There is currently a great deal of uncertainty currently facing businesses across the globe, meaning setting performance targets, pay and bonuses in such an unpredictable market is tough. How do you set performance targets when it is difficult to know what the next three months will look like, let alone the next 12? How do you balance doing the right thing by your employees in terms of bonus and commission when business performance is not where you expected it to be? These are hard questions to answer and there will not be one approach that works for every business - it will depend on individual circumstances. However, there are questions all businesses can ask themselves to help navigate the challenges with performance targets and variable pay.
1. Are there alternative performance measures that will drive the right activity to put the business in a better position when things start to improve?
Performance targets are often, at least partially, attached to financial measures and as well as current targets being null and void for many companies already, it is also very difficult to set realistic alternative financial targets. In their absence, it is worthwhile considering if there are other measures that might be appropriate while the economy is so volatile. Could behavioural metrics be considered? What about health and safety measures, or skill development? Are there activity measures that would position the business to make the most of any opportunities that do arise as things start to improve? Organisational objectives may be difficult to set so team and individual measures may be more realistic. The focus needs to be on how to differentiate between your average and top performers to retain your valuable talent. With the job market being as it is, employees may well stay put short term but as things start to improve it will be your top performers who jump ship first. Businesses should also be open to the fact that the sharp and significant changes most companies have undergone may well identify a different set of top performers. It will be important for businesses not to assume that what differentiated a top performer pre-COVID will be the same going forward as the skill set might be different. Until the future is more certain businesses may well want to hedge their bets and ensure they retain previous top performers but should also be open to how other employees respond to the different skill sets required and consider how to retain them in case some changes brought about by COVID remain.
It may also be appropriate to allow some level of discretion when measuring performance and determining bonus outcomes. Although the direction of travel is typically to move away from too much discretion within variable pay, atypical times may call for atypical approaches. Where possible, adapting performance metrics to more situationally appropriate measures would be preferable to sliding too far back into using discretion, but at a time when many employees report working harder than ever there may need to use judgment. If this is the case then there should be some framework to guide the discretion, ensuring transparency and consistency are still key considerations.
2. Would changing the period over which performance measures and bonus criteria are set help with the fluidity of the market?
There has been a growing trend over recent years to move away from the traditional annual performance management cycle, but objectives and bonus periods are still typically set over a 12-month period. If there was an argument for this being outdated before COVID then surely this is now heading towards a fait accompli. While everything is so unpredictable businesses should consider shortening or even lengthening the period in question. Shortening the period will help keep performance measures relevant and make bonuses more achievable, whilst also allowing businesses the flexibility to adjust measures and criteria more easily as expectations regarding the timeframe have been set at the outset. On the other hand, in some circumstances, it may be appropriate to set longer term financial objectives to allow the economy to stabilise. However, businesses should consider how to keep people engaged long term and this may be better suited to more senior employees who perhaps have more experience with longer term incentives and have greater ability to impact long term corporate objectives.
3. Would emphasising long term value mitigate short term financial impact?
The sense of achievement that comes from hitting performance targets and reaching objectives can be missing at times like this and psychologically losing that sense of accomplishment can lead to a drop in motivation and engagement. Consider how you can leverage the non-financial aspects of reward such as personal development opportunities, projects and secondments to build skills and organisational understanding. Most employees will understand that variable pay is under pressure as the business copes with the current circumstances. Helping them see value in other ways and how that can benefit them long term may help to keep them engaged and motivated.
For some businesses, giving employees some skin in the game may aid retention and engagement during a period where other elements of reward like variable pay become more unpredictable. It may not be worth a great deal now but as business performance improves so will their stake in the business. It will be important for businesses to consider how best to do this whether it is an EMI scheme, restrictive shares, or perhaps unapproved options if it is appropriate to extend to advisors and consultants.
Regardless of the approach taken it is important to remember that everyone is facing uncertainty, businesses and employees alike. Being open and honest with employees, treating them with compassion will go a long way to mitigating the negative impact of all the uncertainty.
If you would like support or advice on bonus scheme design, either long term or short term, we can help. Please give us a call on +44 (0)20 3457 0894 or email cathryn.edmondson@innecto.com to discuss further.
