Best Practice of the week: 5.5.2 Performance Pay
How to reward an employee’s heroic efforts when cash is tight?
Salaries have remained unchanged during the pandemic, but Mercer reports 94% of employers (in a survey of 662) will go ahead with 2020 raises. But many employees have put in heroic efforts: how to reward them in such uncertain times and cash is tight? Many large retailers have opted for the flexibility of full-time employee spot or one-time bonuses: by July 1 Amazon had paid $500 once, while Walmart had paid out $300 three times.
Definition of Performance pay: “How to reward exceptional work, financially and otherwise.”
Bonus types
- Employment bonuses: signing, referral, retention
- Performance or reward bonuses (lump-sum or equity) – annual or year-end bonuses(meeting a target)
- Spot awards (employee recognition)
- Milestone (longevity)
- Profit-sharing: contributions to trustee accounts
- Gainsharing: productivity increase or cost reduction
Employee considerations
- Employee vs. team: how is work organized?
- Salary vs. bonuses: how much can measurable employee or team performance affect profit?
- Potential for attaining the target
- How important is attracting and retaining talent?
- How important is knowledge capital?
- How significant an amount is required to create incentive?
Organizational considerations
- Business goals and targets: how well defined? Possibility of quantifying accurately?
- Cyclical cash flow
- Overall risk of business
- Industry practices
- Employee preferences
- Ability to manage bonus expectations each period so that the incentives remain, preventing entitlement
Bonus plan characteristics
- Simplicity/clarity
- Equitability
- On-time
Key Metrics
- All metrics: SMART (specific, measurable, achievable, relevant, time-sensitive)
- Quality: amount of work that has to be redone, quantity returned
3 Good Questions (discuss in a management meeting)
- What do employees value most about working here?
- Why should we pay more or less than our competitors?
- How do staff differ in their compensation needs?
“Spot bonuses” are a prudent and affordable way to boost morale during risky times. Because they are arbitrary, they need only be awarded when cash is on hand and some very short-term contingency met.
