Individual bonuses allow companies to reward the performance of their best performers and thus retain and motivate these performers in a target-oriented manner. But many companies cut the link between individual performance and variable compensation and instead look for other ways of individual differentiation, such as spot bonuses. hkp.com spoke with the experts David Voggeser and Florian Hauser of hkp/// group about the advantages and disadvantages of this instrument, which is currently hotly discussed.
Mr. Voggeser, a lot of companies no longer distinguish between employees on the basis of their individual performance when it comes to their bonuses. What is driving this development?
David Voggeser: The decision to separate bonus payments from individual performance has many reasons. To a certain degree, companies want to streamline their administration or they no longer consider the often marginal distinction by their managers between good and bad performers useful. In some cases, they decide against it for cultural reasons, for example in order to reinforce the perception that everyone is in the same boat. Bonus payments are then based on corporate and/or divisional performance only.
What experience have these companies made so far?
Florian Hauser: After the initial relief of being released of an administrative burden, many companies often experience considerable disillusionment as the need to give top performers the due respect has not disappeared.
What are the alternatives?
Florian Hauser: For example, you can use differences in base salary increases to take individual performance into account. Simultaneously, however, such increases are delayed and usually also take other factors into account, such as the employee's potential. This means that the effect of the work performance is diluted. Also, these increases cannot be revoked so fixed costs increase. This will make the company's cost structure less flexible and lead to further increases in future, as with compound interest.
David Voggeser: And the differentiation through development programs, e.g. special training, or additional services for top performers does not have the same effect as monetary incentives. In addition, the administration of these processes often requires a great deal of effort even without additional individual differentiation.
So there is no chance of avoiding the differentiation of the bonus?
David Voggeser: As I have said, there is actually no way to escape differentiation - wherever it is carried out. The individual bonus connected to a performance or success is the most effective way of differentiation from our point of view. And with regard to the negative effects discussed, it is worth noting: It depends always on the design of the corresponding bonus systems as well as the use of these systems in day-to-day business.
Florian Hauser: Spot bonuses or spot awards are an alternative for monetary differentiation, which avoid the disadvantages of the bonus mentioned above and at the same time allow more agility regarding compensation. These spot bonuses are financial rewards that can be paid throughout the year.
How does that work?
Florian Hauser: Irrespective of the regular bonus, employees can be quickly and easily rewarded for excellent performance and success by their manager. A special pool of financial resources is normally available for this purpose, which can be fully used by these managers.
How common is this form of variable incentive?
David Voggeser: Currently, more than half of the companies in the hkp/// group Top Management Survey use a spot bonus program. This type of incentive has thus become more and more attractive since 2016. In 2016, the benchmark figure was still below one third. For the current year, we expect a further increase as well.
The hkp/// group Top Management Survey mainly includes large and medium-sized companies, some of which are listed on the stock exchange. What is the situation in smaller companies?
Florian Hauser: There are comparable developments all the way to the start-up world. In particular, around half of corporate start-ups also issue spot awards, and around one third of independent start-ups do so.
One could also have expected the opposite…
Florian Hauser: This difference is due to independent start-ups often still being in the process of establishing a formal compensation policy and defined incentive systems. In contrast, corporate start-ups have access to the compensation systems used in the respective parent company and the associated administration.
David Voggeser: Also, for stand-alone start-ups in particular, the link between the individual’s performance and the success of the company is more immediate and tangible. Employees of these young organizations are more often compensated through a direct participation in the success of the company, for example with shares in the company.
At the outset we pointed out that individual differentiation of the annual bonus is also associated with certain cultural challenges. What are your experiences when it comes to spot bonuses?
David Voggeser: Spot bonuses are linked to discretionary decisions by management. The leeway for decision-making involved requires a corporate culture, which values these freedoms and can do without rigid guidelines.
Florian Hauser: But like any system, it would be possible to bypass this. Who would have thought that the average annual bonus would end up with a significant overfulfilment of the target, i.e. that the majority of employees would achieve a target achievement of 100% or more? With spot bonuses, for example, the degradation of the system could be that spot bonuses are awarded alternately so that each employee receives one payment in turn or that only a few employees always receive a payment.
David Voggeser: But this is not a call for comprehensive restrictions. Rather, managers must have a common understanding of this tool and ultimately it must be used in line with the original objective. Companies need to trust their managers and they should value this trust and operate as managers, i.e. they should differentiate between their staff.
Mr Voggeser, Mr Hauser, thank you for the interview.
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