4 September 2020
Many organisations use performance-based bonuses to reward employees when they or the company has performed well.
This is an approach which has existed for decades, but organisations are increasingly questioning whether this is a sustainable form of reward, or whether they should move towards longer-term incentives.
The culture around bonuses leads to a focus on short-term behaviours, as employees want to achieve the results necessary in the quarter, six-months or year, to gain a financial advantage. But bonus culture can also lead to adverse outcomes and a poor employee culture. Research is mixed on whether bonuses work to increase employee motivation. Sometimes they can instead reward undesired employee behaviour and build a culture of competition and ‘one-up-man ship’.
Instead, organisations are considering longer term forms of reward, seen as more sustainable, such as share save schemes. These enable employers to reward employees with discounted equity in the company, rather than purely financial compensation. Employees can save into the share plan and purchase the company’s stock after the required period has passed. Advocates argue that it helps the company to retain the best talent and that it provides more of a sense of ownership in the company’s performance than monetary bonuses do.
However, share schemes can also be problematic as they encourage behaviour which equates to employees ‘putting all their eggs in one basket’. By purchasing stocks in their own employer, they are now tied to its performance both through their investments and their income. If the employer itself has financial difficulty, this could lead to problems for employees in future.
Another alternative used by organisations are the save as you earn style schemes. These schemes allow employees to save a fixed amount per month into a three or five year plan. At the end of the saving period, the employee is rewarded with a ‘bonus’ payment into their pot normally based on a percentage of their savings. Some schemes do allow flexibility in respect of short-term support for unexpected expenses, whereby allowing the employee to withdraw up to two months’ savings in any one year without penalisation of the end term bonus.
Overall, shares and save as you earn schemes emphasise rewarding long-term loyalty to an employer, as the benefits often only kick in after three or more years, rather than annually as with a bonus. They also encourage a behaviour of saving. Bonuses, conversely, tend to emphasis short-term behaviour and can lead to negative financial impacts if there is an expectation of a bonus or commission payments.
When a pattern builds which leads employees to expect or rely on bonuses or commissions, unexpected changes that either remove or reduce the bonus payments can cause financial stress. The coronavirus pandemic has highlighted this point more than ever – who would have predicted a global pandemic interfering with their “regular” bonus or commission level?
It’s important for organisations considering their bonus or share scheme structure to consider the financial wellbeing impacts. Working with an independent partner can help you to resolve what the most appropriate option for your workforce might be.