Bonuses that burn

The recovering economy is bringing about greater financial performance and many organisations are rewarding employees for sticking through the tough times. They are reinstating salaries to pre-recession levels and offering better packages to attract talent amidst this period of optimism.

Recent research has found that 49% of US companies expect to increase their annual bonuses for executives this year. However, companies responding to the Towers Watson survey say they are continuing to be cautious with other spending. Some 53% of the 251 respondents expected a relatively “modest” overall increase in bonus payments, typically worth no more than 20% of a worker’s base salary.

Bonus expectations are also warming up in Asia. In July, all civil servants in Singapore received a half month bonus payment, in light of strong economic performance across the public sector. They did not receive a mid-year bonus during the downturn last year. Derek Tan, Chief HR Officer, Central Provident Fund Board says public service bodies need to keep up with pay trends in the private labour markets. “We should pay well enough to attract and retain the right people for the organisation,” he says.

The second part of that equation – the retention – is high on the minds of many HR professionals in this part of the world right now. As competition for talent heats up in the Singapore market in particular, the advantage is now clearly with the job seeker and, for better or worse, the job-switcher. A Hay Group survey, conducted in March this year, found that 84% of Singapore-based companies are now taking proactive measures to prevent their high potential and high performing employees from leaving. These include compensation through retention bonuses, higher increments and extra benefits.

Gaining loyalty

Organisations use retention bonuses to prevent critical talent from leaving in the middle of an important business cycle or transition period. Such bonuses are usually paid out in cash or stock options over a period of time, with the value increasing in tandem with the period of stay.

Spot bonuses are another type of incentive used to keep staff happy. These can be disbursed when an employee goes beyond the call of duty or brings in new business. For example, an employee can be rewarded with a weekend getaway for significantly exceeding a sales target. It can also come in the form of small cash rewards, movie tickets and vouchers. When given at the right opportunity, such bonuses serve as a form of recognition and motivate employees to do even better.

Pete Baker, Senior HR Manager, Procter and Gamble, says bonuses, particularly if they are based on long-term incentives such as shares or stock options, may help with retention. However, a great employee experience is a far more effective retention tool. “If employees are doing meaningful work, if they are growing their skills, and if they can balance their work with the other priorities in their life, they are very likely to stay,” he says.

HR experts concur that bonuses alone are not effective in retaining top talent. In fact in some situations, a compensation system mainly driven by bonuses can backfire as they target those employees who may be more inclined to jump ship for a better offer elsewhere. Experts also argue that employees who are solely driven by large bonus payouts will only think about the short-term and may take inappropriate risks.

Instead, they say bonuses should be part of a larger strategy that encompasses factors like job scope, career progression, and work environment. Generation Y employees for example, are typically eager to make an impact from the get-go and constantly seek opportunities for rapid growth. Rewards that target these enviable traits can be more cost-effective than mere cash enducements.

Good managers are also an essential part of an organisation’s retention strategy. Their decisions have a direct impact on how an employee views their workplace and organisation. Acknowledging this, Procter and Gamble places a lot of emphasis on leadership development. “We want to ensure the line managers have the skills to create a great employment experience for their staff,” Baker says. “This is better than a reliance on immediate bonuses.”

Overall, companies need to take a multi-pronged approach towards retention as the practice of dangling fat bonuses will not be sustainable during a period of slow or negative growth.

Preventing year-end bailouts

One of the perennial issues faced by HR is employees quitting their jobs just days after receiving their annual bonus.

Law firm Rajah and Tann circumvents this problem by paying its staff bonus in two parts, in December and April. Employees also get an interim bonus, typically in the middle of the year. According to the firm’s HR Partner, Rebecca Chew, year-end payouts can lead to a sudden outflow of staff. “People also feel more motivated when they are incentivised throughout the year.”

Bonuses spread over a shorter span of time are also more flexible and can be adjusted according to changing businesses needs. This makes it easier for management to suspend or cut bonuses during a period of decline. However, employees need to be informed in advance that such changes could take place, Chew warns.

A compensation system that is both fair and, importantly, seen to be fair, can also prevent employees from jumping ship. Baker says employees at Procter and Gamble are paid fairly throughout their career, based on their direct performances. “This reduces the risk that an employee would receive an offer from another employer that is vastly above their current salary.”