Employees are a critical asset to any organisation. Engaged employees translate to a motivated and productive workforce, which in turn leads to positive outputs for the organisation and its customers.
There are plenty of ways to engage employees, with the primary source typically being compensation. Other methods include building a strong employee value proposition, inculcating an enriching corporate culture, providing plenty of career opportunities for employees, and on-the-job training. However, all these would be in vain without a strong total rewards philosophy. According to LinkedIn’s 2020 Global Talent Trends report, the top three reasons why Millennials left their job were: better compensation and benefits, more advancement and more of a challenge.
The compensation mix of employees typically differ depending on the type of role and seniority. However, there are various compensation vehicles that organisations can leverage on to drive different behaviours amongst employees. For instance, base salary is typically pegged to the job position, regardless of the job holder’s qualifications or past experience. Fixed cash allowances would be dependent on the nature of the job. For example, sales employees typically receive transportation and mobile allowances due to the mobility nature of the role. Bonuses (or variable bonuses) are then used as a compensation tool to drive employee performance.
What is variable bonus?
Based on the definition by Primeum, an incentive compensation blog, variable bonus is made up of multiple types of bonuses and varies according to the position held by the employee. The purpose of variable bonus is intended to compensate for employee’s performance and the bonus may be individual or shared.
Short-Term Incentive
Short-term incentive, also commonly referred to as performance pay, is typically provided for job functions where it is easy to define clear and consistent targets. As it is straightforward to set a standard of work expectations linked to a clear level of performance, this variable bonus tool is the ideal solution.
Performance bonuses typically mean that employees are paid based on a specific target. In most situations, the employee’s performance bonus is pegged to their ability to meet and exceed targets and their performance is assessed in terms of actual achievements measured against predefined targets.
Sales Incentive
Sales incentive is a type of bonus that is linked to results. These types of bonuses are typically provided to sales employees to reward them for selling a predetermined amount of goods and/or services. Sales incentives can come in the form of incentives or commissions.
Sales incentives is similar to performance pay, where predetermined incentives are provided to sales employees when they have met or exceeded a fixed sales target. This helps to motivate sales employees to achieve that particular target in order to receive the monetary award. Commission, on the other hand, is always in monetary form and is a percentage of the price of the product or service sold. The more the sales employee sells, the higher their commission.
Discretionary Bonus
Discretionary bonus is when the bonus is provided to the employee without any prior requirements of the bonus eligibility as well as how much or when the bonus will be disbursed. This type of bonus is typically not included in employees’ employment contract, which means that organisations are not obliged to give employees discretionary bonuses. There are various scenarios in which organisations may provide discretionary bonuses to employees, such as during an exceptionally-well financial year or to retain existing employees due to high turnover rates
Profit-Sharing
Profit-sharing plan is a type of incentive plan that gives employees a share in their organisation’s profits based on its quarterly or annual earnings. This type of plan is typically suited for publicly-traded organisations, and provides employees with a sense of corporate ownership. In terms of the amount provided, it is usually up to the company to decide how much of profits to be shared with the employees.
Long-Term Incentive
As the name suggests, long-term incentive is a type of compensation tool with a longer time horizon as compared to short-term incentives. Most long-term incentive plans have a time period of 2 to 5 years, and are used to promote long-term retention and alignment with corporate goals. As such, this type of incentive plan is typically offered to senior management positions or critical roles within the organisation, where the job has a crucial impact on the overall organisational strategy.
Leverage on a payroll software to manage your incentive plans
Managing various types of incentive plans can be confusing and taxing for HR and payroll. If the department is leveraging manual excel calculations for computation, chances are that the calculations are prone to inaccuracies and inconsistencies. Leveraging payroll software can help to address these inefficiencies, driving accuracy and minimising non-compliance with local statutory requirements.
While bonuses are often used to reward employees for the efforts and contributions to the organisation, it also offers plenty of payroll insights. As incentives are given out on the basis of meeting quantitative key performance indicators (KPIs), organisations can capitalise on payroll data within their payroll system to gain deeper insights in the distribution of bonuses and merit increments. For example, a low sales incentive payout for a particular financial year may suggest that sales employees are not meeting their sales targets or a case of lacklustre market demand.
Bonuses are no doubt a great compensation vehicle to drive the right employee behaviours within the organisation. Coupled with robust non-monetary benefits, the right mix of monetary and non-monetary rewards can help to encourage and create a highly-motivated and productive workforce within the organisation.
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