Coming up fast - Crash Course - The Right Kind of Carrot

Coming up fast - Crash Course - The Right Kind of Carrot - Your business is ticking along happily but it's lacking that certain whoosh! so beloved of Department for Enterprise advertising in the late 1980s. What's needed, you conclude, is to tempt the wag

by ALEXANDER GARRETT
Last Updated: 31 Aug 2010

Your business is ticking along happily but it's lacking that certain whoosh! so beloved of Department for Enterprise advertising in the late 1980s. What's needed, you conclude, is to tempt the wage slaves with a bit more carrot. Why not wave a little lucre in front of your employees in the hope that it will galvanise them into enhancing your bottom line? But how to devise a bonus scheme that won't pay half your workers more for doing what they already do, and leave the other half feeling they've been kicked in the teeth?

WORK OUT WHAT YOU'RE REWARDING. Tania Maidment, performance and rewards consultant at remuneration specialists William Mercer, says: 'Look at what your business objectives are and what behaviours you need to achieve, in order to see whether a bonus scheme is appropriate.' The activities needed may vary from year to year, or within the year. You have to make sure that short-term gains are not encouraged at long-term cost.

SET A HURDLE. Set a target for the business - eg, a profit level - which has to be achieved before anybody gets a pay-out.

CATER FOR INDIVIDUALS AND TEAMS. It's not unusual to set a bonus for all based on company performance, then move on to assessment and reward on an individual basis. The buzzword is 'line of sight' - can the individual see the actions they can take to make a difference? If some work entirely in teams, set team targets and assess the bonus for them as a group.

PAY MOST, BUT NOT EVERYONE. Oliver Overstall, a senior manager in human capital at Arthur Andersen, says: 'It's best to make most people a winner.

The psychology is very sensitive. Those who don't get at least the average bonus will feel like losers, which is bad for morale.' But he adds: 'If someone is a poor performer, you shouldn't pay them. It sends a powerful message that you don't want them to hang around if they can't improve.'

KEEP IT UNDER YOUR HAT. Posting up the annual bonuses on the company noticeboard will cause resentment and dejection. But explain why bonuses are paid, and how to earn them.

MATCH REWARDS TO RISK. Save the biggest carrots for key players, those who have most influence on the success of the business. Says Maidment: 'You have to compete with what executives can get in the recruitment market.

But by offering a higher percentage bonus, you encourage the people who can make the most difference to put in a lot of commitment. They can also be booted out more easily, so you compensate for the risk involved.'

CASH IS KING. Share options have their place, but the value of your bonus can go down as well as up. Upgrading somebody's company car has a sting in the tail: it'll cost them more in tax.

KEEP A BIT BACK. If you pay your big hitters their bonus all in one wad, they'll be on the phone to headhunters next day. 'For these people, it's best to have some kind of rolling payment,' says Overstall. 'They may be paid part straight away, with the remainder rolled up with some kind of matching so that it is worth more when they get it in three years' time.' For those receiving smaller sums, he advises against paying in instalments. 'It will lose some of its impact, and it might be seen as part of the normal rations.'

DO SAY: 'If the firm does well next year, we hope to pay most employees between 5% and 10% of their salaries as a bonus. Exceptional performers will get more, poor performers less.'

DON'T SAY: 'I don't need to manage this business. I just dangle a few bonuses and then wait for the results.'

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