Does Offering A Performance Related Bonus Really Work?

October 13, 2015

10:00 pm

Offering performance-related bonuses has long been seen as a good way to reward and motivate staff. Many say that it increases productivity and improves output with employees striving to meet a certain criteria or generally proving themselves in order to receive compensation for their efforts. Performance related bonuses are often seen as a way of improving staff retention, enticing new talent, distributing wages more fairly and boosting morale; however is this really the case?

Incentivizing vs resentment

Bonuses are widely seen as an incentive for employees, giving them something to strive for and acting as a reward for hard work. While they may encourage productivity and boost morale to an extent, it can be the case that performance related bonuses create unrealistic expectations among employees. Differing budgets year-on-year, or an employee receiving a bigger bonus one year to the next can cause disillusionment and damage morale. Comparisons are easily made and whether that’s on a personal level year-on-year, or with colleagues, it can make receiving or not receiving a bonus feel less like a triumph and more like a slight. Additionally, while bonuses are often given under the proviso that they are kept confidential, it isn’t uncommon for employees to discuss the topic and compare outcomes, which can result in resentment, a lack of motivation and a dip in self-esteem.

Unhealthy competition

Depending on the criteria for bonuses, they can at times cause unhealthy competition among colleagues. For example, if the bonus is reflective of hours worked or sales made it is sometimes the case that employees then don’t share work or shifts. This can result in some staff taking on too much, leading to mistakes and inefficiencies; while others have too little to work on. In these situations it can seem like ‘first come first served’ and result in employees not working to their strengths or as a team in order to reserve a bonus for themselves.

Set criteria

Creating a set criteria to determine what employees should do throughout the year to receive a bonus is the best way to be clear about the behaviors an employer wants to incentivize. This avoids crossed-wires and allows for a fair comparison of the employee to the criteria. In cases where a criteria has not been outlined employees may become confused about what they should be doing in order to exceed expectations and warrant a bonus. For example, a salesperson may believe that their sole purpose is to increase revenue, when in actual fact them receiving a bonus could also take other criteria into consideration. Being clear from the outset and having clear guidelines around which behaviors warrant a bonus, and how much the bonus will be, will make the process of giving bonuses and justifying why a certain staff member should receive a bonus much easier.

Attracting new talent

For many job hunters a high salary is more important than other incentives, such as an annual performance related bonus. It can be argued that in order to attract new talent employers should not reserve money for bonuses etc. and instead offer a higher salary. Arguably, a bonus is a nice perk but what employees really value is a good salary and decent benefits package. Therefore sometimes attracting new talent is best done without bonuses and instead using that money on increasing wages and on offering an attractive employee benefits package.

While we can see that there can be drawbacks to offering monetary compensation for performance, what works for one business might not work for another. Effective bonus schemes outline criteria that needs to be met in order to be eligible for the bonus while making said criteria neither too hard nor too easy. Employers implementing this type of bonus scheme also need to have a good understanding of an individual’s role and an agreement on how their performance will be measured. Measuring employees as individuals is a major factor in offering bonuses, as two employees might not have the same role and therefore the opportunity to meet an across the board criteria.

If your business does decide to implement a performance-based bonus scheme then other things to consider include when the payment would be made, how often does the scheme run – is it monthly, yearly? Additionally, it is important to consider what the amount of bonus available will be based on. For example will it be a percentage of salary or based on sales, as well as whether there will be a flat rate payment or if the amount an employee receives is incremental to their performance. Ultimately, for a performance related bonus scheme to work there needs to be forward planning and all outcomes need to be considered to ensure that it’s viable and the best way to reward employees.

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Will Bridges is an HR Consultant at Unum, one of the UK’s leading financial protection insurers. Unum specialises in providing Income Protection through the workplace, and is committed to helping the UK’s workforce get a back-up plan. Visit them online at: