Using our heads to solve your Reward challenges.
Why do organisations have bonus schemes? Let's start with a bit of history. The principles of why organisations operate bonus schemes have been around since at least the 1920s when manufacturers used them to motivate and create competition between salespeople. In the 1940s, organisations started to conceptualise how bonuses and incentives might be used to drive behaviours. Psychologist Clark Hull established “incentive theory” which rather than focusing on the more intrinsic forces, proposed that “people are pulled toward behaviours that lead to rewards and pushed away from actions that might lead to negative consequences” and also how two people in the same scenario might act completely differently based solely on the nature of the rewards offered to them. By the 1990s, bonus schemes had become even more commonplace for all types of workers and the sophistication around how they were structured and the nature of the offering, e.g. stock options rather than just cash, had become more complex.
When bonus schemes work well, organisations report seeing improved employee performance, increased loyalty, reduced employee turnover and a stronger work relationship among colleagues bonded together by a common goal. Win-win!
Many of our clients ask for our help to design bonus schemes that effectively support their business strategy whilst also looking after employee interests. There are some common themes - increased profitability, higher sales, better shareholder returns and more recently an improved focus on equality, diversion and inclusion and wider aspects of environmental, social and governance matters. But it is important to get to the heart of what the organisation needs and understand what different mechanisms work in different scenarios (and which don't) before just putting a ‘cookie cutter' scheme in place.
Have you heard of The Cobra Effect? Apparently, the British in Colonial India wanted to reduce the number of cobras in Delhi. They offered a cash reward for each dead cobra brought to them. The incentive worked so well that the clever Indians started to breed, raise and kill the snakes in order to claim their bonus. Once the problem was realised, the scheme was pulled but then the cobra farmers did the logical thing and set all their snakes free. The result, even more snakes on the loose in Delhi!
The above are just a few examples of how things can go wrong. Potential unintended consequences are harder to spot by those that haven't seen them in action in some way shape or form, or at least heard about them. Not only have most of us seen these in our past lives in previous in-house roles, but at Reward Heads, we've also been told the stories by some clients coming to us for help with putting things straight.
In addition, while it is important that bonus schemes are structured appropriately, it can often be the case that organisations or leaders do what they have always done. Bonus schemes remain largely the same as they were at organisations years and years ago when the world was different, or are brought across on an almost like for like basis from experiences at previous organisations that leaders have been employed at, with little consideration that what is right for one situation may not be right for another.
There is also a fair bit of Reward jargon, where even Reward professionals assume they know what it means and what any resulting outputs might be, yet different words mean different things to different people. I've been in more than one client Board meeting where we were discussing the merits of “gateways” or “thresholds” and there have been many different views about what those terms even mean, let alone what they drive.
Another consideration is that, while some benchmarking providers can report market average percentages at different job levels, most surveys have no way of telling you how each participant's schemes are structured, how challenging or easy any targeting is and what levels are regularly being achieved and actually paid out against them. At Reward Heads, whilst we obviously cannot share confidential details around our clients' schemes and results with others, we do find ourselves with a front row seat being able to see what does and doesn't work and what payouts look like in real life across a multitude of organisations in different industries. This insight is incredibly useful when advising clients about their schemes.
We are also aware of the many pitfalls that unsuspecting organisations can fall into causing bonus schemes to backfire, which happens more often than you might think - some subtly and some much more spectacularly. A costly outcome either way!
For example, it is easy to think about how you would like to change the behaviour of people in your team who think like you, but people are very different and often those whose behaviour you are looking to change don't think like you, so they can respond differently.
Another argument is that if a scheme is a thinly veiled attempt to obtain leverage, save money, or try to artificially fix an internal issue, then people may feel manipulated and some will push back. It is also the case that while many workers will always do their best within the rules, there are also a number of employees who might play the game but can come up with smart ways to beat the system. Some research suggests that as many as 5% of employees knowingly engage in this type of activity. They're not being dishonest, just clever at spotting any loopholes.
From a financial point of view, it is vital that schemes are modelled and costed appropriately to ensure they are affordable. While many organisations might look at what their maximum payout might be if they achieve great results, and therefore have an idea of overall budget figures, it is important to look at what else happens elsewhere on the sliding scale of success. While the expression may now be considered a bit old hat, the importance of checking that a scheme “washes its own face” at all times shouldn't be forgotten. Not only can we support with scheme design, but if you don't have the appropriate resource available to work through that for you, we can work with you and our skilled analysts to help on that front too.
The evolution of bonus schemes has positively impacted people and organisations. From the 1920s to now, they have offered something people can achieve if they hit a specific target or goal and it gives them something to work towards. They help us appreciate people, and working in Reward, we know the importance of doing just that. But it is just as important to ensure that they are done right and drive the right motivations so that employees see them as fair and organisations are using their budgets wisely and effectively.
If you would like to talk to us about how the Reward Heads team can support you on ensuring that your bonus arrangements are set up the best way for your organisation, then please reach out to either Claire Williams, Consulting Director, or Victoria Milford, our CEO on rewardsolutions@rewardheads.co.uk
Claire Williams - Consulting Director