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Bonus plans play a valuable role in performance

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Despite their negative reputation, bonus plans are a valuable way of communicating priorities and targets

Despite their negative reputation, bonus plans are a valuable way of communicating priorities and targets, reinforcing desirable practices, and giving feedback on performance, according to a recent research report by the Performance and Reward Centre (PARC).

The report also finds that in 2010 bonus plans included a wider range of targets and measures as companies focused on long term sustainability as well as immediate profit delivery.

The report, Developing Performance Incentives and Sustaining Engagement in a Volatile Environment, reviewed the links between incentive plans and engagement and investigated how a selection of major organisations had managed their incentive plans through the recession.

The findings indicate that the influence of reward may vary with the type of employee role and the organisational setting. In general, incentives are not the primary driver of motivation/engagement with leadership, strategic direction and personal opportunity being more important. Nonetheless they do reinforce and support performance via communication and focus on key targets. Indeed over recent years incentive plans have become a supporting element of the wider performance management system in many organisations. However, poorly functioning incentives can demotivate or disengage.

"Bonuses have come in for intense criticism recently – mainly due to bankers’ pay but also in other cases when organisations have paid large bonuses despite declining financial performance," says Kevin Abbott, director at PARC. "Our research shows that, in fact, bonuses are a valuable business tool and many companies have adjusted their arrangements so that they stay relevant, achievable and fair in the current economic conditions."

To find out what companies had been doing, in-depth interviews were conducted with reward directors from UK, US and continental European firms. The results showed that around three-quarters had changed their incentive plans over the last two years. A third had specifically changed their bonus arrangements as a result of the recession, often citing the need to ensure that staff were engaged through a very difficult period. In many cases, additional targets or measures were introduced to incentivise staff against operational or strategic goals rather than purely profit-based measures. These might relate to cash flow, efficiency, customer service, talent, project delivery, safety or the environment.

"For many employees in the private sector, some form of bonus plan is a normal part of their reward for delivering their objectives," continues Abbott. "For most employees these are not substantial sums but an element of pay based on the achievement of financial or non-financial targets that are important for their role, their team or the company as a whole. Bonus plans can enhance the communication of what needs to be done and so reinforce the motivational leavers of business direction, clarity and purpose. They also enable employees to share in the success of hitting business targets."

The report concludes that, as management determine such plans and payments, it is important to recognise that these constitute investments in the business, alongside activities such as research and marketing – incentive plans should therefore be reviewed with the same rigour as other such investments. Ultimately it is shareholders’ responsibility to assess management’s effectiveness in making these decisions over time.

The report, jointly prepared with US based partners WorldatWork, was presented to members and other interested parties, including shareholder organisations, at a meeting chaired by David McLeod. Visit www.parcentre.com for the report’s Executive Summary and to read a recent WorldatWork article on the research.

Nigel Turner is a researcher at PARC