With Christmas just around the corner, finance managers across the land are grappling with the thorny issue of the seasonal bonus.
Set up with thought and monitored carefully, bonus schemes can be an excellent way to encourage your employees and deliver good results. Failure to plan or execute the reward scheme, however, risks turning it into a destructive force.
To help address this, finance director and consultant Kate Coles has drawn up a six-step health check for company bonus schemes.
Many companies have a bonus or share options scheme in place, but how much thought has gone into setting it up in the first place? Have you checked it WILL incentivise staff? Can the company afford it? What happens if someone gets greedy? And do your staff actually understand what the scheme means for them?
Here are six points to consider in relation to your bonus scheme.
- Is it worth it?
A bonus scheme is effectively an agreement between a company and its staff. If the staff deliver a great performance, they will get a share in the upside. Cash bonuses based on the year end results, and possibly personal performance reviews too, are the most common in business.
Any bonus has got to be seen as worthwhile by the staff, or they won’t buy into it. They’ve got to view going the extra mile as a good investment, and that the bonus at the end is fair, or more than fair, reward.
If you’re offering a pittance or putting too high a bar on the payout, your staff won’t engage. They’ll decide that having the extra time, energy and headspace is far more valuable, and may even decide to hunt for a new job with better reward prospects. As a benchmark, a month’s salary and upwards is seen by many as worth it for the average member of staff.
- Plan your metrics
Make sure you can afford any bonus scheme you dream up. You must examine the bonus trigger metrics and be confident that no other factor can knock a hole in your results yet still leave you with bonuses to pay.
This is why revenue and profit targets are often both key bonus criteria, as minimum targets here should prevent the company from paying out inadvertently. But don’t forget that cash bonuses require, yes, cash, so make sure you will have enough in your bank account when payday comes around.
- Check the numbers
How do you decide whether a payout is due? Many companies base their bonus metrics on audited accounts, which gives a level of comfort that all the target numbers are correct. But a stark reminder that this is not infallible came when Patisserie Valerie’s black hole was uncovered. The CFO and CEO had received high payouts due to excellent year end results – which were revealed as incorrect after the bonuses had been awarded.
It’s likely that Patisserie Valerie’s bonus scheme played a part in the accounting irregularities. People are fallible, and having a high reward within touching distance can be incredibly tempting. Frauds can occur in any department, for any amount; the smaller amounts just don’t make the national headlines.
Make sure all of your company’s bonus metrics have rigorous controls around them – even the ‘softer’ metrics, such as personal performance. Managers have been known to submit staff reviews that bear no relation to the actual performance of a staff member but garners them a bonus. Giving your auditors, if you have them, visibility of the key bonus metrics also means they can add the relevant metrics to their key controls list for testing.
- Keep your promises
If you’ve set up a scheme, you need to see it through. If staff have upheld their end of the bargain but the company backtracks on its promises, you won’t have many staff left.
This was recognised by British Car Auctions (BCA), who upheld the £29m bonus to We Buy Any Car’s CEO in 2018, despite a shareholder revolt. The incentive scheme had been set up four years previously and had clear results with We Buy Any Car’s share price rising over the past few years. Whether or not BCA’s Remuneration Committee had forecast the full potential of the bonus payout as £29m back in 2014, remains unknown.
- Make it work
Bonus schemes are designed to drive performance. One of the main reasons they fail is that staff do not understand how they personally can influence the metrics, and so do not change their behaviours to improve results.
Don’t just announce the bonus scheme in a company meeting: take the time to explain the metrics to your teams in smaller groups. Each team will have a different part to play in the company’s success, and you need to make sure they know how they fit into the bigger picture – just as the fabled Janitor was helping to put a Man on the Moon.
- Consider the wider picture
Shareholders and the public recognise the importance of bonus and incentive plans: it helps their investments appreciate. Yet spare a thought for how the size of the bonus pot sounds when you say it out loud, against the ongoing background of austerity and a struggling high street.
Good staff are worth their weight in gold, but will the public believe that a single person should pocket millions? Persimmon’s CEO faced a public backlash over his £75m bonus, causing him to step down. This was after he had taken a 25% reduction, down from £100m. Although Persimmon kept their side of the bonus bargain with the CEO, it has had a negative impact on their reputation and they now need a new CEO, which is not the desired effect of an incentive plan.
A fine line
If your company has a bumper year, sharing the upside with your team is a great way to reward them for their hard work.
Set up with thought and monitored carefully, you will have a brilliant incentive mechanism to encourage your team to develop your business and their own personal development.
Get it wrong, or leave metrics open to manipulation, and you risk the reward scheme turning into a destructive force.
Spend time with your HR and Finance teams and try to pull holes in different scenarios, control gateways and how you deliver the bonus messaging before you launch a scheme, and the company will be well-rewarded in return.
About Kate Coles
Kate Coles is a chartered accountant, business consultant, trustee and co-founder of enhance.finance, a coaching and mentoring business for FDs by FDs.