Can Bonuses Ever Be Justified Again?

With the country suffering through the worst recession in living memory there has been understandable public dismay at large bonus payments to senior executives. When those bonuses have gone to executives who are widely seen as responsible for creating the financial crisis, that dismay has tipped over into anger.

Sir Fred Goodwin of the Royal Bank of Scotland, commonly known as Fred the Shred, has been at the centre of all this, having pocketed a pension fund worth more than £16 million, despite bringing one of the UK’s oldest and most respected banking institutions to its knees. In March he became the victim of an anti-banking group called ‘Bank Bosses Are Criminals’ who vandalised his home.

In February, Royal Bank of Scotland, now 70 per cent owned by the taxpayer and which has received £20bn in public funds, cut its planned £1bn bonus pool by 90 per cent after pressure from the Government.

In the US, President Barack Obama has expressed anger at $165m bonuses pledged to Bonus web3 executives of bailed-out insurer AIG, calling the payments “an outrage”. “It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165m in extra pay,” he said.

Yet despite this, City workers have continued to pocket their bonus payments. survey conducted by the City recruitment consultancy Morgan McKinley revealed that 73 per cent of those working at 200 banks and other financial institutions in the UK received bonus payments in 2008. 16 per cent said their bonuses had actually increased.

All of this has served to put the issue of bonuses firmly under the spotlight. While the issues have centred on bonuses awarded to bankers, it has led some in the sales profession to think about the bonuses that they receive and pay. Can bonuses be justified, and if so, how should they be awarded?

Questioning sales bonuses

Leigh Ashton, MD of The Sales Consultancy, a company which provides training and advice to sales teams at SMEs and large corporates such as Barclays, believes that bonuses have little power to motivate salespeople. She says: “A common error many sales managers make is to see bonuses as a motivation tool. The trouble is that people are rarely motivated by money. There are others sticks and carrots you can use for that.”

She does believe that bonuses are important, but only because they are traditional. “Salespeople are used to receiving bonuses,” she says. Yet, few finance officers will be satisfied with that explanation for such a large debit on the balance sheet. Bonuses, if they are to be justified, need to have a clear, beneficial effect on the sales and profits of the company.

Most observers agree that bonuses can do this. The promise of significant bonuses can help to recruit top salespeople, and it can be an effective tool encouraging certain behaviours and outputs – tell a salesperson that they will get a 10% bonus if they visit one extra prospect a week and chances are they will find a way to do so.

The problem is that many bonus schemes for salespeople are not devised or implemented effectively The company might find that the salesperson is visiting an extra prospect a week, but it produces no extra sales because the salesperson is rushed in that meeting. Or they may have no way of actually telling whether or not the meeting ever took place.

Recent research from consultants OpenSymmetry found that 63% of UK sales directors worry occasionally or frequently about the accuracy of commission payments to their sales staff. 44% of respondents regularly see commission payments at their organisation beset by errors of 5% or more. Only 28% say their commission scheme is effective in motivating their sales force.

Time to get it right

Not only is this a widespread problem. It is an increasingly important one. Bill Schuh, VP Europe at Callidus Software, a provider of sales performance management tools, comments: “Despite the current backlash against executive compensation, now is the perfect time to be introducing robust, company-wide pay for performance schemes as they will help organisations meet challenging market conditions.”

He adds: “Pay for performance is an incredibly powerful lever to change employee behaviour, but organisations need to think through the consequences of targets and have the ability to translate them into specific, measurable objectives that they understand and can control. In a recession pay for performance is the perfect model to ensure staff are supporting business objectives and positioning the company to emerge from the downturn in stronger shape than the competition.”

As anyone who runs a sales team knows, devising and implementing a successful bonus scheme is a difficult task that requires specialist skills and long-term attention. You can though make a good start by following these ten steps.

Ten steps to a successful bonus scheme

1) Know what behaviours and outcomes you want to encourage.

This is the most vital step. Encourage the wrong behaviours and outcomes and your bonus scheme will be ineffective at best, and destructive at worst. So begin with a clear idea of your objectives, then investigate fully to identify which behaviours and outcomes from your salespeople will produce that result. It could be arriving on time, making 100 calls a day, or reaching certain sales targets – whatever it is it must link to your broader business objectives.

2) Ensure that the scheme will be self-financing

Be careful you don’t end up paying more in bonuses than you generate by introducing the scheme. Ultimately the bonus payment should be a percentage of the additional profit it generates.

3) Consider profit and long-term customer relationships as well as short term sales

Too many sales bonus schemes reward only short-term sales. They produce salespeople who have little regard for their company’s reputation, little interest in their longer-term sales pipeline, and little enthusiasm for post-sales customer service. Make sure your scheme encourages sustained sales success.

4) Make targets ambitious but achievable

Targets that are too easy for your salespeople to reach produce too little benefit for you and fail to develop their skills and experience. Targets that are too difficult to achieve just demoralise your salespeople, and render the scheme ineffectual.

5) Invest in accurate measurement systems and technologies

It’s no good basing bonus payments on the achievement of something you cannot measure. If you have no system for counting the number of times a salesperson picks up the phone, then you will have to rely on your employees’ word for it, and you may find yourself paying everyone a bonus! There are consultants who can advise you on how to measure performance, and technologies that can help you do it – make the necessary investments in this area.

6) Get the balance right between individual and group bonuses

While you want all your salespeople to be aiming to achieve their individual sales targets, you also want them to work together as a team. They need to encourage each other, share best practice, work together on leads, and so on. By making part of the bonus payment dependent on group performance you can create a team which is more than the sum of its individual parts.

7) Don’t use bonuses to motivate

Bonuses are useful tools for recruitment, retention and encouraging certain behaviours and outcomes. They are not a replacement for proper management.

8) Communicate it well

Designing your bonus scheme is only the first stage. You also need to implement it successfully. To do that you need first of all to ensure that everyone knows about it and understands what they need to do to earn a bonus. Hold a meeting to announce and discuss it. E-mail information to all salespeople. Meet salespeople individually to discuss what it means for them.

9) Provide progress reports

As well as monitoring progress towards bonuses in individual appraisal meetings, hold regular team meetings to update the entire department on individuals who are performing well, and progress towards team targets. Never under-estimate the power of a sales board.

10) Review frequently

Your priorities will change over time, so plan to review your bonus scheme at least once a year. In this way you will ensure it continues to produce the results you need.

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