whether you have a filing cabinet, bookcase and a cupboard? Perhaps, at the pinnacle, how many windows or even a corner office with windows in two walls!”

Director of Human Resources for Veolia Water UK, Keith Luxon says that despite the cliché, saying a simple ‘thank you’ is often worth much more in motivational terms then a bonus is six or more months later.

Helena Peacock, HR Director of publisher the Penguin Group says that culture and demographics are what’s important when looking at the value of rewards.

A passion for books is what lures employees to work at the organisation and the draw of two free ‘pulp’ (books returned by shops) together with the opportunity to take advantage of a 60% discount on Penguin titles is as much a contributor to keeping workers happy, motivated and retained as any bonus scheme.

When do bonus schemes fail?
“Some people would say that any bonus scheme that gives everyone maximum bonus is working. However you could say, with equal validity, that a scheme that always pays maximum bonus cannot be working properly.

“Schemes fail when the driver for the bonus is an artificial construct that is not a genuine measurable objective of the organisation,” comments Walker.

Again it seems as though keeping the structure simple is best. Kingston supports this view and says that bonus schemes only fail when they are over complicated and restricting in as much as who gets what and why.

Young believes that it goes beyond this. That in some organisations they fail because they’re simply unfair. Fuelled by poor management, unfair payments and unreachable targets they’re bound to backfire and demotivate staff.

Luxon says that the problems arise when they get stale and management fail to replace them.

Having a system that is open to manipulation and fails to encourage desired behaviours is also the result of a poorly structured bonus scheme. Earlier this year PC World took the decision to end their commission scheme because they wanted to stamp out sales chasing that was taking precedent over customer service.

Following a restructure they’ve implemented a new scheme in which staff will be rewarded for working together and offering good customer service.

Can you reduce bonuses for poor performance rather then reward for good performance?
Brian Boyd posted a question to the Any Answers forum asking this exact question. Most members agreed that it would be unlawful where an agreement isn’t in place with employees.

Walker, however, believes that a scheme such as this could be justified where the alternative is a site or company closure. “Pay cuts with the possibility of recovering the cut and earning a bonus could be a better bet than job cuts.”

Luxon says that reducing bonuses for poor performance is not the way to deal with capability issues though.

“A bonus should be just what it says on the tin…a bonus for doing something over and above what you are paid for. Poor performers should be taken through corrective action or disciplinary routes and this shouldn’t get mixed up with rewarding great achievements.”

Barry agrees and adds that schemes that reduce bonuses for under performance offer a very negative form of motivation.

“It’s all stick and no carrot – but it might work in some situations. In ancient China the practice of rewarding soldiers before a battle was seen as highly effective – they had more to lose and would fight harder but that’s another time and culture. In a way this mirrors the approach taken by one of my employers when a smoking ban was introduced – the first person who broke the rules was fired which certainly stopped everyone else in their tracks but hardly motivated them.”

HR Zone members agree that for a bonus scheme to achieve results the system has to be simple, transparent, well communicated and equitable. Where manipulation is rife and fat cats get rewarded for diminishing profits ill-feeling will quickly ensue not only from other employees but from all stakeholders. So they must achieve their aims, pay at the right rate and drive the right kinds of behaviours.

As Walker says: “Bonus schemes are designed to get as much as possible for as little as possible. Your staff probably view them in the same way.”