Rewards & Incentives

Performance-Related
Bonus Scheme
 



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It is possible to use ANPAS (or any other performance appraisal system) solely for employee development and feedback purposes. But many organizations will wish to link the appraisal process to specific reward and incentive outcomes.

This is a perfectly legitimate objective. There are studies showing that employees find the process of appraisal more satisfying and credible when it is directly linked to reward outcomes.

Brief Description
Before we look at the step-by-step process for calculating the bonus, a quick overview will be helpful.

The Bonus Plan first calculates a Bonus Fund. This is the actual amount of money that the organization is prepared to allocate for bonus use. Next, an average performance appraisal rating is determined for each employee.

If an employee scores higher than a pre-determined level, he or she is bonus-eligible. The size of the bonus paid depends on the total number of Bonus Points to which an employee is entitled.

The number of Bonus Points is determined by both the employee's performance (as reflected in their average rating) and the employee's current salary range.

Finally, a simple formula is used to exactly allocate the money in the Bonus Fund to all eligible employees.

Full Description
There are five separate steps in the Bonus Plan -
Calculate the Bonus Fund
Determine Bonus Eligibility
Select Bonus Band
Select Salary Band
Calculate Individual Bonuses

Calculate the Bonus Fund
The first step is to determine the amount of money that is available to pay the bonuses.  It is suggested this amount be (usually) about 2.5% of the annual wage and salary bill. This amount is known as the Bonus Fund.

The figure of 2.5% may be varied to reflect the policies, needs and circumstances of each organization. For example, a percentage of profit may be preferred, or even a percentage of profit increase. Obviously in such cases there will be no bonus due unless there is a profit or an increase in profit.

Whatever method is selected, it is suggested the size of the final bonus payments (when calculated) should lie in the range 2% to 10% of the bonus recipient's base wage or salary.

Determine Bonus Eligibility
To be eligible for the bonus, the employee must achieve an Average Factor Rating (AFR) of 3.40 or better. The AFR is calculated by summing the ratings and dividing the result by seven.

For example -
(4 + 4 + 3 + 3 + 5 + 3 + 4) / 7
= (26) / 7
= 3.71

This employee's AFR of 3.71 would make them eligible for the bonus.

Select Bonus Band
There are three Bonus Bands, B1, B2 and B3. The employee's Bonus Band depends on their AFR. The table below shows the AFR ranges for each Bonus Band, together with the Bonus Points that apply to each:

Bonus Band

Average Factor Rating

Bonus Points

B1 (lower)

3.40 to 3.99

1

B2 (middle)

4.00 to 4.49

2

B3 (upper)

4.50 to 5.00

3

Select Salary Band
There are three Salary Bands S1, S2, S3. Those in the higher bands will receive proportionately larger bonuses. This is necessary to maintain compensation relativity and provide attractive incentives to employees on higher incomes. 

It is up to each organization to decide how it will define the lower, middle and upper bands. As a guide, the proportion of employees in each Salary Band should be about S1 60%, S2 30%, and S3 10%. The most common approach is to define bands according to wage and salary cut-off points; for example:

S1... $0 p.a. to $30000 p.a.
S2... $30001 p.a. to $50000 p.a.
S3... $50001 p.a. and above

Another approach is to use job evaluation cut-off points to achieve the same result, or to group employees loosely into categories, for example:

S1... Junior and non-supervisory staff
S2... Supervisors, specialists, middle managers
S3... Senior and top managers

The method chosen to classify employees into Salary Bands is not important, so long as it is systematic and reflects the general seniority structure of the organization. 

Once the Salary Band is known for each employee, the number of Bonus Points can be determined -

Salary
Band

Bonus
Points

S1 (lower)

1

S2 (middle)

2

S3 (upper)

3


Calculate Individual Bonuses
For each individual, add up their total Bonus Points. Then each individual bonus is calculated by this formula -

This formula will exactly allocate to the recipients the total amount of money available in the Bonus Fund.

Example
There are 36 employees in the Purchasing Department of a medium-sized organization. The total (gross) annual wage and salary bill for the employees of this Department is $1,062,000. The Bonus Fund is set at $26,550 (2.5% of the total).

Among the employees, 12 have received Average Factor Ratings of 3.40 or better (therefore they are "eligible for performance bonus").

 Employee  Bonus  Band  Salary Band Total Bonus
Points
 Bonus
Amount
$

John

B1

S1

2

1609

 Tony

 B1

 S1

 2

 1609

 Judith

 B1 

 S2

 3

 2414

 Caitlin

 B1

 S1

 2

 1609

 Robert

 B1

 S1

 2

 1609

 Mitchell

 B1

 S1

 2

 1609

 Sue

 B1

 S1

 2

 1609

 Barbara

 B1

 S2

 3

 2414

 Matt

 B2

 S3

 5

 4023

 Peter

 B2

 S1

 3

 2414

 Helena

 B2

 S2

 4

 3218

 Sarah

 B3

 S1

 3

 2414

 Totals

-

 -

 33

 26551


Example
In John's case -
bonus = (2 X 26551) / 33
= $1609

Example
In Helena's case -
bonus = (4 X 26551) / 33
= $3218

Payment of Bonus
While the bonus could be paid in a single lump sum, it is suggested that multiple smaller payments - bonus instalments - be paid throughout the next performance period (quarterly instalments may be ideal). A number of payments at intervals can do more to strengthen the link between performance and rewards than a single payment which is all but forgotten in a short time.

It is also important that the bonus be paid by way of a separate check, pay packet or deposit. The payment will lose much of its impact if it is simply consolidated with normal pay. Every separate payment is a reminder to the employee of the value of his or her personal effort, and serves to encourage the type of behavior that leads to superior job performance.




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