Despite economic conditions, short-term cash incentives and annual bonuses have become standard practice for the majority of companies in the UK. Ninety-four per cent of UK organisations surveyed by Towers Watson stated they offered a broad range of their employees annual incentives. Bonus pay-outs have remained at or near target levels over the past few years, unwavering in the challenging economy.
A majority (62%) of UK employees are automatically eligible for bonus plans, or become so once reaching a certain grade, as opposed to completing a probationary period or fixed length of service.
“When designed and implemented successfully short-term variable pay can be very effective in incentivising employees to perform. However, when companies pay-out bonuses regardless of individual or financial performance the rewards can be perceived as an entitlement, rather than an incentive, and lose their value as an employee motivator,” Joris Wonders, director of Towers Watson’s UK Reward practice said.
This is referred to as an ‘auto-bonus’ culture, one which Stephen Burke, director of executive compensation at Towers Watson explained as a phenomenon where bonus amounts are not reflective of performance, but become an element of fixed pay.
While data on Australia regarding the auto-bonus trend hasn’t been collected, Burke stated some organisations in Australia are gravitating towards it. “I don’t know if it is a wide-spread phenomenon, but it certainly is here in Australia.”
He stated that it often occurs in one of two circumstances. One such is where there is fierce competition for key talent, and as such losing an individual can be “prohibitively expensive”. To prevent the loss of such employees, they are given a bonus as an incentive to stay, regardless of how they performed.
The other circumstance is in businesses which for one reason or another have had a pay-freeze or have had very limited fixed pay increases over time, Burke stated. In this case, bonuses become a way for organisations to try and keep up with their shortfalls in pay increases.
“If that happens as a one off it is not necessarily a huge issue, but when it happens more than once it is very easy for that to become the culture … unless you’ve got a very clear remuneration strategy that everyone lives by then it’s very easy for that kind of practice to become ‘The way we do things around here’,” he explained.
Burke warned that falling into an auto-bonus culture greatly undermines the effectiveness of performance based pay programs, effectively making it a part of fixed pay.
If employees lose the incentive to work towards targets, then this can weaken the connection an organisation has with their shareholders, and reduce productivity as employees no longer have the monetary drive to push harder.
“It is only giving an upside to the employees. We always like to see a lot of alignment on the upside [for both employees and organisations] but there has to be some degree of downside for those people and companies who don’t perform in a particular year,” Burke stated.
If organisations find themselves falling into the auto-bonus trap, then they must roll-back and ensure they have a well-defined corporate strategy, which flows through into their remuneration strategy.
“If you have that road map of what you are trying to achieve, then putting in place programs and sending out messages that are consistent with that is the critical piece,” Burke said. “If you don’t have the road map, then you aren’t going to make it to the other end.”