Definition:
Incentive & Remuneration Schemes are used to encourage commitment to increasing productivity and profitability or in achieving some worthwhile objective. They are designed to be effective in aligning the interests of the company and its employees.
General Rules:
- Transparent – ie. easily understandable
- Should be measured more by objective factors and less by subjective factors
- Rules made known to all (on that scheme) and not changed arbitrarily
- Be perceived as “fair”
- Goals need to be attainable
- Keep as simple as possible
In general, should judge everyone on what they are authorised to do and for which they are accountable. A uniform scheme to all employees is probably not correct while a mix of individual and organisation performance measurements is better. Schemes can have any number of permutations and combinations depending on comfort levels of management. Discretionary bonuses can also be used.
Types of Schemes:
1. Share Based Schemes
Individuals are awarded shares in the organisation based on level and/or years of service. This scheme is generally only used by listed companies.
The advantages are:
- Recognises that every employee can and will have an effect on the performance of the organisation;
- Criteria relatively cost effective to set and administer on a per employee basis;
- Employees as shareholders receive the same change in share value and dividend as other shareholders;
- Most simple method for large numbers of employees;
The disadvantages are:
- Not directly focused on individual employee actions;
- Employees who are very effective only receive the same benefit as those who just do their job;
- Hard to make work for non-listed entities.
2. Percentage Profit Based Schemes
The employees will receive a percentage of the profit of the company. Generally reserved for senior staff or just the most senior one or two employees. For instance the CEO and CFO may be awarded 2% each of the organisations post tax profit.
The advantages are:
- Direct alignment with the profitability of the organisation and is not paid if organisation is not profitable;
- Measurement of profit is already performed;
- Bonuses only paid out of profit.
The disadvantages are:
- Profit may be manipulated and may not be easily understandable to the employee;
- Disclosure of organisation’s profit is required.
3. Profit Pool Based Schemes
A pool of money is set aside for the employees to share based on some predetermined criteria. Management may say that they have a bonus pool of say $10,000 to be shared amongst all divisional employees based initially on making $100,000 profit.
The advantages are:
- Organisation knows that it will only ever pay bonuses out of profit (if an annual payout);
- Can be used for divisions within the organisation;
- Can be calculated and paid on a monthly or quarterly basis;
- Provides quick feedback to the employee (and their families) for good effort.
The disadvantages are:
- If done monthly or quarterly, bonuses can be paid out where a full year loss occurs;
- Can be cumbersome to calculate.
4. Performance Criteria Based Schemes
These are probably the most common schemes for employees in Australia today. Objectives are linked to the job role and then employees are rewarded for meeting those objectives. For instance, an employee may be rewarded a possible 10% extra gross wage for meeting five pre-determined objectives. If only four of the five pre-determined objectives are met then only 80% of the 10% is awarded.
The advantages are:
- Closely links the jobs that the employee does to the their remuneration;
- Generally set in a cascading of objectives through levels of the organisation;
- Enables the employee to get good verbal feedback.
The disadvantages are:
- Time consuming to administer
- Possibility that employees have opposing objective and need to ensure that all objectives set for employees are aligned;
- Bonuses may be paid when the organisation is not profitable.