I’ve recently been working with a client on reviewing their bonus scheme. They’re looking to change it, right now they’re paying staff bonuses simply for doing their jobs. So what does that mean in practice? Well, their current scheme isn’t linked to performance targets, KPIs, or business outcomes. Employees receive a monthly bonus regardless of individual or company performance. Unsurprisingly, this has created an expectation that the bonus is guaranteed.
Bonuses, when used well, can be powerful motivators. They’ve long been a staple in sales roles, sell more, earn more. Typically, these bonuses kick in after a defined threshold is met, such as a specific number of units sold or a monetary target. Employees then receive a percentage of their sales, often with tiered levels, hit the minimum and you unlock a bonus, exceed it and your earnings increase.
This can be a smart way to drive business growth. But we’ve also seen abuses, especially in regulated industries where staff have mis-sold products or added unnecessary extras just to boost their earnings. In financial services, for example, strict rules exist to curb these risks. For most businesses though, a well-designed bonus scheme can be a useful way to boost engagement and profitability.
So, what does a good bonus scheme look like?
Make it non-contractual. If a bonus scheme is part of the employment contract, it becomes difficult to change or remove. Any changes would require employee consultation and agreement. Without that, you’re stuck. Some employers have resorted to firing and rehiring on new terms but this practice is likely to be banned by the UK government. Stick to including only the statutory requirements in your employment contracts.
Run it on an annual basis and invite employees to join the scheme each year. This gives you the opportunity to review and update objectives and targets to ensure they remain relevant and achievable.
Keep it discretionary and clearly state that the scheme is discretionary and may be amended or withdrawn at any time. This gives you the flexibility to make changes or withhold payments if circumstances require it.
Link it to business performance. For example, you could set a company-wide financial target, if the business reaches £X in revenue or profit, a bonus pot is unlocked. You can build in tiers: the more the business exceeds its targets, the larger the percentage paid out.
Tie it to individual performance and set clear, measurable objectives that employees must meet to be eligible for the bonus. Don’t wait until the end of the year, track progress regularly so everyone knows where they stand.
Done well, a bonus scheme can align employee motivation with business success. But if not structured properly, it can quickly become a costly entitlement
