MyCIMA

Successful Bonus/Incentive Scheme

Replies : 10

I need to design an incentive/bonus scheme for the next FY. We have a small company, 3m t/o, 100 employees. Three different but inter-linked revenue generating units. Just wondering if anyone has any experience of how a successful bonus/incentive scheme could be operated?

I've had a couple of suggestions, one based on budget targets, another based on sharing out (say) 10% of net profits. 

Any input anyone? 

Sources of information

CIMA joined forces with PwC and Radley Yeldar to form the Report Leadership group which has looked at executive remuneration.  This report does contain a bit on scheme design and can be accessed via the RL website which also showcases some best practice examples of executive remuneration.  This will give you some signposts to companies with good schemes.

Also several organisations review annual reports and commend executive remuneration policy and reporting.  For examples. the ICSA Hermes award in 2009 for best practice disclosure on remuneration policy and practice went to Aviva plc and Dana Petroleum plc.  Looking through the remuneration report for these two organisations will give you some pointers that you might find useful when designing your own scheme.

Designing incentive scheme

Dear Dahu,

I think applying an uniforma incentive scheme to all the employees is not correct. Even though targets/objectives of each employee should translate into organisational objectives, it is difficult to keep that always in mind in reality. Further, some of the employees may not be able to have impact on profitability even though they have done "outstanding" in the tasks given to them. To deny incentive to these employees is to demotivate your achievers.

To given an example, a operational worker may have worked very well. He has shown increase in productivity, has reduced waste and also made certain suggestions for improvement in other areas. He should not be denied incentive just because company's profitability is not upto the mark. 

However, on the other hand, if company is not making enough profits, paying higher incentives would lead to losses & liquidity problems.

Hence, I think, the incentive scheme should be a mix of individual as well as organisation's performance.

Incentive schemes

A fairly easy to administer bonus scheme. I am not sure if you are a sales or production orientated company, but in principle can be applied to both.

- No bonuses paid unless breakeven is reached.
- Above breakeven, bonuses are based as a % of GP, and there are different levels of bonus for each responsibility area, i.e. operational get 2.5%, tactical 5% and strategic 7.5%. This obviously has to be pr'd depending on number of staff in each department.
- No penalties if breakeven not met, and no carry over to following months.

To make these work, everyone needs to be accountable for what they do. Careful studies of sales calls per hour and other performance measures need to be examined and scrutinised to see if efficiencies can be made. It can be painful, but we have always found that this is the area where resources are wasted - people not producing enough. At the end of it, they monitor themselves, seeing how much they can do in a certain time and are rewarded through the bonus scheme.

This way, it is the interest of all staff to reach targets, and the sky is the limit on what size of bonus they get. The incentive is on GP, so deters a bonus on sales problem where GP can be erroded through discounts.

There is always scope for discretionary bonuses, to be decided at board level.

The aim is to get everyone working hard to meet objectives, but not at the risk of profit. Other bonus schemes for quality and customer satisfaction can also be set up if these areas need improving.

The KEY thing is meeting breakeven first, if breakeven is not being reached, there is obviously a serious problem.

We have the same turnover with a quarter of the staff!

 

An Incentive Model as per you Requirements

In My view, anyone should get incetive for his performance in his area of authority and accountibility only. If a production worker/CSR has no control over Pricing and other strategic areas, which ultimately decide profiotability, their incentive should not be based on profits/profitibility.

AS your company is already generating profit, their is no point of thinking about breakeven. The question is how to compensate employess.

A very simple rule can be applied. Judge every one on what they are authorised to do and what they are accountable of. For eg. A worker should be given incentive on his performance in quality production, less wastage, a CSR on quality of handling customers, Handling Time etc, a Finance Manager on less cost of compliance, saving taxes, timely reporting etc.

 Similarly Different Criteria can be set for every employee based on his areas of responsibility.

cima finalist to acca

what exemptions do you get in acca professional if you finish cima

Hi Katolo,

Can you please start a new discussion on this question as you are taking the main discussion thread off topic.  Alternatively you might like to contact the ACCA direct about this. 

Regards,

Bill Haskins, CIMAsphere moderator

an incentive model

in my view, if all your workers are on the same level eg work men uniform incentive payment will be ideal other wise if different levels and skills then work out how much each group contibutes to production and profit then use the same percentage for there incentives, remember you cannot payout everything you need to remain with something thats why you are in business.

i remeber the time i was working for the mines we had a similar arrangement where if there is a bonus each employee will get a certain amount depending in what category you are in, which will limit the amounts each employee gets at the end of the day.

A factor

Any recipient of an incentive or bonus should know that it has been achieved. They should not wait to be informed by someone else. If they do not have or receive the information on which the inc/bonus is to be paid, why are they getting 'it'? Best regards Cliff Moggs

an incentive model

we have been operating an employee bonus scheme for 7 years on the following principles

*we use the EVA model as the basis and just alter WACofC each year. This ensures that any bonus distribution is made only after an economic profit is generated

* every employee who is employed as at year end and is in a permanent capacity is elegible - we have businesses in 5 countries

* the bonus pool what ever its size is distributed based on your actual share of the total company wage pool for the year ie Economic Profit divided by Total Wage times your share of Total Wage Pool

* the Economic Profit is divided in three equal parts - 1/3 for the shareholders, 1/3 for the business, 1/3 for employees

* the consolidated accounts for the group are used and therefore the currency will be that of the consolidated group

* it is paid in the second month after year-end

Whilst the formula may seem complicated the benefits are clear

* it is completely fair - everyone particpates based on actual overall performance of both the P&L and Balance Sheet based on your market worth

* it is after any incentive schemes (ie commissions, individual incentives etc)

* it builds in a natural tension - (why are you doing this if it doesn't add EP)

* If the business makes an EP then there is no negative cash flow effect as it is affordable after adding Economic Value to the business

* it focusses everyone on a uniform goal and thereby avoids internal conflicts

 

Clarification

To Gary Oliver,

 Could you please clarify what you mean by WACofC?

 

Incentive Model

I think you could try implementing a share based model (Share appreciation Rights Scheme). It is a new generation incentive scheme with the overaching goal of creating value to shareholders and financial benefits for participants. It is structured to optimise company's interests. it reduces the dilutive impact compared to issue of shares as an incentive, it facilitates retention of key talent.