A Practitioners Framework for Bonus Scheme Design

Richard Howell, Personalleitung DACH Region / HRBP (HR Lead) DACH Region at Nilfisk

When designing and delivering Reward models, the maxim "You get what you pay for" rings true.  In my early years of working in HR with a global investment bank, the way to establish a winning team was, typically, to get out the cheque and poach top talent to a competitor.    One of the reasons I wanted to move sectors is to expose myself to HR philosophies and practices beyond this rather primitive "pay more than next door" approach.

When designing and delivering bonus or incentive schemes, there are multiple levers or design considerations that can be considered – quite literally – to steer performance.  Here I share some principles and practices that I have personally developed and deployed over many years to help lead and guide organisations to solutions that align with their organisational philosophy and priorities.  The key "7C" framework (see Figure 1 below) was first used in a bonus scheme design workshop that I ran for European Sales leaders more than a decade ago.  With this group and many times subsequently, my goal has always been to enable and accelerate a positive change and increase in people and organisational performance.  Through working with and alongside business leaders, solutions have consistently emerged and been implemented that resulted in a significant shift in terms of organisational culture, capabilities and – ultimately - performance.  I have observed how employees learn new skills and approaches and increasingly act or behave in a manner that aligns with the outcomes that the bonus model rewards.  Is this manipulation?  Yes, but motivating and rewarding performance can result in win/win outcomes for both the employee and the business, as both reap the rewards of the outcomes achieved.  A bonus scheme can be an immensely powerful force for good.  "You get what you pay for."  Let's now look at the factors that can be considered in designing and deploying an effective solution.

Figure 1 – The 7C Bonus Model Framework

I would like to at this point, acknowledge the influence McKinsey's 7S model in developing my home-grown 7C framework.  McKinsey 7S was one of the first tools I learnt about in my early years as an HR and Change professional.  Every factor or element is interlinked.   The architect of the bonus scheme must decide to what extent a given factor is accentuated or in focus.  Trade-offs are inevitable.  Creating a clear share vision around what the bonus scheme should achieve and how to achieve it is not necessarily a straightforward endeavour.  The actual design and maintenance of a given model will require a certain level of expertise and resources.  Let's now explore the Cs, starting from the "top" - Culture - and ending up with the factor that is central to everything – Commercial Strategy.

Culture

Bonus schemes both shape and reflect culture.  Depending on whether business leaders want to reward organisational, team/functional, or individual performance, the measures and metrics can be set accordingly – reflecting the organisational philosophy.  Also, remember that countries and regions have underlying cultural norms on the spectrum of individualistic to collective.  It may not be appropriate to impose a universal model or approach globally.

Bonus schemes shape culture too.  One of the biggest Organisational Development challenges I have faced to date was helping to create a "hunting," not "farming" culture in a global salesforce.  Probably the single most effective intervention I led to effect this was re-working the bonus scheme for Sales, linking part of the bonus scheme to the Business in Development Pipeline, as measured by the CRM system.  The CRM system went from being a data graveyard to a goldmine of business intelligence.  As we tracked and rewarded progress through the sales funnel, sales changed their behaviours, and a more distinct hunting culture emerged.

Cost

In cost terms, look at the ratio of hard currency value generated vs. the amount paid out – effectively, the ROI or "Return on Investment."  Leadership may need to be shown in black-and-white terms that a bonus scheme that – at first glance – appears to look very expensive if underpinned by and reflecting appropriate commercial results is a superb investment.   The scheme can demonstrate yielding a value or return worth multiple times the actual cash cost.

Remember, too, the time, energy and other resources needed to set up and maintain the scheme.  Crunching the numbers for the pay-out calculations should be as automated and straightforward as possible.  If it takes days to collate, aggregate and calculate, then something is probably amiss.

“Employees will always compare the perceived “fairness” of the bonus parameters that apply to them vs. those applied to others, both inside and outside the organisation.”

Complexity

The level of sophistication can vary enormously.  Sometimes the devil is in the detail – so, for example, I learned in the pharmaceutical world to be very specific about defining up-front how we would deal with parallel trade sales.  The small print mattered.

Questions to consider include:

• How many elements are reflected and rewarded?

• Will scheme parameters vary, function by function or depending on the hierarchical level within the organisation?

• Will pay-out curves vary to reflect market conditions or the maturity of products/markets?

• Are there any specific accounting or other market issues that need to be addressed?

I am now in a position where I can build sophisticated and multi-faceted models in Excel.  It is possible to “start simple.”  Consider the example illustrated in Figure 2, showing how a weighted average calculation may be applied to a set of objectives or outcomes.

Figure 2 – Illustration – Simple Weighted Average Bonus Scheme

Control

In my experience:

The organisation wants to be able to “Control” the scheme so that it ensures that it delivers a good return on investment.  In a very dynamic emerging market, it may be very difficult to set parameters such as a sales or profitability target based on, say, a whole year.  One option would be to consider adjusting targets and paying out more frequently, thus ensuring the agile “model.” When the Covid pandemic threw planning and forecasting into comparative disarray, the company I was working with opted to publish and reward quarterly rather than annual targets.  At the same, whilst the business-as-usual scheme was temporarily put on hold, we focussed on the three elements that really mattered in the here and now – sales, profitability, and cash, whilst suspending two further elements until we had ridden out the storm.

Control is also an important consideration for the recipients of a bonus scheme.  Both individually and collectively, the question will be asked, “To what extent can I, can we influence the outcome or the results of the elements being rewarded?”  Perceived lack of control may lead to the employees disengaging and not striving to realise the results.  Typically, employees are more likely to go the extra mile if they sense a positive correlation between their efforts and the desired results and reward.  Striking the right balance between recognising individual and collective achievements will be as much a matter of philosophical or cultural preference as personal conviction as to how far performance is a product of individual or team performance.  There is no one right answer and each organisation has to develop and evolve it’s own approach.

Consistency

Employees will always compare the perceived “fairness” of the bonus parameters that apply to them vs. those applied to others, both inside and outside the organisation.  For this reason, I believe it is a good idea to have insights into the typical “market” practices for bonus models in the given industry sector, country, or culture and according to the type and hierarchical level of the role.  Broadly speaking, the bigger the role, the more skin in the game in terms of variable pay.  Similarly, the “sharper” the role is (a term from Hay Job Evaluation) in terms of being able to directly influence commercial outcomes, the higher the variable element.  So it is that organisational senior leadership and sales employees are – by and large – rewarded with a higher “at risk” pay element.  Internal comparisons are also important.  For this reason, it is worth considering which job families and functions will receive what bonus opportunities, and at what “level” of responsibility or seniority, which may – in turn – be underpinned by a systematic grading structure based on job size parameters.

Business Intelligence

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Pharmaceutical

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