At this time of year, as the traditional financial year closes, many businesses consider the level of employee bonus they may be able to pay out to their staff. It raises some interesting questions about the use of bonuses and their long term impact:

  • Do bonuses increase staff retention over time?
  • Do they meaningfully increase employee motivation and engagement?
  • What impact do bonuses make on the psychological contract between you as an employer and your employees?
  • How do bonuses compare to other motivational techniques?

The psychological contract is defined by the Chartered Institute of Personnel and Development (CIPD) as the ‘perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other’. In other words, it effectively tells employees what they are required to do to meet their side of the bargain and what they can expect from their job.

When the psychological contract breaks down it impacts negatively on employee satisfaction, on commitment and engagement of employees, on employee well-being and on turnover rates.

Most companies use a bonus as a recognition tool and as a reward for performance. When administered well, a bonus usually has a short-term positive effect on individuals’ motivation and engagement.

There is evidence that suggests transparency around bonus payments and the wider remuneration policy of your business will have a significant effect on retention. A recent CIPD survey on attitudes to pay and pensions demonstrated that many employees don’t understand how their salary links to their performance. Only just over half (51%) of workers surveyed said their organisation had explained to them the rationale behind its pay decisions and more than three quarters (76%) of employees said they hadn’t been told what they needed to achieve to get a pay rise, and only a quarter (26%) said their employer is giving them the training they need to increase their earnings in the future. The survey suggested that employees are more satisfied with the outcome of pay reviews and bonus awards if the organisation takes time to explain the reasons behind it.

So, when it comes to Reward, make it clear what the incentives are, what employees need to do to achieve them, and reward fairly across all departments. This will help employees to see the benefits of their efforts and this in turn, will strengthen your bond with them.

We believe that Herzberg’s model of hygiene and motivational factors is still as valid today as when he came up with his initial theory in 1959. Herzberg asserted that factors such as salary, security and work conditions are ‘hygiene’ or maintenance factors which are required to provide a basic foundation for work but it is job enrichments factors such as responsibility, personal growth, recognition and advancement that are the true motivators.

Plenty of more recent surveys including by the Institute of Leadership and Management (ILM) confirm that there are other factors which will have longer-term benefits to staff morale, retention and engagement beyond paying bonuses and having a clear approach to reward.

The other big motivators are not intrinsically linked to pay and remuneration and arguably, will have a bigger impact on the strength of the psychological contract. These factors will include:

  • Employer brand (or employee value proposition) – a set of corporate values and purpose which employees can identify with: ‘what do I need to do to be a part of it’, ‘do I belong’ and ‘I see what’s in it for me’?
  • Communication – honest, frequent two-way communication between workers and managers, including constructive discussion of workplace issues.
  • Challenging and exciting work – everyone having a challenge plan and periodically being asked to rate the degree of excitement their job brings them.
  • Opportunities – people having a variety of opportunity and freedom to take responsibility for their learning plans and growth.
  • Control over the job – people being trusted to shape the way they work and the projects they get involved in; they have been recruited to do a job – allow them to do it.
    Business Impact – people are provided with information on the effect their work is having on the business and the business you sell or provide a service to, so they know their work makes a

In conclusion, a balanced approach to Reward and bonus payments will help in the short term but to get the long term benefits of a well-motivated, satisfied workforce, efforts to develop a foundation of trust, communication, responsibility and challenge are the keys to success.

For more information on setting up a Reward bonus scheme or for advice about developing your employer brand and managing employee performance then see our website, or contact Julia or Angela for more information.