When bonuses backfire

Many organisations invest significant resources in bonus schemes that ultimately demotivate their workforce. 

The most common pitfalls include:

• Obscure calculations: When employees can't understand how their bonus is determined, they question its legitimacy and fairness.
• Lack of tracking: Bonuses that materialise once a year without regular progress updates fail to motivate ongoing behaviour.
• Perceived insignificance: When the reward doesn't match the effort required, employees may disengage entirely.
• Fairness concerns: Perceptions that bonuses are unevenly distributed or favour certain departments create division rather than unity.
• Suspicion of manipulation: If employees believe figures were adjusted to minimise payouts, trust evaporates.
• Anonymous delivery: Bonuses that appear in employees pay without context or explanation miss a valuable opportunity to recognise contribution.

Successful Case Study

One particularly effective bonus scheme I contributed to design was implemented at an engineering company facing financial challenges. 

Rather than abandoning incentives during tough times, we decided to create a bonus scheme with the following key elements. 

The organisation was operating at a loss, but we wanted to incentivise collaboration to minimise these losses. Our approach was straightforward:

1. Clear, simple objective: Any reduction in forecast losses (up to a specified ceiling) would generate a bonus pool.
2. Equal distribution: Every employee—regardless of seniority or department—would receive exactly the same amount.
3. Regular transparency: The CEO communicated quarterly financial updates to the workforce, including the projected bonus based on year-to-date performance and forecast.
4. United purpose: The equal distribution created a sense that "we're all in this together".

The results were impressive, and the actual losses greatly reduced from the original budget. 

Employees appreciated the simplicity, fairness, and regular updates. 

More importantly, everyone understood exactly how their efforts contributed to reducing losses and increasing the potential bonus.

Key Principles for an Effective Bonus Scheme

Based on my observation of numerous schemes in several engineering businesses, I have identified three key principles for effective bonus schemes:

1. Simplify calculations: Design a bonus structure so straightforward that any employee could explain it to a colleague. Complexity breeds suspicion and disengagement.
2. Track progress consistently: Regular updates throughout the year keep the incentive visible and provide multiple regular motivational boosts.
3. Personalise delivery: When it is time to distribute bonuses, ensure line managers personally communicate it to each team member. This creates an opportunity to express genuine appreciation for specific contributions, answer questions about the bonus calculation and gather valuable feedback to refine the scheme for the following year.

The most successful bonus schemes aren't necessarily the most generous ones—they're the ones that employees understand, trust, and perceive as fair. 

By applying these principles, organisations can transform their incentive structures from potential demotivators into effective drivers of collaborative success.

Help

Nowadays I work with overstretched leaders of Engineering SMEs to help them prepare their business so they can achieve profitable growth.

To explore how I could help you, please use the link below to arrange a free 30-minute conversation.

http://tinyurl.com/HerveJardonCalendar