Merit increase or bonus, how do you reward performance ?

Welcome back to Compensation Insider ! I wish you an excellent year and hope you will be visiting my site regularly 🙂

Given we are at the beginning of the year and most HR and Compensation experts are about to go through salary reviews and bonus payments, I thought it would be relevant to share an answer I gave 2 years ago to my friend Wael. To further clarify his question, he explained : “High inflation as well as increasing competition for talents necessitate annual salary reviews/ increases. For these we need a regional and international benchmark. But how about star employees rewards? What is a good practice to reward them, in addition to salary review for all others, without jeopardizing the profit margin?” You will find all 18 answers here, and here is the one I gave – I still go for it 100% :

Rewarding performance comes in many different forms and you need to have a comprehensive system in place.

1. Base pay increase

It covers market movement and maintaining the company’s competitiveness in attracting the right talents. It can also cover “inflation” (though this approach has a lot of long-term costs linked to expectations of salary increase even when the company/employee is not necessarily doing well).

Hence there is the  need to benchmark to market, and define clearly the position that fits your company’s strategy : to pay below, at or above market. Each approach has its merits and disadvantages.

Base pay increase can also come as recognition for past performance combined with appreciation for future potential, in the form of promotion. But in general, I don’t believe that base pay increase should reward solely the performance related to achieving the year’s objectives.

2. PLUS Bonus

If you decide to pay one, especially to reward your star performers, there are a number of things that are to be considered.

A discretionary bonus may give the manager a feeling of control over the team members because he/she decides the payment, yet in reality this does not foster performance or collaboration. The truth is, people need line of sight : they need to understand how their actions can influence the company results / performance.

It is also important to have a least a good part of the objectives quantified and clarified at the beginning of the performance evaluation cycle so that there is a clear alignment between the company’s objectives and what employees will strive to achieve.

Then, describing how this will translate into a financial reward for the employees is also important. And finally, you need to ensure that the evaluation process is fair, so that the payments are perceived a equitable, and you need to communicate thoroughly.

A bonus should never be considered a diminution of profit or a risk for your profit margin. A good rewards system will be designed to take into account its related costs from the onset, therefore adapting the simulations to include both fixed and variable personnel costs (this means you need to have the proper HRIS and financial systems in place for cost simulations).

You can design systems where the pool of money to be distributed is linked to the profit, and thereafter distributed on the basis of individual or team performance so that your stars, even in a period of economic duress, are still rewarded – otherwise, as soon as the economy picks up, you will see a brain drain…

3. PLUS Recognition systems

You can implement other elements that will allow you to reward “on the spot” when great results are achieved, whether at the individual or team level. This goes from the simple, free stuff just like saying “thank you and congratulations” in private or in public, to full-scale stock option awards, through one-off payments or gift vouchers etc….

The most important element there is being able to react quickly and not wait until the end of the year… at which point it is too late for the recognition to have its expected motivational / morale boost effect.

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Related posts :

• What to consider for salary planning ?
• How to decide how many promotions to grant each year
• The best order in which to apply salary increases in any organisation
• How do you link performance management and a performance-driven culture ?

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