Rewards & Incentives
Performance-Related Bonus Scheme
While it is possible to use performance appraisal for employee development and feedback purposes solely, many organizations 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.
The examples given below are based on a performance appraisal system with a five-point rating scale and seven performance factors. (Why seven? Because the underlying method is based on the ANPAS performance appraisal system, which uses seven performance factors and five-point Likert-type scales. A rating score of one represents very poor performance, three is competent, and five is excellent. This method of bonus calculation may be modified to suit almost any type of appraisal system involving multiple performance factors and scores.)
The first step in a bonus plan is to calculate a Bonus Fund (or budget). 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 both the performance and the relative seniority of the employee. Finally, a formula allocates the money in the Bonus Fund to all eligible employees.
There are four separate steps in the Bonus Plan -
1. Calculate the Bonus Fund
2. Determine Bonus Eligibility
3. Select Salary/Seniority Band
4. 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.
2. Determine Eligibility
To be eligible for the bonus, the employee must achieve an Average Factor Rating of 3.40 or better. The Average Factor Rating is calculated by summing the ratings and dividing the result by seven.
Calculate Average Factor Rating:
= (sum of factor scores)/number of factors
=(4 + 4 + 3 + 3 + 5 + 3 + 4) / 7
= (26) / 7
This employee's Average Factor Score of 3.71 would make them eligible for the bonus.
S1... $0 p.a. to $40,000
Another approach is to use job evaluation cut-off points to achieve the same result, or to group employees loosely into seniority categories, for example:
S1... Junior and
The method chosen to
classify employees into Salary Bands is not important, so long as it is
systematic and reflects the general pay and seniority structure of the
This formula will fully
allocate the total amount of money available in the Bonus Fund,
regardless of the number of recipients. If there are fewer recipients,
the bonuses for each individual will be correspondingly bigger. For this
reason it might be wise to have a bonus cap of around 10% per
individual. That is, the maximum bonus payable to an individual
should not exceed 10% of their regular wage or salary. This may result
in a 'leftover lolly' problem, that is, money unallocated in
the Bonus Fund. Such residual amounts can be re-consolidated into
general funds or re-used for bonuses in the next performance period.
This is a matter of policy for each organization to determine.