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.

Relevant Terms

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