Money (that’s what I want): How to structure performance bonuses

The best things in life are free

But you can't keep 'em for the birds and bees

Now give me money (that's what I want)

That's what I want (that's what I want)

That's what I want (that's what I want) yeah

That's what I want

Money (that’s what I want) by Barrett Strong, also recorded by The Beatles

While work can bring a number of important benefits - personal growth, social interaction, improved mental and physical health, use of skills – many people are also motivated by financial reward – i.e. money.

One way that employers can attract staff above and beyond their annual salary or hourly rate is to offer performance bonuses.

However, when designing a performance bonus program, employers need to carefully consider a number of factors to ensure that the system is effective, fair, aligned with business objectives and sustainable.

Criteria for bonuses and clear metrics

How will someone obtain the performance bonus? Are there clear, specific measurable criteria for obtaining the bonus? Vague terms such as “exceptional performance” can be disputed.  What is exceptional vs good vs adequate performance? Are they objective or subjective? Objective measures can be number of sales, amount of money fundraised, % of client satisfaction scores, cost savings achieved etc.  Subjective measures can include client compliments, an assessment of performance that is then verified or calibrated amongst other scores/employees.

Having clear, transparent criteria helps employees understand exactly what is required to be accomplished as well as reducing potential disputes and allegations of unfairness.

Further, are the performance bonuses aligned with business objectives? For example, if the priority for the organisation is revenue growth, then performance bonuses tend to tie in with sales or profit targets.  But at what cost? Does your organisation also have criteria that these sales are not obtained by way of misleading or deceptive conduct or undue pressure tactics?  Many organisations tie performance bonuses with compliance with relevant codes of conduct or HR policies as well.

Individual vs team wide performance bonuses

Some organisations focus on team or organisation wide or individual bonuses or a combination.  There are advantages in team wide or organisation wide bonuses in that everyone shares profits if the company does well, but this can be a disincentive for high achievers because even if they do well, if another team does poorly then everyone is dragged down.

Similarly, individual only incentives can reward strong performers, but can also incentivise the wrong behaviours – focussing on individual targets at the expense of other areas of the organisation, which does not assist the overall business to maintain sustainable profitability.

A combination of both individual and team or organisation wide bonuses can assist to mitigate these issues but can also be more complicated to implement.  Some teams may feel that there is inequity across different departments or roles.  For example, sales teams naturally lend themselves to performance bonuses and many expect it but the contribution of support staff, administrative staff and other areas that “keep the lights on” also should be considered.

Timing and frequency

How often will a bonus be paid? Annually? Half yearly? At the end of the financial or calendar year? When a particular project has been completed? There are pros and cons with each option – shorter term incentives can provide additional motivation but can be difficult to administer and plan budgets.  Similarly, particularly where there are subjective assessments on performance, a calibration process may be required – after all, most line managers want to say their team is the best and everyone deserves a bonus – but this may not calibrate with another team.  Market cycles and industry norms may also impact the timing and frequency of bonuses.

From a financial perspective, employers need to be clear on taxation requirements and whether bonus payments attract superannuation.  More frequent bonus payments do add an administrative workload to both HR and payroll teams which should be taken into account.

Summary

A well designed, strategic performance bonus scheme aligned with organisation goals can be motivating, build your organisation’s value proposition and incentivise staff in the right way.  However, it is important for employers to be aware that they need to be sustainable over the long term, particularly in downturns or in difficult times for your organisation.  Either way, clarity about the performance bonus structure, eligibility, time periods and payment schedules is critical.  Regular updates throughout the relevant period would also assist with maintaining motivation.  Otherwise, it will just be all about…

Well, now give me money (that's what I want)

Whole lot of money (that's what I want, whoo)

Whoah, yeah, you know I need money (that's what I want)

Now give me money (that's what I want, whoo)

That's what I want, yeah (that's what I want)

That's what I want

Remotely Legal can assist employers and boards on all aspects of employment law, including advising on difficult people issues, reviewing policies and assisting with enterprise bargaining.  Remotely Legal can train your boards and management teams on how to deal with incidents and investigations.  Remotely Legal can also be your fully outsourced HR and people legal team.

RL Investigations, part of Remotely Legal, are a team of highly experienced and qualified lawyers and investigators, who can function as your independent, external investigation team providing fast, comprehensive and reliable investigation reports, workplace culture reviews and suggestions for organisational improvement. RL Investigations can also help your internal HR or investigation team to improve their investigations and assist decision makers in considering the right factors when making key decisions.

This blog is general advice only.  Please obtain legal advice in relation to your specific circumstances.  This blog was written by a human so please seek permission if you wish to copy any of it.