Cash Bonus Programs, How Effective Are They?

Friday, October 25, 2013

 

Cash Bonus Programs are a mainstay of many organization’s Total Rewards, but how effective are they is driving the desired performance behavior and linking that performance to organizational initiatives?  The answer can be found in their design, communication, execution, maintenance, and measurement.

 

Design:  “If I offer a large bonus, won’t my workers will do an outstanding job.”  Not necessarily.  Who is eligible, what performance outcomes are desired, what performance behavior is eligible, how is the calculation done, when are payment made, is the bonus integrated with base pay, is a portion of the bonus “held back” or deferred, are bonus payments included in calculations for benefits, are pay-outs scalable and variable based on performance levels required and organizational needs?

 

Communication:  I once worked for an organization where eligibility for bonus programs was not communicated to the covered employees.  How much, how often, when, and to whom bonus program edibility is communicated is essential to driving the desired performance behaviors and linking those behaviors to organizational initiatives.  Communications drives the “brand” identity of a bonus program, its perceived organization support, as well as its creditability.

 

Execution:  It is never sufficient to design and communicate a rewards program if its execution falls short of delivering on the payouts effectively and efficiently.  The power of a rewards system loses its ability to drive the desired performance behaviors if payouts are incorrect, delayed, lack creditability or presented in an inappropriate manner.  While an organization may not want to publish dollar amounts on their corporate web site, top reward earners should be celebrated nevertheless in some internal/external fashion, e.g., “The Million Dollar Club, Top Sales of the Year, Zero Lost Time Accidents for 10 Years”, … etc.

 

Maintenance:  Organizations live in a dynamic and complex ecosystem of competitors, regulations, and technology.  To be successful, every rewards system must be adaptable to the changing internal and external environment in order to tie performance behavior to the ever changing and new organizational initiatives.  A bonus plan from 2000 is unlikely to drive performance behavior or be linked to the organizational initiatives of today.  Left unattended, any bonus program will become out-of-date and un-harmonized and may even drive the organization to be less competitive, create recruitment and retention issues, and raise sustainability questions with stakeholders.

 

Measurement:  It is a commonly held belief that failing to measure is tantamount to failing to manage.  Ongoing outcome measurement of any bonus program is the foundation for the determination of its effectiveness in changing behavior, i.e., increased profitable sales, reduced costs, … etc.  Without a base-line measurement, it becomes impossible to know if the incentives of a bonus program are too high, too low or just right.  While financial measurement is generally the realm of an organization’s finance function, it is vital that a program’s owners (HR, Marketing, Sales, and Production) be in alignment with its Return on Investment.