Bonus plans increasingly include non-profit performance targets
Recession has led employers to adjust bonus plans as they react to shifting priorities

Despite their negative reputation, bonuses are a valuable way of communicating priorities and targets, reinforcing desirable practices, and giving feedback on performance, according to a recent research report by the Performance and Reward Centre (PARC). The report, “Developing Performance Incentives and Sustaining Engagement in a Volatile Environment”, also concludes that in 2010 bonus plans included a wider range of targets and measures as companies focused on long term sustainability rather than short term profit.

“Bonuses have come in for intense criticism recently – mainly due to bankers’ pay but also in other cases when organisations have paid large bonuses despite declining or even loss-making performance,” says Kevin Abbott, director at PARC. “Our research shows that, in fact, bonuses are a valuable business tool and many companies have adjusted their arrangements so that they stay relevant, achievable and fair in the current economic conditions.”

In-depth interviews were conducted with Reward Directors from UK, US and Continental companies. The results showed that around three-quarters had changed their incentive plans over the last two years. A third had specifically changed their bonus arrangements as a result of the recession, often citing the need to ensure that staff were engaged through a very difficult period. In many cases, additional targets or measures were introduced to incentivise staff against operational or strategic goals rather than purely profit-based measures.  These might relate to cash flow, efficiency, customer service, talent, project delivery, safety or the environment.

“For many employees in the private sector, some form of bonus plan is a normal part of their reward for doing a good job,” continues Abbot. “For most employees these are not substantial sums but an element of pay based on the achievement of financial or non-financial targets that are important for their role, their team or the company as a whole. Bonus plans can enhance the communication of what needs to be done and so reinforce the motivational leavers of business direction, clarity and purpose. They also enable employees to share in the success of hitting business targets. Nonetheless, as management determine such payments, it remains important to recognise that these constitute investments in the business, alongside activities such as research and marketing, and should be reviewed with the same rigour as other such investments.   It is shareholders’ responsibility to assess management’s effectiveness in making these decisions over time.” The report, jointly prepared with US based partners WorldatWork, was recently presented to members and other interested parties, including shareholder organisations, at a meeting chaired by David McLeod.

9 February 2011

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