KEY POINTS:
Companies that offer their staff bonuses for a job well done, for meeting targets or that share annual profits with staff, do better than those that do not. That's the view of HR specialist Martin Price, who says incentive schemes including cash payments to staff help employers retain good workers and says staff become more loyal to their company as a result.
"It also helps business owners manage their staffing costs because they only pay extra money when performance targets are reached, and so day-to-day costs of the business are reduced," says Price.
"What incentive schemes do from a financial point of view is to enable employers to divert some of the incessant financial pressure from the labour market into a variable payment. The value for the employer is that it pays extra money to staff when the company does well and the employee gets a boost for meeting targets or lifting productivity."
Price launched a remuneration and reward consulting firm HR Equations in 2001 after leaving Telecom as acting general manager of HR.
He says managers need to be clear on what is being offered and what the targets are.
"If managers communicate well then everyone knows what the rules of the game are and that's really important, because if the rules aren't clear then no one is going to be especially rewarded or motivated."
Price says employers need to understand the distinction between instant motivation schemes (such as a performance related bonus) and a long-term reward (annual profit share). But instant motivation schemes can come with their downsides as they can cause internal competition within a department.
This can sometimes be destructive unless a strong team leader ensures fair play among sales teams.
"In these situations the sales manager needs to implement a fair sales lead allocation system," says Price.
"So if there are people generating leads then those leads need to be distributed to sales staff in a way that is seen as being fair, or you will get what you don't want [internal competition that can compromise the company]."
Price says research shows that money is a clear motivator.
"Offer someone 20 per cent less to do a new job and see what response you get. To say money is not a motivator is not born out by research."
Price says New Zealand has a conservative approach to bonus schemes when compared with Australia.
He says the difference in pay packages between the two countries is mainly down to the bonus culture that has developed across the Tasman.
"It is the main reason why New Zealand pays poorly for management jobs," says Price. "It's a broad statement, I know, but if you took two similar jobs - one in New Zealand and one in Australia - you'll find they both pay about the same in salary.
"But Australian firms have a far more aggressive bonus structure and so pay far more than New Zealand firms overall.
"Executive bonus schemes here may account for 15 per cent of salary on average - in Australia it's often 40 per cent. You can earn a pile more in Australia than here."
Price says the way executives are paid in New Zealand is out of step with the rest of the Western world. But why?
"It's the great Kiwi egalitarian way of thinking and it's causing a problem because we are falling behind Australia on the overall pay stakes for management roles."
Long-term rewards schemes are worthwhile, says Price, but don't expect any sudden changes in staff performance because the gap between action and reward is too long.
He says annual bonuses and profit sharing are ideal for increasing teamwork, not individual performance.
"You are not going to get an individual to bust their backside today because in 12 months' time they may get a bonus. What you look for here is the soft side, cultural stuff that includes fostering teamwork or successfully completing a project work - long term behavioural change and commitment to the cause.
"Don't expect a person to change their behaviour today because of a long-term incentive."
Price also says bonus schemes should be team-based.
"If you look at a typical pay packet, your base salary already determines your personal worth. It reflects the value of your CV in the market and you will get an annual pay review based on your past performance.
"So when it comes to the bonus, there's no point reinventing the individual staff package - you have already captured that in the base salary. So the bonus should be for teamwork and what's done as a group, and then you get the right balance."
Price says his guide for team-based annual bonus is 15 per cent of salary.
"The bonus needs to be big enough to make a difference. So on a $50,000 salary that would be about $5000 after tax - enough for a holiday.
"If you pay a bonus of 15 per cent, the company will enjoy some labour market protection as it will be paying over and above the typical salary that a company's competitors may be paying - it will help a company retain staff and engender loyalty.
"If you really want to send a message to your staff that you want their loyalty and that you care, that you are in this [business] together - we fail, you fail - you fail, we fail - if you want to send that message of mutual dependence and mutual gain then pay staff a bonus."
Price says the worst thing a company can do is to make a fortune in profit over the course of a year and then offer staff just a cost of living pay rise.
"That's a very bad message," he says. "The company is saying to its staff, 'We made all this money but the most we can give you is a four per cent pay rise'. Staff will ask themselves, 'So why did I do all that overtime, why did I go the extra mile, why did I stay late?' And of course there is no good reason.
"Tell me an employee who doesn't want more money if they and their mates do really well. I don't think you'll find one."
Price says bonus schemes are an essential tool if an organisation is to create a financial partnership between shareholders and employees.
If employees produce good results, some of that surplus should be shared with them.
This is a very strong cultural message: "Shareholders and employees are mutually dependent. We need each other if both of us are to financially prosper".
MYTHS ABOUT MONEY
The University of Arkansas' analysis of 38 studies on pay across different samples, geographies, industries, job types and time frames explodes the following myths:
* Myth 1: Financial incentives do not motivate
Finding: Financial incentives consistently improve quantity of performance.
* Myth 2: People do not value money
Finding: Money makes a difference in people's behaviour
* Myth 3: Financial incentives are punishing for people
Finding: People find incentives rewarding
* Myth 4: Financial incentives undermine personal, internalised motivation
Finding: People find financial incentives complement personal, internalised motivation
* Myth 5: Financial incentives erode the quality of performance
Finding: At worst, financial incentives are unrelated to performance quality. At best, financial incentives can complement performance quality.
Source: HR Equations
