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Bonuses Are Back: But Harder To Earn

A study by global management consultancy Hay Group today reveals that UK firms are putting more emphasis on bonuses as the economy emerges from the downturn

  • Nearly half of UK firms putting greater emphasis on bonuses and incentives

  • Majority raising performance threshold and shifting to hard financial targets

  • Bonuses under greater scrutiny at board level

  • Need for closer alignment to business strategy is key driver for change

  • Study warns of risk to workforce morale

A study by global management consultancy Hay Group today reveals that UK firms are putting more emphasis on bonuses as the economy emerges from the downturn.

At the same time, the study suggests that bonus culture in the UK is undergoing significant change: companies are making short-term incentives harder for employees to earn, and subjecting them to greater scrutiny at the highest level.

The report examines how the use of bonuses and incentives is evolving post-recession. The study is based on the views of HR professionals in 1,300 firms globally, of which 132 are based in the UK.

According to Hay Group, almost half of firms are putting greater emphasis on variable pay for all levels of employees, while more than half are raising performance thresholds for employees to earn bonuses and incentives. Two thirds of HR professionals agree that bonus schemes are under greater scrutiny by senior management. These changes are being driven by companies wanting better alignment of variable pay programmes with their business strategy.

However, the study warns that a narrow focus on bonuses risks skewing employee behaviour, and that increasing the pressure on employees may further damage workforce morale post-recession.

Stuart Hyland, head of reward consulting at Hay Group, comments: “The bonus is back on the agenda for UK PLC – but getting harder for employees to earn and under increasing strategic scrutiny.

“While increasing the emphasis on variable pay, firms need to ensure they drive the right behaviours, and guard against placing excessive pressure on already de-motivated staff. However, currently this is a risk they are prepared to take as the upsides of getting it right can be significant”

The Bonus Is Back

According to Hay Group, variable pay is playing an increasingly important role in employee reward.

Close to half (46 per cent) of UK firms are increasing the proportion of variable pay relative to base salaries for their employees: 28 per cent have already done so, while a further 18 per cent plan to over the next two years.

Over a third (35 per cent) are increasing funding for bonuses and incentives: 20 per cent have done so, with 14 per cent planning to in the next two years. A similar number (33 per cent) are widening eligibility for bonuses among staff, with 20 per cent having implemented this and an additional 13 per cent planning to do so.

Raising the Performance Bar

However, UK workers will need to work harder to achieve their bonuses and incentives than before the recession, the study finds.

Over half (52 per cent) of firms are increasing performance thresholds for variable pay: 35 per cent have already implemented tougher measures, while 17 per cent plan to.

At the same time, the emphasis is shifting to hard, financial targets. Over half of UK businesses (55 per cent) are placing more emphasis on financial performance metrics - e.g. sales, revenues and profits.

Strategic Scrutiny

At the same time as becoming harder to earn, bonuses are under closer scrutiny than ever before.

Two thirds (66 per cent) of UK businesses believe that their board is more likely to be involved in decision-making when it comes to variable pay.

Stuart Hyland comments: “'As a result of widespread concern about the impact and role of bonuses in the wake of the financial crisis, firms need to develop cost-effective reward strategies and target their limited pay budgets towards those they most need to retain and motivate to deliver sustainable business improvement.”

Drivers for Change

The study also analyses the reasons for the shift towards variable pay.

More than three fifths (61 per cent) of HR professionals identify the need for better alignment with business strategy as the key driver of change.

Other important drivers are: improving team performance (35 per cent), enhancing individual performance (31 per cent) and ensuring market competitiveness (31 per cent).

Stuart Hyland comments: “UK businesses are learning the lessons of recession and the financial crisis, and reflecting these in their variable pay strategies through ensuring tougher alignment to corporate objectives.”

Warning Signs

Hay Group warns that the shift to variable pay is not without pitfalls. The report points out that it risks skewing employee behaviour, and further damaging already fragile workforce morale following a period of pay cuts and job insecurity.

Stuart Hyland comments: “Changing variable pay will not drive business performance if targets are not clearly aligned to the organisation’s business strategy and employer brand.

“Employees have been through a tough time, suffering pay cuts and freezes, bonuses that haven’t paid out and falling pension values. Companies that get bonus scheme design right enhance performance. Those who get it wrong risk workers switching off altogether which would seriously damage their prospects for growth and maybe their very survival.”

“Reward is the most powerful way to send the right message to employees. What is important to a company – its behaviours, values and strategic objectives – must be reflected in its reward strategy.”

Communication and Ongoing Review

The study also highlights the importance – and challenge - of effectively communicating variable pay schemes to employees.

Almost half of UK firms (48 per cent) are unconvinced that their incentive schemes are understood by their workforce, while less than a quarter (23 per cent) believe that their schemes are effectively communicated by line managers.

As a result, close two thirds (61 per cent) have implemented changes to the communication of variable pay programs, or are considering doing so.

In keeping with the focus on bottom-line performance, evaluation is also a key focus when it comes to bonuses and incentives. Over half (53 per cent) of firms have or will be evaluating the effectiveness of variable pay.

Stuart Hyland comments: “Communication and ongoing review are the next steps for companies variable pay strategies, as they focus on optimising execution now that they’ve analysed the metrics and increased the thresholds.”