Stephen Archer examines how the bonus culture has affected UK companies, and how businesses can move forward and introduce alternative reward schemes that will motivate, engage and retain staff in the future.

The furore over bankers’ bonuses continues. Recently US President Obama expressed his ‘outrage’ over the $450m paid in bonuses to staff at Insurers AIG after the company had been bailed out by the government. The US Treasury Secretary is going to force it to hand back $165m.

This incident mirrors the widespread fury felt in February when Royal Bank of Scotland looked set to pay millions of pounds in bonuses after being bailed out with taxpayers’ money. This didn’t happen of course because the government intervened, but the incident gave bonuses a very bad name.

Bonuses have become a dirty word, synonymous with avarice and unfairness. The term conjures up, quite rightly in some cases, visions of overpaid bankers receiving massive payouts each year as a matter of course, regardless of their performance.

As Alastair Darling stated last month, “The party is over when it comes to bonuses,” indeed, the whole bonus system is set to be shaken up with new international rules introduced to curb the bonus culture being introduced soon. Companies will be forced to review the way in which their bonuses are paid and how they relate to individual and team performances. They will be under close scrunity and the current systems will no doubt be replaced with more transparent ones. This is very good news as, in many cases, the bonus culture had got out of control. However, there is a real danger in calling for the end of bonuses in business.

Some critics believe that the whole system of bonuses is fundamentally wrong and unfair. They believe that people should simply be paid for the job they are doing and nothing more. However, this approach can betray a hair shirt mentality or worse still, a culture where reward, recognition and the pursuit of ‘the extra mile’ are frowned upon.

Human nature

We must remember that we live and operate in a western culture where organisations are managed by human beings with all of the foibles of human nature. People mostly respond to reward and recognition. In many instances, bonuses can be hugely beneficial to businesses as part of a carefully considered rewards package – helping increase competition, motivation, productivity and business performance.

What is clear is that bankers’ bonuses, and indeed any bonus scheme, must be linked to performance, which goes beyond the basic requirements of the job. In recent years, companies have got it wrong. They have used bonuses as a short-term retention tool in place of a long-term employee engagement strategy.

The whole idea of a bonus being an unexpected payment for outstanding performance seems to have been forgotten along the way, with bonuses being an expected part of the remuneration package. I have heard of many people talking about ‘guaranteed bonuses’, but this is a contradiction in terms. It cannot be regarded as a bonus if it is guaranteed.

Over the next year, very large bonuses with tenuous or, indeed, no links to performance will be greatly reduced and in some cases disappear.

Shareholders and the regulators will not tolerate this. Hopefully, we will see a more realistic approach to bonuses where they are more proportionately linked to salary levels and payments. Let’s hope also that businesses go back to basics and reward bonuses only for additional efforts and results attained by individuals or teams over and above expected performance levels.

It’s not all about money

But let’s not forget that bonuses are not the only way of rewarding performance – companies should think about alternatives, such as implementing well-planned recognition programmes, which can be positive and profitable. Financial remuneration is not always the answer, particularly if the rewards are carefully tailored to individuals in the company.

Small business owners have never had the luxury of being able to pay out big bonuses, but very often have long-serving and loyal staff because they value them and often build relationships based on mutual respect and trust.

Companies with high retention rates are generally those that make a long-term investment in their staff. They see them as individuals and tailor reward packages to them; they ensure they have a good work-life balance, involve them in the business, empower them to make decisions and thank them for their contribution. Bonuses of course contribute to employee retention when added to this mix; however, they are not an effective way to keep staff long term when used in isolation.

Many companies who saw bonuses as being central to their employee retention strategy no doubt have to change their thinking in light of the financial crisis. But, if they are scared that they will start to lose people because they are no longer paying out large bonuses, then they arguably hired the wrong people in the first place.

It is also a myth that companies think they have to pay the most and give out the biggest bonuses to get and keep the right people – the current mess in the banking world suggests they had attracted the best, but they were not good enough.

We need a bonus culture in the future that is more transparent, performance based, proportionate and less widespread, and companies need to go back to basics and ensure that bonuses are just a small part of their employee reward strategy.

Stephen Archer is director of Spring Partnerships.