It’s nearly that time of the year again!

Employers all over South Africa are gearing up to pay bonuses. What factors should be considered to ensure that the bonuses paid fit the organisation’s short term variable remuneration strategy? Who is in control of the consistency in the allocation of bonuses? Are the strategies being applied with the intention for which they were designed? Simple questions with complicated answers.

For short term variable remuneration such as annual discretionary bonuses, most Employers should start by looking at the design of a strategy from a labour perspective and then identify the parameters that the economic variables can be slotted into.

A few labour concepts to consider:

  1. Organisation structure

    Start by drawing up an organisational structure and identifying which employees fit into core functions and which fit into support, what level of decision making and responsibility each individual has and how vital their role is to the organisation.

  2. Scarce skills

    From the Organisation Structure, identify which Employees have scarce skills that would be hard to replace, generally this would be specialists and highly academically qualified employees.

  3. Retention

    Identify what the retention issues are in the organisation, as well as the organisation’s needs in terms of BEE, client requirements and any organisational planning in terms of growth, succession, skills transfer and general operational requirements. Interestingly, South African organisations generally place more weight on retention than most European organisations. Be careful not create structures where mediocre or bottom category employees are retained.

  4. Performance

    This boils down to understanding what the individual employees do, in comparison to what they should do, and what this adds to the organisation. From there the following components can fall into place: consistency in the ratings of performance appraisals, identification of key deliverables, job descriptions etc. Poor performers should not be paid the same percentage bonus as average performers, it can be used against the Employer and sends the wrong message. Reward top performers enough to create a gap between them and the average performers. If you can’t decide if someone is a top performer then it’s simple – they aren’t.

  5. Total remuneration

    Often understanding what the Employees really earn is very hard! Especially if there are long term incentive structures in place in the form of share schemes, options etc. If the Employer can’t work out what the Employees are earning, I can almost guarantee that the Employees themselves can’t either! Fortunately, most organisations only have between 5%-10% of their Employees on long term incentive schemes.

    For the purposes of this article, and for most Employees, their remuneration will be the fixed amount received annually in the form of a monthly salary, and a short term incentive in the form of a bonus. Employees and Employers forget about things like prior year bonuses when negotiating increases but it’s all coming out of one pocket so it is imperative to understand how much the Employee is worth and what is being paid. 

  6. Historical issues

Many Employers make the mistake of not looking at previous years bonus allocations and understanding what was done and why. Good record keeping is the key to consistency.

Once an Employer has looked at the labour concepts they should decide how to face the economic variables, and which labour concepts and organisational drivers should be aligned to the strategy. Often the economic variable is determined in two ways. The first is where a fixed pot gets split between the Employees with a weighting based on items identified in the labour concept exercise. The second is where each employee is allocated a bonus based on the labour concepts exercise and that will determine the amount that the Employer spends. 

Sometimes it is best to split the strategy so that the pot method applies to core staff where performance is often easier to quantify; and the individual method for support Employees, where more qualitative measurement has to be applied.

Employers need to consider the economic variables carefully and ask the right questions. Are the financial results that are being used to determine how much can be allocated to bonuses sustainable and are they really a reflection of the numbers?

Once there is a rough understanding of the above, an Employer can start drafting a document to create a short term variable remuneration strategy that fits with the organisation’s plan and the desired behaviours and outputs of Employees.

Candice Eaton

Head of HR and Labour Consulting, Johannesburg

Also read: What is the cost of an employee?