How should private companies handle bonuses?

We live in a bonus culture. As companies have become bigger and more complex, attracting, incentivising and remunerating senior staff has become a logistical minefield. Certainly in the UK, we have a severely wounded National Press on the lookout for the next overpaid fat cat who they drag into the bear pit and give a good kicking about his (yes usually his) remuneration. To be honest, most companies are pretty lame in how they justify their senior executives’ remuneration, probably because they can’t, so the ‘Press know they are on safe ground; giving a banker a shoeing is likely to appeal to most readers.

The concept of bonuses has evolved; originally they were developed as a mechanism to hold onto senior staff, reduce fixed overheads and to hedge against underperformance. This is when they were discretionary, however, now almost all senior directors expect a healthy bonus structure and this filters down into lower levels of the organisation. The issue is that bonuses quickly become expected by staff rather than being regarded as a measure of performance, and often the criteria for awarding them are soft, based on a variety of criteria rather than individual performance.

Harness this with the fact that many companies are fearful of unsettling ‘key’ employees, and one wonders whether we have created something that rewards longevity of employment rather than added value. I suspect the whole issue of bonuses causes more grief and upset in companies than acting as a motivational tool.

However, they won’t go away. We are firmly of the opinion in private companies that they should be viewed in different ways.

In our view bonuses should have three purposes in private businesses.

v  A high performing individual performance can have a far greater effect in a small business than in a larger one, so they can be used as a means on rewarding and retaining key individuals for specific performance. We shouldn’t be afraid of highlighting and rewarding key people for outstanding performance.

v  Secondly, people talk, especially in smaller businesses. The accepted wisdom is that bonuses should remain secret; the reality is that they won’t. You might consider using bonuses as a method of highlighting key, high performing individuals, perhaps even publicly. Use them as an incentive to others.

v  Thirdly, we all want bonuses to do two different things; reward performance and encourage longevity of service. These are two very different issues and perhaps should be treated separately. In terms of encouraging longevity, there is always an issue in smaller, private businesses of sharing equity. It’s hugely emotive, probably goes way beyond its real value. Perhaps consider two bonus structures; one for individual performance, the other for long term service, creating a long term investment pot that senior staff share in.

Our recommendation for handling the bonus conundrum in private businesses.

v  Firstly, explain (in writing) exactly how the bonus will be calculated, who qualifies, how it’s judged and who is in control. It has to be seen to be fair, properly setup and administrated and benefit both company and the employee. Make it a transparent, fair and objective. Bonuses can become a minefield if they are seen to be divisive, secret and unfair. Good companies communicate well with their staff; make sure the whole bonus strategy is open, fair, thoughtful and equitable.

v  Move away from the all or nothing approach. Have quarterly reviews with staff, properly assess their performance and create a system where they earn points towards a final, annual score. Part of the dissatisfaction with bonuses is the lack of knowledge or control of the outcome.

v  Make it a mix of individual and company performance (probably half and half.) Individual performance needs to be recognised, even in tough times. Also it needs to be a mix of hard and soft criteria, and related to individual roles.

v  If you can’t afford to pay a bonus in cash, be creative. It doesn’t mean you can’t reward exceptional performance. In a tough year, extra days holiday maybe be as welcome as cash. If a company is seen to empathise and be understanding, it can help make up for lack of cash.

Jumpstart Consulting helps small, private businesses succeed.