UK average earnings growth resembles a cardiogram: steady, flat periods, then regular, short jumps. The upsurge each spring is explained by bonus payments, which represented 0.6% of the 4.6% earnings increase last year.
Some 52% of organisations in the CIPD’s Annual Reward Management Survey operate schemes and one in seven employees received a bonus in 2004. The sectors with the highest bonuses are retailing and financial services, where they can represent more than 20% of earnings.
Bonus schemes are not new. John Lewis, whose scheme dates back to a trust formed in the 1920s, has just paid 63,000 staff a bonus of seven weeks’ salary as profits rose by 11%. Other big retailers such as Tesco, which last month announced a record payout of £220m to 150,000 staff, have run similar schemes for years.
What is new is the expansion in application and amounts, with an extra £1.5bn pumped into UK schemes in 2004. Traffic wardens, airline cabin crew, delivery drivers, job centre staff and even head teachers and GPs are all now likely to be subject to cash incentives.
Royal Mail attracted publicity last month for a new scheme in which postal workers received an annual Share in Success payment of £1,074 each after record annual profits of £537m. And in an attendance bonus lottery scheme in the second half of last year, which helped cut absenteeism by 11%, 37 staff won new cars and thousands won holiday vouchers in the prize draw.
Politicians such as Gordon Brown support the flexibility of bonus schemes, while chief executives such as Adam Crozier at Royal Mail sing their praises - which is hardly surprising when the average bonus for a FTSE100 company director is more than £250,000.
Bonuses look great when things are going well. But they appear less attractive when the economy and payments take a dip. According to Will Hutton, bonuses cause “low morale, weaken(ed) workers’ commitment and high labour turnover”. Shouldn’t postal workers be going to work anyway, without extra incentives?
It can be argued that bonuses depress wages, with retailing jobs such as checkout operators among the UK’s lowest paid. Much easier for, say, Tesco chief executive Sir Terry Leahy to take some downward flexibility on £55,000 a week than for people earning £10,000 a year.
Research in the CIPD’s Guide to Bonus and Incentive Plans suggests these schemes affect employee behaviour, though it tends to lessen over time. Royal Mail may need to change its attendance scheme next year.
The chief problems tend to be a negative effect on unmeasured performance and game-playing by employees to maximise payments. Typically, as regulator Postwatch complained of Royal Mail, bonuses reward financial results rather than customer service. Directory enquiry company The Number sacked 30 staff, allegedly for giving incorrect numbers to speed responses and maximise bonuses.
Correspondingly, the top performing organisations in the CIPD’s Rewarding Service study operated performance schemes, but they always incorporated customer service measures.
So how do you decide whether and how best to
use bonus plans? It’s not a decision to be taken lightly. A thorough review of performance requirements and reward arrangements is required to clarify what bonuses can achieve.
As far as the ‘how’ is concerned, key requirements include: using a few, customised performance measures, with clear line-of-sight between employee actions and bonus payments; giving as many participants as possible a chance to win as often as possible; and extensive employee communication and involvement.
Asda’s All-Colleague Bonus Scheme, operating since 2000, for example, pays out against store profit targets, with regular Colleague Circles in each location to listen to staff and engage them in improving business performance.
The latest multi-million-pound payout from Asda’s scheme may induce heart palpitations in some chief executives. But, in our hyper-competitive economic environment, more of them should be considering how to use bonus schemes, and use them more effectively, beyond the confines of the boardroom to involve employees in driving up their business performance.
n Duncan Brown is assistant director general, Chartered Institute of Personnel and Development