Why your bonus structure can make or break your company

Some companies believe that good financial incentives are the key to attracting and retaining top talent. While this may be true, how these bonuses are structured is just as important. It’s not very motivating for staff to hear they’re getting lower or no bonuses due to poor financial results, only to hear later that the top execs were paid out massive bonuses regardless.

Last year amid the mess that was the Carillion collapse it emerged that the top executives received bonuses of almost a quarter of a Million in 2016. This despite financial targets not being met and the company reporting losses.

However, Carillion is not the only major construction firm that has been guilty of these practices. Interserve was also making negative headlines, from their failed EfW projects to concerning financial reports. Yet in the midst of this a newly appointed chief executive was paid 125% pro-rata bonus for just 4 months work.

Better bonus approaches

While the argument is that top execs carry a great deal of responsibility, is there a better way to structure bonuses so that it benefits not only the individual, but the company as well?

Companies often use percentages to calculate bonuses. While this may seem fair, it benefits the top earners more than those lower down the ranks. 10% of £50 000 is significantly more than 10% of £5000. Careful consideration needs to be given when structuring bonuses, keeping the actual pay out in mind if they are to be used as incentives.

The debate on individual or collective bonuses will largely depend on the company culture. Where there is an emphasis on collaborative effort and this is an important part of achieving outcomes then collective bonuses may be an option. However, this can also be a double edged sword where some individuals or business units end up carrying others, putting in extra effort to ensure they reach targets to get bonuses while others sit back.

The SMART approach links bonuses to Specific, Measurable, Achievable, Relevant, and Time-bound goals, in other words tangible results rather than promises of performance that are subjective. It holds employees on all levels accountable because the figures don’t lie. This approach also protects the business by only paying out bonuses when it can afford to.

What approach does your company take?

If you need advice on bonus structures and what to consider, contact us today on Tel: 020 7183 0255, we’d be happy to help.