How to introduce an Employee Bonus Scheme

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Bonus schemes are another tool to assist with employee retention, motivation and to help employers attract new employees. The following guide talks through Harwood HR’s guide to setting up a bonus scheme.

What is the desired outcome of introducing a scheme?

The success of your bonus scheme will largely depend on your reasons for introducing the scheme in the first place. You may want to introduce a scheme to motivate a whole team for their performance or to reward an individual for meeting their objectives, hence encouraging more of the same behaviour.  

Defining the Bonus “pot”

Deciding how the money for bonus payments is calculated is important for ensuring that the bonus scheme works for the business rather then becoming a cost that is difficult to meet.

Different methods of defining the bonus pot include using company Gross Profit Margin or defining a level of revenue that needs to be reached to activate a bonus payment. The level of revenue should be a “stretch” target and be above the companies expected revenue levels to ensure the scheme is cost-effective.

If new business is being used as a factor for bonus payments, then a company should also consider the retention of existing business as a bonus criteria to avoid all employee efforts being aimed at new business at the potential risk of losing current clients.

Other considerations when introducing a Bonus scheme

Keep it simple

Your bonus scheme needs to be simple and easy for the employees to understand. It also needs to be straightforward for managers and finance to deliver.

Pay frequency

How often will the bonus be paid? Will this be a monthly payment, quarterly, annually? This needs to be decided

Eligibility

A bonus scheme can be introduced from; day 1 of employment, after successful completion of probation or from after 1 years service. Whatever you choose, this should be detailed to the employee.

Different levels of pay-out depending on seniority

You could consider offering different levels of management different cuts of the bonus. It’s recommended that this is done on the level of the job role (eg Director, Manager, Supervisor, team member) rather than on the person to avoid any challenges around unfair treatment.

Non-Contractual

We would always recommend keeping any scheme non contractual as this gives employers the flexibility to change or withdraw the scheme depending on operating conditions.

Potential Challenges/problems

Employers should always have evidence and justification for any bonus payments.

If pay is based on individual performance or you are to differentiate payments to employees of the same grade, then evidence should be in place to demonstrate that the decision was made fairly.

A bonus scheme can sometimes have a negative impact by driving the wrong behaviours. For example, encouraging employees to become picky over what work to focus on to ensure they get their bonus, these can cause both operational and employee relations issues. The expectation of how an employee can earn their bonus must be beneficial to the company from every angle to have the desired outcome.

Other ways to incentivise a team

If you decide that a bonus scheme is not the right cause of action at this time then these other benefits can also help achieve the companies aims of attracting, motivating and retaining staff: 

Increase annual leave entitlement– increased annual leave for each year of service. Giving employees their birthdays off is also a fabulous way of showing gratitude. (simple yet effective).

One-off payments – a one-off payment is based on a specific time period or project. This requires clear goals and targets to be set and agreed with the team with fair administration.

Employee Discount platforms – Companies define an amount which allows employees to access discounts at cafes, gyms, cinemas, etc.

Employee Assistance Programme – counselling service and support for the team run by an external provider.

Time off for Volunteering – allow the team to get involved in local community projects.

Harwood HR – HR Consultants providing HR Consultancy and HR Outsourced Services.  We provide clear, cost effective HR advice. For a free consultation, please contact us on:

0117 439 0119 or info@harwood-hr.co.uk

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