10 fundamentals for a winning bonus scheme
29th April 2025
Samantha Gee
Are you spending – or considering spending – significant sums of money through bonus schemes?
In theory, this is a good idea. Bonuses are a really clever aspect of the reward package. You can align pay with performance, create a competitive package, and encourage the behaviours needed for success.
But all too often the success of a bonus scheme falls down in the initial design stages. Any money spent on bonuses needs to work really hard to deliver a return – harder than base salary which is usually perceived as more valuable as it is guaranteed.
All of which begs one vital question, are you throwing this money away by falling for some common mistakes?
As part of our series of ‘Top 10’ blogs celebrating our tenth anniversary, we’ve developed a ten-point health check to ensure your bonus is pulling its weight and delivering results:
1. Is it understood?
Surprisingly, the majority of bonus schemes are simply not understood by participants. Right up to executive level. Ask your employees to explain the scheme to you and see what they say. Then simplify it wherever possible.
2. Does it have a purpose?
A bonus says, ‘these are the things we want you to do and we will reward you for doing them’. Are you clear on what you want those things to be, and do they align with your business goals? Share the purpose of your bonus as openly as possible.
3. Are the measures right?
The performance goals in the scheme are what participants will focus on. Are they clear and straightforward? Are there too many – we say select 2-3 high level measures. And as performance is best measured in a rounded way, are there both financial and non-financial measures? Don’t forget to provide regular updates on how you’re performing against those measures.
4. Is the performance link clear?
Can participants see what they need to do to get a bonus and how much they will receive? An authentic scheme will communicate the ‘on target’ as well as the maximum bonus opportunity.
5. Is the payout reasonable?
Have you got bonus levels right? Are they competitive and worth the effort needed for the required results? Ensure payments increase/decrease sufficiently in line with performance against your identified measures.
6. Is the focus on behaviour not spreadsheets?
Any bonus needs to be affordable and the financials are important. Making sure the sums add up is simply a requirement of a well-operating bonus system, but not the purpose. Too often I see financially complex schemes that have lost sight of the purpose. Keep the numbers as simple as possible and ensure all participants understand what they need to do and what they might get for doing so.
7. Is there too much ‘discretion’?
Discretionary schemes are helpful as they allow an employer to update the terms in the future. But too much discretion in how the scheme operates is not a good idea. It weakens the link between performance and reward. A bonus with no stated mechanics that simply relies on discretionary allocations is a lazy scheme. It won’t deliver any business benefit apart from a potential feel-good factor for a short while after the awards have been communicated.
8. Is it explained in personal terms?
The one question you should answer in the opening paragraph is ‘what does this scheme mean to me’? Explain potential payouts in personal terms (e.g. £x or X% of salary), not as a percentage of financial goals.
9. Have you drowned in percentages?
It’s not unusual to have a scheme that sets the performance criteria as a percentage of target, bonus pool amounts as a percentage of profit, individual bonus award as a percentage of salary, and proportions of bonus that are down to individual performance as a percentage of the overall award. Simplify the scheme as much as possible and avoid having too many percentages in there.
10. Are the T&Cs clear?
A good scheme will have eligibility criteria, for example, how it affects new joiners, leavers and those on leave of absence. But these really are the ‘tail’ not the ‘dog’. Too often I read a set of bonus rules that are simply a list of eligibility criteria with pretty much nothing else relating to the purpose or mechanics of the scheme. Put the T&Cs at the back and focus on the scheme purpose first.
There’s a reason why bonuses are popular. If designed and communicated well, they can drive performance towards business goals and deliver a great return on investment. Make sure yours is working for you.
How we can help
At Verditer, we are specialists in creating a transparent approach to pay and reward. Do get in touch if you’d like our help with bonus or incentive design.
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