Throughout my career, I have sat in several meetings where management believed that their people can be motivated by the minute metrics of the bonus systems. The basic idea was that management decided what it wanted to achieve and arranged a payment system in a way that they believed will elicit greater effort and commitment.
I have also worked in organisations that have Performance Related Pay.
I tend to dislike these systems for the following reasons:
- It can incentivise the wrong behaviour, e.g. staff push customers to buy a product that is not suited to them (for example, in financial services)
- To the member of staff who has done the work, the actual award can seem paltry compared to the effort invested
- Unequal salaries can cause envy and division within the workforce leading to “lower performers” withdrawing commitment
- I believe that most bonus systems are opaque and difficult to understand. And justify. This can be counterproductive and demotivating
- Evaluation of achievement can be very subjective and is often influenced by the quality of relationships
- There’s a risk that time is spent by competent and senior people in devising ever-more detailed systems: time which could perhaps be spent on other initiatives
I believe the basic salary the average employee receives should be the rate for the job and I don’t think it’s fair that they should be paid lower than average. If people are performing poorly, that needs to be dealt with creatively not just by paying them, say, 80% of the market price.
So is there ever a case for a bonus?
Some will say that certain jobs cannot be filled without a bonus. Sales people, for example, are used to getting a car and a bonus as part of their package and won’t come to an organisation that does without. I am not sure about this. If the basic salary and terms are fair, and the organisation sells good stuff without pressure I think the people will come. A good experience at Sofa.com led me to ask if the staff were incentivised. I was told they were paid a good salary and they were motivated by a good product. They felt the price and quality, and superiority of their product, made it “sell itself”.
The John Lewis approach
John Lewis is another company that provides a great customer experience with knowledgeable staff who take the time to help you choose. I have spoken to staff who take instruction booklets home at night, or who use their own phones to get you information in the shop. John Lewis seems to encourage long service, and employ “characters” who know all about beds, or fountain pens, or fridges. They get a bonus if the company does well.
At Notting Hill Housing we introduced a bonus system. It is a very simple one. Each year we set a budget that should deliver a surplus. If we make more we pay a bonus - the same amount to everyone in the company. The most that can be made is £1,000 extra (if we make £8m more than we planned). Morally justifiable, the bonus is paid from surpluses not from rents and it is paid on top of market median pay which all staff receive regardless of the market conditions or success of the company.
We brought in the bonus to help everyone focus on a key success factor – our profitability. This is what enables us to deliver our mission: affordable homes for low-income households. At NHH we have lots of staff who focus on customers, whose activity is only obliquely linked to profitability. But by giving everyone the same bonus we make sure all benefit from the company’s success, not just those building or selling homes for example.
By concentrating on only one metric we get the whole company focused on that thing – the overall success of the company as expressed in its surplus. The Board has the right to reduce or cancel a bonus if we do badly on other fronts e.g. if customer satisfaction tanks. But in the last seven years we have paid the bonus every year.
Because all eligible NHH staff benefit from the bonus it is quite an expensive commitment to make – if we give everyone £1,000 this costs about £1m per year. We feel it is justified for the following reasons:
- Some of the value created by staff effort is repaid to them
- It incentivises teams to make or save money, enabling us to meet our objectives
- We are all in it together in terms of objectives and benefits; our system unites teams and individuals
- Our lower paid staff receive the same level of bonus as senior staff – up to £1,000 a year. It is much more valuable to the lower paid staff – as a percentage, and due to lower tax take - than to the senior staff. This helps retain our front-line staff as they effectively earn a little above the median level, which can be just the London Living wage.
- Because the whole process is transparent and relates to our published accounts, all can be sure that the bonuses are fairly distributed.
- Like our annual staff parties, the bonus helps the staff bond and feel part of a successful and happy team.
At present we are piloting a performance related pay system with our sales teams at their request. There are also occasional ‘thank yous’ given to teams or individuals for very special achievements, e.g. £25 vouchers, breakfast, or a drinks party. Very occasionally we give leaders an extra £1,000 for truly exceptional work; these are one-off sums discussed and agreed by the whole Executive.
What is your experience of Bonus Systems, Performance-Related Pay and Rewards Systems?