Bonus Schemes – Time to get Back to Basics

However, is it possible that the issues with these schemes are driven more by how they are deployed and utilised by employers than by anything else?

The re-emergence of the ‘Survivors Bonus’

Some of the criticisms levelled at annual bonus plans are certainly fair. In many employers, a regular and stable payout history has led to a culture of entitlement where schemes have stopped being genuinely variable. In these environments, employees usually get a positive performance rating and simply expect the bonus scheme to payout every year as it has become a simple ‘survivors’ bonus. Many of these type of bonus schemes disappeared during the last recession when pay budgets reduced significantly, but they have made a rapid reappearance over the last few years.

The recent history of annual Bonus schemes

During the recession, survivor bonus schemes didn’t work as budget restrictions meant that there simply wasn’t enough money to fund them. In this environment, it became a question of how to distribute limited funds to best effect. We saw more emphasis on performance and the payout/ performance thresholds needed for an award were increased, as were the potential upsides of delivering that performance. This saw fewer people getting an award, but the awards could be of higher value for the top performers. In theory, schemes became more variable with awards reserved for the most deserving. For those who didn’t receive an award, options to express their frustration were limited as the recession meant that there were limited job opportunities elsewhere.

However, with a return to a growth economy following the recession, we have seen employers relaxing their definitions of performance, often inadvertently, and once more moving to ensure that as many employees as possible receive some form of payout as they respond to two recent trends. The first is the challenge of managing the ‘great resignation’ in a post-Covid world where the challenge of replacing leavers has been a business-critical issue. The second has been the ‘cost of living’ crisis where employers are fully aware of the challenges facing their people and therefore want to put as much money in their pockets as possible to retain them and keep them motivated. In this environment, informing an individual that they would not be receiving a bonus would lead to a very difficult conversation which most employers want to avoid.

Following recent news regarding the economy, which has seen inflation falling to its lowest levels in nearly three years, employers need to be ready to rethink their approach to bonus awards.

A loss of focus

Over the whole period described above, bonus plans have been used in lots of different ways for many different reasons as they have been put under pressure to meet a diverse range of business objectives. For example:

• are they intended to be an incentive or a reward?
• are they supposed to reward performance or not
• and how is performance defined – individual, team or business’s
• are they intended to differentiate reward between individuals or not?
• are they genuinely variable or within closely defined parameters?
•  are they motivating and engaging employees or simply retaining them?

Trying to deliver across all of these challenges has resulted in some confused scheme designs and implementations that unsurprisingly struggle to deliver value as they have lost their focus and purpose over time. For example:

•  One organisation had a scheme that was driven by a complex algorithm that nobody seemed to understand and which created many strange outcomes that managers could not influence e.g. one group of administrators received an annual bonus award of £127 and nobody could explain why. It turns out that the algorithm was built in 2010.
• One organisation had a scheme that was so complex and convoluted and with so many different performance metrics that it could not differentiate bonus awards up or down as the metrics simply cancelled and averaged each other out.
•  One organisation had a scheme which used performance metrics that the business could not track or measure as they did not have the financial systems in place. As a result, it was difficult to tell an employee that the metric had not been achieved so everyone was told they had hit that target.
•  One business used a 100% centrally controlled and market driven scheme that managers had no influence over and who, as a result, were not involved in communicating outcomes at all, only being made aware of issues and inconsistencies after the awards were communicated to individuals.
•  One organisation had a scheme which gave a pot of money to managers for them to distribute amongst their teams as they saw fit with very minimal guidance (that was frequently ignored anyway). This resulted in decisions which were confusing to employees and which line managers struggled to justify or explain when challenged.

In all of the instances described above, the schemes were creating more issues than they solved, and they led to employees (and often Managers too) feeling confused, disappointed and disengaged.

How do you balance all of the potentially conflicting demands on a bonus scheme?

The short answer is that you don’t. It is wrong to try to create a scheme which does too much as it will result in confusion and will simply dilute the scheme’s impact too much. It is far better to take the scheme back to basics and to focus on just a few things that the scheme needs to deliver and ensure that it does those things very well.

This degree of focus does mean that the bonus scheme might need to be changed every few years rather than being left to simply run and run, but this is not an issue and will help to ensure the scheme remains aligned to business (and employee) needs. There is no right or wrong answer on what this focus should be as it needs to be determined for each business, based on their specific context and aspirations.

Difficult Conversations?

When a bonus scheme is being implemented effectively and is genuinely differentiating reward, it is likely to involve conversations which could be classed as ‘difficult’ with a percentage of individuals getting a lower than average or even a zero bonus. These are never going to be easy discussions for managers to have with an employee but a scheme that is clear and has well defined criteria for payouts will help in this regard. Individuals might not like the news that their award is low, but they should be able to understand the reason why. If handled well, these conversations can be very positive and be used to help drive a performance culture and mindset in the business.

Bonus Schemes and Pay Transparency

Many organisations would benefit from a review of their bonus plans as they fall into the confused and mixed message buckets described above. However, pay transparency regulations in the EU are creating a much wider and more immediate need for employers across the region to review their schemes. Pay Transparency regulations are due to come into effect across the EU by June 2026 which, for many employers, is only one complete bonus cycle away now.

The new regulations will have an impact on the design of bonus schemes and employers need to review their approach to ensure that it will remain compliant. For example, employers will need to communicate with employees and be able to describe how the bonus scheme operates in some detail including who is in/ out of scope, how awards are determined and what can impact that award. This means that any schemes involving a high level of discretion in setting the award level will need to be redesigned. Even those who operate less subjective schemes with more guidance around awards, need to think about how ready they might be to communicate that guidance across the business and whether that is still the most effective approach today.

Its time to take stock

Employers have had to deal with a lot of change in recent years as a consequence of various economic, political, social and regulatory changes as well as the global pandemic of course. These changes have led them to evolve many aspects of how they do business and who they do it with. This has resulted in some fundamental changes to their overall business strategy and related talent and people approaches and yet the core bonus approach still persists. As a result, there is a good chance that the bonus scheme will be misaligned with current business and employee needs. If allowed to continue like this, it will only contribute to the poor reputation that such schemes have for delivering limited value.

Employers need to look at their wider reward strategy and approaches and bonus schemes should certainly sit towards the front of the queue as a key part of that.

It is possible to have a bonus scheme which breaks away from the norm and which delivers value to your business and people, but it is not going to happen by accident or by itself. It requires some thought and planning and a back-to-basics mindset that starts from the foundation level of really understanding the value you want your scheme to add and aligning this with the needs of your business and your people.

How can we help?

Reviewing your reward strategy and/ or your bonus plans can be a daunting and challenging topic to address, and this is where our Reward Services team can help. Our people have years of experience in delivering practical and pragmatic solutions to clients across a range of business sectors in Europe, the UK and beyond.

If you would like to learn more, please get in touch with your usual Blick Rothenberg contact or Stuart Hyland using the form on this page