Nearly half of UK firms are putting greater emphasis on bonuses
Employers are putting more emphasis on bonuses as the economy emerges from recession. But the bonus culture in the UK is undergoing “significant change”: companies are making short-term incentives harder to earn, and subjecting them to greater scrutiny at the highest level. These are among the main findings to emerge from a new study by Hay Group.
The report examines how the use of bonuses and incentives is evolving post-recession. It 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, the 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, said: “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
Close to half (46%) of UK firms are increasing the proportion of variable pay relative to base salaries for their employees: 28% have already done so, while a further 18% plan to during the next two years.
Just over a third (34%) are increasing funding for bonuses and incentives: 20% have done so, with 14% planning to in the next two years.
Exactly a third (33%) are widening eligibility for bonuses among staff, with 20% having implemented this and an additional 13% planning to do so.
Raising the performance bar
Over half (52%) of firms are increasing performance thresholds for variable pay: 35% have already implemented tougher measures, while 17% plan to.
At the same time, the emphasis is shifting to hard, financial targets. Over half of UK businesses (55%) are placing more emphasis on financial performance metrics - e.g. sales, revenues and profits.
Two-thirds (66%) of UK businesses believe that their board is more likely to be involved in decision-making when it comes to variable pay.
Hyland said: “'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
More than three-fifths (61%) 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%), enhancing individual performance (31%) and ensuring market competitiveness (31%).
Hyland said: “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.”
Communication and ongoing review
Almost half of UK firms (48%) are unconvinced that their incentive schemes are understood by their workforce, while less than a quarter (23%) believe that their schemes are effectively communicated by line managers.
As a result, more than six in ten (61%) have implemented changes to the communication of variable pay programmes, 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%) of firms have or will be evaluating the effectiveness of variable pay.
Hyland said: “Communication and ongoing review are the next steps for company's variable pay strategies, as they focus on optimising execution now that they’ve analysed the metrics and increased the thresholds.”
A final word
“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.” - Stuart Hyland, head of reward consulting, Hay Group.
Want to know more?
The research was conducted to identify key trends and current practices in variable pay. In May 2010, Hay Group surveyed HR professionals in just over 1,300 companies from across 80 countries, 132 from the UK, on their variable pay policies and their plans for variable pay strategy in the future. Hay Group also used data from its PayNet databases to analyse country by country the amounts (as a percentage of base salary) companies planned to pay in bonuses to their managers against what they actually paid.
Availability: For more details contact Jemma Dunne, email: firstname.lastname@example.org or tel: 0207 856 7330.
Hay Group is a global consulting firm that “works with leaders to turn strategies into reality”. With 86 offices in 47 countries, it works with over 7,000 clients across the world. For more information, visit www.haygroup.co.uk.