Amicus Guide

to Bonus
Schemes

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 ■ CONTENTS

What is a Bonus Scheme? 4

Why have a Bonus Scheme? 4

Types of Bonus Scheme 5

Bonus payments 11

Negotiating/Equality issues and Bonus Schemes 13

Amicus Guide to Bonus Schemes
First printing April 2006

Bonus Schemes – a Trade Union perspective 16

Conclusion 18

Published by Amicus

General Secretary Derek Simpson

35 King Street, Covent Garden, London WC2E 8JG

Hayes Court 33-37 Moreland St

West Common Road London
Bromley BR2 7AU EC1V 3HA
Tel: 020 8462 7755 Tel: 020 7505 3000
Fax: 020 8315 8234 Fax: 020 7505 3030

2 This guide book is downloadable in PDF format from 3

www.amicustheunion.org
 ■ What is a Bonus Scheme
At best , a bonus scheme is a self-financing system that rewards
employees for improved performance. These can be measured in
terms of single issues like output or profit but are increasingly
being measured against a broader set of business goals. As such
they are more flexible and can be modified or adjusted as
necessary from year to year to take account of changing business
priorities.
Bonuses are additions to pay that are linked to individual or team
performance and are measured against a set of objective criteria.
Employers introduce bonus payments to reward individuals or a
team for doing well. By definition a `bonus’ payment is an extra
and is not part of basic pay. It is defined as pay under the law in
that it must not be gender biased.
■ Why have a bonus scheme?
Companies will often use bonus schemes as a method of
motivating employees to achieve key business objectives, by
rewarding staff for good performance at an individual, team,
departmental or corporate level. According to a survey of UK
organisations by The Work Foundation almost two thirds (64%) of
companies believe their schemes to be effective in helping to meet
organisational objectives.
Companies often cite the following reasons for introducing bonus
schemes:
• To improve business performance (eg productivity, sales or profits)
• To focus employees’ efforts on key objectives such as customer
service, quality and on-time delivery
• To increase employee motivation by establishing a clear link
between pay and performance (at an individual or team level)
• To support stakeholder ideals by allowing employees to share in
the success of the business
• To encourage change within the organisation
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• As a way of rewarding staff as and when the business is
performing well, without permanently increasing the pay bill.
■ Types of Bonus Scheme
The kinds of bonus and incentive arrangements covered in this
guide are only one way in which organisations reward and
motivate employees Organisations use a variety of forms of reward
and remuneration including basic salaries and extending to non-
cash incentives and recognition awards. Bonus schemes can be
difficult to categorise but in general they operate at four different
levels.
These can be roughly defined as:
• Individual
• Team
• Site
• Corporate
Bonus schemes can be based on a single factor or a range of
factors.
Single factor schemes allow special focus to be put on a key
target or business objective, such as profits or productivity, or a
matter that needs particular short-term attention.
Multi-factor schemes take in a wide range of factors and may
include targets at a corporate level as well as targets aimed at a
particular department or team.
The balanced scorecard approach is used by some organisations to
establish their business objectives. One method of helping to
pursue these balanced objectives is to introduce a multi-factor
bonus scheme. For example, by basing variable pay on the
achievement of targets against a balanced scorecard, Norwich
Union Insurance is able to measure performance from a range of
perspectives such as change, efficiency, people and customer. The
scheme helps managers to link individual and team efforts to the
overall business goals. Support staff may be set targets at an
individual and or team level depending on what is most
appropriate to achieving the balanced scorecard objectives of their
particular business unit.
 In some cases, a single-factor scheme covering a key area at
corporate level, such as profits or productivity, may be seen in
effect as delivering on the company’s overall objectives by
measuring the performance of employees and of the business as a
whole. Other organisations prefer to apply their balanced
objectives to other elements of reward, such as individual
performance-related pay, rather than to free-standing bonus plans.
Below is a list of factors that are often used to establish
both single and multi factor bonus schemes:
• productivity and output
• quality
• safety
• financial performance/profits
• cost management
• sales
• customer service/satisfaction
• attendance
• individual performance.
Productivity and output
The bonus arrangements in manufacturing often focus heavily on
levels of productivity. Toyota Motor Manufacturing UK bases part
of its three-factor bonus on a production efficiency index, which
measures the actual man hours required to produce good quality
parts compared to benchmark times. At the Plymouth operation of
Toshiba Information Systems (UK), output is measured against
monthly and quarterly schedules. Companies operating in other
sectors also measure output or productivity in various ways. For
example, the AA’s patrols are measured on the time taken from
receiving details of a job to completing it and the proportion of
vehicles fixed at the roadside. In this type of circumstance of
course, good productivity also equates with good customer service.
6 The precise definitions of what constitutes profit in this context are
Quality
In manufacturing, multi-factor schemes have often followed a
recognition that the more traditional single-factor productivity
arrangements may need to make explicit allowance for quality
considerations as well. All the multi-factor schemes in this guide
that reward productivity or output also include measures of quality
to prevent efficiency gains coming at the expense of a
deterioration in service or product standards. For example, the two-
factor bonus operated by Toshiba Information Systems’ Plymouth
operation is based on output and quality — with both weighted
equally. It calculates quality as the number of defects found on a
daily and monthly basis.
Safety
Health and safety is most likely to feature as a factor in bonus
schemes in manufacturing or other contexts where the perceived
risks are highest. Safety is, for example, taken into account in the
schemes at BP Grangemouth and Kimberly-Clark’s Barrow Mill
operation. At the latter, it is measured against the lost time
records of individual employees.
Financial performance/Profits
A considerable number of bonus schemes include financial targets
and some are based solely on profits. Some of the profit-related
schemes have their origin in the now defunct Inland Revenue
registered profit-related pay (PRP) or approved profit-sharing
schemes.
Profits are typically measured at corporate level, although some
organisations have also linked the generation of the bonus pool to
business unit profits so that the effect that the individual has on
the size of the bonus is more visible. For example, for the majority
of employees in The Big Food Group, 75 per cent of the bonus
potential is linked to the business unit profit target and 25 per cent
to the group profit target. The Asda Store Bonus Scheme is also
based on the performance of the company and individual stores.
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well beyond the scope of this guide. However it is worth noting
 that several of the companies featured here, particularly in the
banking sector, use the concept of ‘economic profit’ or economic
value added as the key measure. This takes into account net
operating profit after tax, less the cost of capital.
Cost management
Gain-sharing bonus schemes particularly focus on cost reduction
and efficiency savings. BP Grangemouth, Yorkshire Building Society
and TRW Systems, all factor cost control into their gain-sharing
schemes.
Gain-sharing is a formula-based type of bonus scheme that enables
employees to share in the financial gains and efficiency savings
made by a company as a result of improved performance. The
formula determines how the gains are to be shared between the
company and its employees. In manufacturing contexts, such
schemes often operate at site level.
Sales
Sales revenue commonly features as a factor in bonus schemes
operated by service sector companies, particularly retail
organisations and financial services firms. At the Nationwide
Building Society, these targets relate to mortgage book growth,
membership growth and growth in new products opened. Marks
and Spencer Group operates a single factor scheme based on sales
growth. The bonus schemes operated by The Great Eastern Hotel
and the AA also include sales targets.
Customer service
There is a growing tendency to include customer service measures
in bonus schemes. This is particularly the case in retail and
elsewhere in the service sector. For example, United Utilities Service
Delivery had a target to reduce the number of written complaints
by ten per cent in 2002/03 and ‘meeting customer needs’ is one of
the personal objectives taken into account for employees at HSBC
Bank under its ‘Let’s Reward Success’ incentive scheme.
8 permitted. If employees at Daewoo Electronics are late on one
Public sector organisations also increasingly link bonus payments to
their customer service targets. Companies House has service
targets which include processing 99 per cent of documents within
five days of receipt and responding to 90 per cent of telephone
calls within 20 seconds.
Attendance
Attendance is often one of the measures included in multi-factor
bonus schemes. Attendance is a factor in the schemes at
Companies House, TRW Systems and Yorkshire Building Society.
Attendance tends to be measured at a site or team level.
Rewarding employees for perfect attendance
Some organisations continue to operate single-factor bonuses to
reward individual employees for ‘perfect’ or ‘full’ attendance,
usually measured over a week or a month. The definitions of ‘full’
attendance often allow some leeway for absence in specified
circumstances, for example, antenatal visits and other such
appointments are generally not counted as absence for the
purposes of the bonus calculation. Other exemptions might include
hospitalisation, bereavement leave, approved maternity or paternity
leave, jury and TA service.
Employees at Pork Farm Bowyers can lose up to four hours over
the week without any loss of attendance bonus. Generally, the
schemes pay out in full or not at all. However, at a few
organisations, such as Wirral Hospital, there is a sliding scale of
payments reflecting various levels of attendance. Toshiba
Information Systems’ Plymouth operation pays a reduced amount
in instances where one day a month, (or over the period of a
season), is lost through absence.
A certain amount of lateness may also be tolerated when
establishing an employee’s absence rate and his or her eligibility for
bonus payments. But practice varies widely on this. At Matsushita
Electronic Components (UK), no lateness or early leaving is
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occasion in the month, and for longer than half-an-hour, they are
 disqualified from the attendance bonus scheme for that period. At
Honda, any single incident of lateness over two hours counts as
■ Bonus Payments
Many bonus schemes are self-financing, using profits or cost
absence. In addition, if an employee is late or leaves early on three
savings to create a bonus pool which is then distributed among
occasions over a 12-month period, (not including those times
employees in a variety of ways. The frequency of these payments
where lateness was for more than two hours), this is also counted
varies and often depends on the objectives of the scheme.
as absence.
However, before any payments are made, qualifying hurdles or
minimum target levels may have to be met.
However, too many exemptions or valid reasons for absence can
undermine the rationale for an attendance bonus. This has no
Bonuses may be paid as an equal flat-rate cash amount or as a
doubt played a part in the decision by a number of companies to
percentage of salary across a department, site or company.
phase out attendance bonuses or consolidate them into basic pay.
Payments may be further differentiated in the following ways:
• vary by grade or role
Individual performance
• reflect individual performance
Individual performance can be included as a factor in its own right,
• be based on team performance.
being derived from performance appraisals or separately measured,
Individual performance can itself be based on a number of
‘factors’.
Distribution of payments based on a grade or role
The level of awards made by HSBC Bank varies according to job
For example, Hitachi Automotive Products Europe bases its
and grade. Target awards reflect whether or not an individual
personal performance bonus against six key criteria: customer
works in an income-generating or a support environment, those in
focus, leadership, initiative, teamwork, enthusiasm/motivation and
income-generating roles receive target awards set one per cent
ability/ flexibility.
higher than for support staff at the same grade. In its team bonus
trials, Customs & Excise has tested out both flat-rate payments to
At United Utilities Service Delivery, 40 per cent of the bonus is
all team members and varying payments depending on job band.
based on individual performance. Employees typically have five to
Feedback after the first phase of trials suggested that the majority
eight individual objectives, which are capable of generating a
of staff favoured the flat-rate scheme.
bonus.

HSBC Bank sets personal objectives for employees under four

Distribution against individual performance
broad key result areas: meeting customer needs, core standards,
Many of the schemes run by financial services organisations
personal impact and business integrity.
distribute payments on the basis of individual performance. For
example, National Australia Group Europe makes payments
In some cases, individual performance simply affects the
annually according to an individual’s grade and his or her
distribution of payments from the bonus pool.
performance appraisal rating. At Norwich Union Insurance,
payments are linked to four possible standards of performance at
an individual or team level.
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 Distribution related to team performance
Distribution is based on team performance measures, which usually
include absence and teamworking, plus further targets specific to
the particular team. Assessment is carried out of the teams’
performance to overcome the difficulties inherent in the teams
having some targets that are not easily comparable, some may
arguably be harder to achieve than others. All members of a
particular team receive the same payment.
Frequency of payments
The frequency of payments is likely to be linked to the objectives
and type of scheme operated. Nearly two-thirds of the
organisations mentioned in this guide make bonus payments on an
annual basis. This reflects the fact that a large number of them link
their bonuses at least to some extent to annual profit targets. The
frequency of bonus payments made by the AA to its patrol force,
service delivery and call handling staff varies depending on the
particular factor in question. Payments linked to the financial and
customer service targets are made on an annual basis, while
bonuses for meeting sales and quality/output targets are paid
quarterly. Coats Barbour makes payments on a weekly basis. At a
number of companies, including Boots The Chemists and Toshiba
Information Systems’ Plymouth operation, payments are made
every quarter.
In some contexts, shorter measurement periods and regular
payments may have a greater motivational impact. Conversely, the
longer the bonus period, the more scope there is for making a
significant lump-sum payment that stands out more from basic
pay. Interest in a bonus scheme that measures performance over a
longer period can be maintained by communicating progress
against the targets to employees on a regular basis. Most
companies operating bonus schemes only make payments from
their bonus schemes if certain minimum levels of performance are
achieved.
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Minimum targets may be set for all the factors in a scheme or a
trigger may relate to only one factor, typically profits. Most of the
schemes fully or partly based on financial measures include a
threshold profit level that must be reached before any payments
are made.
Management discretion
Organisations often maintain a degree of discretion over the
payment of bonuses. For example, the board of BP Grangemouth
reserves the right not to make payments if a serious lapse, such as
a major health and safety incident, occurs on site. The managing
director of United Utilities Service Delivery can decide to make no
bonus payments if the financial objectives or critical success factors
are not met. At Barclays Bank, group governance may make
discretionary payments even if the minimum economic
performance target is missed.
■ Negotiating/Equality issues and
Bonus Schemes
Bonuses may be paid for very good reasons. However, it is all too
easy for pay discrimination to creep in.
As well as looking at differences between men and women, the
bonus scheme needs to take into account other aspects of equality
such as race, disability and age. Whilst not directly covered by the
Equal Pay Act, pay discrimination is illegal under the Race Relations
Act and the Disability Discrimination Act.
Compliance with the part-time workers (Prevention of less
Favourable Treatment) Act 2000 means part-time workers should
not be left out of bonus schemes, a pro rata target/pay approach is
most often utilised to ensure there is no discrimination.
The targets and objectives for teams should be equally achievable,
in so far that it should be no easier for one team to reach their 13
targets than another team. One team’s targets should not depend
 on another group, or be heavily reliant on outside factors. Targets
should be within the control of the team.
The bonus scheme design needs to ensure that there is a
consistent approach to targets and objectives across the
organisation. The scheme also needs to check how these affect
men and women, or different racial groups. Central monitoring
helps to ensure consistency, especially where teams employ more
women or men e.g. IT teams are often mainly men, retail staff
mainly women. Central monitoring is also essential in checking on
access to bonuses across the organisation.
Organisations which use bonuses usually incorporate them into an
existing payment system. It is common for individuals to receive a
different bonus depending upon their grade, point on pay scale,
length of service, hours worked or team within the company. This
can be confusing and employees may not always understand how
the amount they are paid is arrived at. Some employers may pay
bonuses for 'hard' skills e.g. producing a certain number of
widgets, rather than 'soft skills' e.g. those involved in Human
Resources, which are more difficult to measure.
When negotiating a bonus scheme:
• establish criteria for awarding bonuses and make sure everyone
involved in the decision making process knows what these are
and how to apply them.
• ensure that the performance rewarded is clearly defined and
achievable. Look to minimise areas of subjectivity and link
performance to SMART formula (Specific, Measurable,
Achievable, Realistic, Time related).
• Look across the company at the different bonus payments, who
receives them?
• Ensure groups of workers e.g. part-timers, are not excluded
except for a genuine reason not based on their sex.
agreements covering different groups. It is sometimes hard to
compare different groups or realise the impact of certain
allowances on individual pay. The more complex and less
transparent the system is, the more vulnerable it will be to pay
inequities.
The element of discretion in awarding a bonus is likely to be the
most vulnerable to sex bias. Managers don't always realise the risks
involved when they are given the discretion to award bonuses.
Training in how equality issues affect pay and how to avoid
discrimination should be given to all those involved in allocating
bonuses, setting targets, making discretionary payments,
monitoring and reviewing the bonus scheme.
Communication
The reason why one job attracts a bonus and another does not, or
why one employee gets a bonus and the other does not, should be
clear to everyone concerned. The way in which the bonus is
calculated should also be clear.
For a bonus scheme to achieve its objectives, it is important that
employees and line managers understand its objectives and the
relationship between performance, however measured, and
payments.

14 Organisations may have different bonus schemes for different kinds 15

of workers, manual/non-manual for example, or collective
 ■ Bonus Schemes – a Trade Union
perspective
Traditional bonus schemes and their operation are increasingly
being replaced by merit pay systems. Generally, trade unions have
either opposed merit pay systems or at best been extremely wary
of them. While recognising the value of performance appraisals as
part of the process of identifying and responding to training needs,
union negotiators have been acutely aware that any linking of pay
to performance is a potential threat to collective bargaining.
Some of the main union objections to merit pay were summarised
in a pamphlet published by the Trade Union Research Unit (TURU)
in 1988. These include:
(a) divisiveness - undermines co-operative working
relationships
(b) isolates individuals from the collective bargaining arena,
and undermines collective bargaining altogether
(c) coverage - some groups frequently excluded
(d) allocation of merit awards can reinforce sexual and racial
discrimination.
However unions moved from a stand of total opposition to a more
sophisticated response which allowed approval of schemes where
they were fully negotiated.
The banking sector of Amicus published a set of guidelines for
union negotiators dealing with employers planning to introduce
performance-related pay schemes. These are summarised as
follows:
• the union should be involved in the establishment of a scheme
and in its review
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• schemes should ideally operate in addition to guaranteed
increases and the union should maintain negotiating power over
the minimum level of increases
• involvement of the union in assessment criteria
• the right to appeal
• union involvement in training of scheme "operators" and union
representatives
• there should be no automatic link between poor awards and
disciplinary procedure
• schemes should have safeguards to ensure that workers absent
because of trade union duties, public duties, sickness, etc do not
receive a low rating because of this.
The Central Arbitration Committee (CAC) hears trade union
complaints when it believes that employers are in breach of the
Employment Protection Act 1975, now consolidated into the Trade
Union and Labour Relations (Consolidation) Act 1992, and are
failing to disclose information for the purposes of collective
bargaining. In response to an increasing number of complaints over
the introduction of merit pay schemes the CAC said: "It is
important, for healthy industrial relations, that trade unions should
not be excluded (from merit pay systems) simply on the grounds
that a new payment scheme is geared solely to individuals and
cannot be discussed in a collective forum without breaching
confidentiality."
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 ■ Conclusion
The key to trade union approval of bonus and merit pay schemes is
involvement and understanding. Where such schemes are fully
negotiable and the advice outlined in this guide is followed, such
schemes can be well received by members. However, schemes
must be kept under regular review and workplace representatives
must ensure that they are kept fully informed of payment levels
under such schemes and monitor the distribution of payments.

Most importantly, workplace representatives must ensure that all

aspects of the scheme are fully negotiable.

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