Remuneration

4. Bonuses and Commission

Bonuses and commission payments need to be seen by employees as extras, or there will be no incentive effect.

4.1 Incentives work, if the targets are right.

• Incentive pay is only effective when it relates to specific achievements.
• It needs to be closely matched to the business and to the people involved.
• Incentives based on competition backfire if the same people always win.

4.2 To get the desired results, you need to decide whose performance an incentive scheme should be based on.

• Incentives may be linked to performance at the company, team or individual level. The right linkage will depend on factors such as how much one person or group's success depends on the efforts of others.
• Research shows many performance-related pay schemes give disappointing results, though this may often be due to poor targeting and unrealistic expectations.
• Profit-related pay is a type of performance-related pay that automatically reflects a whole company's achievements. Even without tax breaks, profit-related pay (paid to everyone at, say, ten per cent of salary) can be a powerful, non-divisive incentive.

4.3 Performance bonuses need to be large enough to be significant to the individual.

• You will usually need to make bonuses between ten per cent and 25 per cent of salary to motivate employees effectively.

4.4 Other bonuses can be used to focus attention on areas that affect the success of your business (eg a weekly productivity bonus or a 13th month's pay to boost staff retention).

4.5 Commission is the usual basis of pay for sales operations.

• But low-basic, high-commission pay structures may not be the best way to motivate and retain people, as commission will be seen as income, not as incentive.