Changing our thinking on ‘variable financial rewards’

In summary

A majority of organizations now use some type of ‘variable financial reward’ in an attempt to motivate employees to ‘go the extra mile.’ The most common approach to variable rewards is an annual bonus payment paid to an employee based on an annual appraisal of performance against a pre-defined set of personal objectives.

This process is fundamental flawed, and rather than motivating employees to perform, it is often a string demotivator and one of the major causes of employee dissatisfaction.

A very different approach is needed.

Problems with the annual bonus

This approach has many, many downsides, and few upsides

1) Bonus as an entitlement – far from being seen as a reward for something extra or exceptional that has been achieved, bonus is now largely regarded by employees as an ‘entitlement’ i.e. an integral part of their total rewards package. There is an expectation that a bonus will be paid, and the only question is how much. This is fundamentally at odds with the whole concept of a bonus – which should be seen as a reward for something exceptional that has been achieved by an individual or team; or alternatively as a way for the organization to share its financial success with its employees. We should never forget that salary is not an entitlement for turning up – it is, itself, a payment for a quality job delivered by an employee. Clearly therefore the bonus must stand for something more than this.

2) Relevance of annual goals in a time of rapid change – personal goals set in advance and expected to cover a 12 month period are increasingly meaningless in times of rapid business change. Organizations today, require great agility to respond to rapidly emerging threats and opportunities. As organizational goals change, personal goals need to be realigned which is not factored in to a static annual performance goals setting processes

3) The Bell Curve – probably the most disliked of all aspects of an organisational appraisal process, the Bell curve is a forced ranking system that tries to segregate the best, mediocre and worst performers. The bell curve in application n most organizations seeks to identify a very small percentage of ‘high performers’ and leaves the majority of employees languishing in a mid range of performance. But ask yourself the question “do we want an organisation where only a small percentage are high performers?” Isn’t it desired for a majority of our employees to be high performers? Certainly the few who make the high perfomer cut and benefit from the largest bonuses will be highly motivated. But these are generally employees who are natural self motivators and performers. The impact on the majority who are in the middle ranking, however, is to reduce motivation

4) Negative impacts on employee coaching and mentoring – by hardwiring an annual performance bonus to an annual appraisal, we reduce the value of the appraisal as a tool for employee development. In most employees’ eyes, the annual appraisal (and its resulting ‘score’) becomes synonymous with the variable bonus reward. All other aspects/goals of an appraisal process are subordinated to the overriding impact of the financial reward. This means we lose an opportunity to have meaningful discussions on career progression, training and skills needs, and alignment of priorities going forward.

So what’s the solution?

Financial rewards play a strong part in motivation, and it is reasonable that organizations should have this tool as one way to say ‘thankyou’ for an exceptional job delivered. But clearly the bureaucratisation of this lever of motivation into the current annual process of employee entitlement has failed.

So, how can we make the most of variable rewards.

There are two components which will transform your employees’ thinking about variable financial rewards:

1) ‘Spot rewards' – a flexible structure where teams or individuals who have delivered exceptional value to the organization may be rewarded instantly with some financial benefit. This may be from a range of achievements such as a major project delivery, an exceptional response to a customer management situation, an improvement idea, a risk identified and mitigated etc. The value of this approach is in its immediacy. It does not need to be tied down with extensive bureaucracy, but is itself a measure of an organization’s agility. Of course there should be ‘safeguards’ to the process, but it is an approach that makes a variable reward accessible to any employee at any time, and not just to a select few.

2) ‘Annual profit share’ – there is nothing more motivating, as an employee, than engaging with the organization’s success. An annual, equal distribution of profit across all employees (when the organization has been successful) is a strong technique to gain heightened employee engagement with the business. It encourages team based behaviours, as everyone benefits from the overall success of the organization. It does go hand-in-hand with a strong HR management process to root-out underperforming employees , but will lead to a feeling of ‘belonging’ that will create a positive workforce culture , and a desire to ‘go the extra mile’.

Hidden benefits

There is also a hidden benefit to the above approach. Very few organizations have ever ‘costed’ the administration effort required for the current annual variable performance system. Its administration both in HR and in line management is a considerable overhead, particularly when viewed in light of its overall negative impact. The proposed system is simple to administer and reduces costs of administration.

Today, and into the future, organizations that prosper will be driven by motivated employees with a belief and pride in what they do – and in what their organization achieves. Such organizations will become employers of choice – able to recruit and retain the very best people in a time of quality employee shortage. HR should take the lead in working with management to establish the levers that will make this possible. Variable performance rewards are one such lever, but they should be applied with a better understanding of what will be really important to get the best from our workforce.