Rewards & Incentives
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.
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.
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
1. 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.
2. 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. (Note: This example is based on the ANPAS performance appraisal system. ANPAS uses a five-point Likert scale for ratings, where a score of one represents very poor performance and five is excellent performance. This method of bonus calculation could be modified, however, to suit almost any type of appraisal system involving multiple performance factors and performance scores. For individual assistance, contact Archer North.)
For example -
(4 + 4 + 3 + 3 + 5 + 3 + 4) / 7
= (26) / 7
This employee's AFR of 3.71 would make them eligible for the bonus.
3. 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:
4. Select Salary Band
p.a. to $30000 p.a.
Another approach is to use job evaluation cut-off points to achieve the same result, or to group employees loosely into categories, for example:
Junior and non-supervisory staff
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
formula will exactly allocate to the recipients the total
amount of money available in the Bonus Fund.