Bonus Schemes Offered by Bibby Financial Services - Book Report/Review Example

Business Report on a Review of the Bonus Schemes Offered by Bibby Financial Services Executive Summary Bibby Financial is widely regarded as the United Kingdom’s largest and most successes invoice discounting and factoring company. The principal aim of this study is to attempt to clearly establish what exactly are bonus schemes as well as the various aims and rationale behind them. Table of Contents Executive Summary 2 1.0 Introduction 4 1.1 What are Bonus Schemes? 4 2.0 Findings: 6 2.1 What companies such as Bibby Financial Services achieve by Developing Bonus Schemes 6 2.2 The Rationale for the establishment of Bonus Schemes 6 2.3 The Link between Employee Work Performance and Bonuses 7 2.3.1 Performance Bonuses 7 2.3.2 Holiday / Year End Bonuses 8 2.3.3 Profit Sharing Bonus 8 2.3.4 Discretionary Bonus 9 2.3.5 The Key Elements of Bonus Scheme Offered at Bibby Financial Services 10 3.0 Current Thinking as to the UK Bonus Schemes 10 5.0 Recommendations 13 References: 15 ­­­­­ 1.0 Introduction Since its inception, Bibby Financial service (BFS) has successfully grown in leaps and bound to become one of the United Kingdom’s largest independent invoice discounting and factoring company. For over 28 years, BFS has been offering its services to its clients spread out all over the United Kingdom. BFS has a dedicated team of finance specialists who are able to offer its clients a wide range of specially tailored financial solutions for their businesses. The report will clearly highlight what exactly are bonus schemes; the aims of developing bonus schemes, the rationale behind the establishment of the bonus schemes, analyzing the link between bonuses and work performance. The report will also proceed to discuss the current bonus schemes that are available to (BFS) employees as well as examine the role that is played by these bonuses in enhancing the employee commitment to BFS and general motivation. The paper also highlights a number of bonuses and their potential effect on employee performance and provides a set of possible recommendations that can be used by BFS in modifying and developing their current bonus and reward Scheme. 1.1 What are Bonus Schemes? Bonus Schemes are basically designed to help provide cash payments to an organization’s employees. These payments are usually based on the general performance of the individuals, the work team within which they happen to be working within, the performance of the organization itself or a combination of these factors. Bonuses are also variably referred to as pay at risk or variable pay (Armstrong, 2012). Armstrong and Murlis, (2007) argue that One of the key defining characteristics of bonuses is that they are normally not consolidated into an employee’s base pay. Employees have to ensure that they strive to earn and continually re-earn the bonus. This is found to be markedly dissimilar to increases arising from some of the individual contingent pay schemes such as contribution-related pay, work performance related pay and pays that happen to be related to services that are normally found to be consolidated. As a result of the nature of these pays that allows employees whose exemplary performance in one year to continually receive them in subsequent years, even though their performance in these subsequent may not be sustained at the previous high level, these pays are generally described as the gifts that keep on giving. Cash bonuses are widely viewed to be the sole means through which people can be provided with a number of rewards in addition to their current base pay. These cash bonuses may also be paid to employees on top of their current individual contingent pay. 2.0 Findings: There are a number of important factors and a concrete rationale that necessitate the establishment of a bonus scheme for Bibby’s employees. Each of these Bibby’s Financial bonus scheme elements is discussed below. 2.1 What companies such as Bibby Financial Services achieve by Developing Bonus Schemes Bonus schemes help provide rewards to an organization’s employees for their good work performance. Bonus schemes recognize an employee’s past achievements and performance while encouraging both teams and individuals to try and post better performances in future (Arthur, 2001). Bonuses enable an organization’s employees to share in the general success of the business organization a factor that helps increase their engagement and commitment. Bonuses help in ensuring that the pay levels offered by the organizations constantly remain competitive, this helps the company in the attraction and retention of a good caliber of employees. Bonuses help provide a direct form of incentive that helps in increasing motivation and engagement while helping generate relatively higher future levels of team and individual performance (Armstrong and Murlis, 2007). 2.2 The Rationale for the establishment of Bonus Schemes Bonus schemes contribute to the overall creation of a very high performance culture as well as providing an appreciated positive impact on the bottom-line results of BFS. However, it is important to evaluate the options available for the organization when implementing a bonus scheme either as a basic addition to the contingent pays given to or as a possible alternative to the more conventional individual contingent pay. 2.3 The Link between Employee Work Performance and Bonuses Different bonuses are seen to affect the general performance of employees in different ways depending on their structure. Some of these bonus schemes and their effects on employee performance include: 2.3.1 Performance Bonuses Employees generally pay performance bonuses to employees who happen to have achieved high ratings or satisfactory results during the organization’s annual performance appraisals. This is an incentive based bonus that helps the actual amount of payment to employees’ level of performance. Employees whose overall performance is rated as being outstanding or at the highest possible achievable level are awarded the largest bonuses determined by the organization while employees whose performance is rated as simply being satisfactory receive a lesser amount of bonus. The overall effect of this type of bonus is that it normally results in conscientious employees constantly reminding themselves that their tireless monthly hard work and efforts will eventually be rewarded at the years end and hence serving to encourage them to improve their work performance. 2.3.2 Holiday / Year End Bonuses In providing holiday bonuses, companies do not normally connect employee performance ratings to the actual amount of bonus. Although organization leaders think that they are essentially rewarding employees who have happened to perform relatively well, employees general happen to receive the same amount of bonus regardless of their tenure, position, performance rating or tenure. This type of bonus is often found to have no substantial effect on the performance of mployees as they tend to perceive it as being of a customary nature and hence do not strain themselves by attempting to put in extra hours, works smarter or even harder as they will receive this bonus regardless of their work performance. 2.3.3 Profit Sharing Bonus Employees who happen to receive profit sharing bonuses are seen to strongly depend on the organization being able to adequately meet its profitability or service goals for the year. These employees are often found to not be essentially concerned as to how their actual performance will truly affect the overall ability of the organization to attain its set goals. Although some employees are noted to understand the connection existing between their own individual performance and the bonuses offered, some employees are nevertheless seen to not understand this connecting which serves to explain why while some employees are seen to be constantly working hard with the aim of ensuring the company’s success, some of the employees are noted to be somewhat satisfied with their often individual mediocre ratings. However, if a company’s entire workforce is made to better understand the benefits that could potentially accrue to them as a result of their efforts; this will be seen to have a positive effect on their work performance as it will cause the employees to exhibit both diligence and pride in their work (Durai, 2010). 2.3.4 Discretionary Bonus Most employers tend to qualify their policies by stating that the granting of bonuses at their companies is generally conducted on a mainly discretionary basis. This means that the organization cannot essentially promise its employees that the existing business conditions will help dictate the amount of bonus that they happen to receive, nor can they even promise that the employees will definitely always be receiving bonuses. Some of the bonuses in this category are seen to be greatly tied to individual employee performance, a factor that causes the possibility of receipt of a bonus to become an incentive for most of the company’s employees. This type of bonus provides the opportunity for companies that might happen to be having unstable revenue margins an avenue that they might use to announce that they will not be rewarding any bonuses at the year’s end. The positive result of this type of bonus on the work performance of employees is that employees who realize that they are actually the company’s most valuable resource will constantly be encouraged to try and strive for a high performance rating regardless of whether they are anticipating any bonus at all. This is mainly due to the fact that these employees are intrinsically motivated to try and do good work. The unmotivated employees will ensure that they only do just enough work to ensure that they earn a relatively satisfactory rating or look for other jobs. 2.3.5 The Key Elements of Bonus Scheme Offered at Bibby Financial Services BFS is seen to offer a number of bonus schemes that are essentially based on the specific work that an employee does as well as the bonus that they can be able to achieve. At the BFS head office, the bonuses offered to their employees are seen to include a 5% Performance related pay which is similar to the 5% offered for its UK based employees. The head office’s profit sharing margin is set at 5% which is half of the 10% that is offered for its UK based employees, however while the Global profit sharing margin at the head office is seen to generally stands at 10%, the global profit sharing margin for its UK based employees is seen to stand at the much lower value of 5%. 3.0 Current Thinking as to the UK Bonus Schemes Turner Adair, the chairman of the United Kingdom Financial Service Authority is quoted as claiming that inappropriate pay structures played a key role in encouraging behavior that helped in contributing to the recent economic recession. The incentives structures of most financial institutions are generally deemed to reward short-term profit as opposed to rewarding the long-term performance of financial institutions (Boeri, Lucifora and Murphy, 2013). Another critical charge that has variously been leveled against the bonus culture among financial institutions is that most bank executives often tend to take a number of undue risks primarily because incentives are usually asymmetric: Bonus schemes often tend to offer very good rewards to success but sanction failure mildly. Rees (2008) argues that bonuses can potentially play a key role in helping most businesses manage to get back on track. Although the recent economic recession saw most banks being criticized for setting up bonus schemes that were deemed to be vastly generous that often tend to reward a reckless lending culture, it can be successfully argued that effective bonus schemes can help stimulate innovation, productivity and profit, this will result in the eventual increase of both individual and company wealth. Reese (2008) points out that although bonus schemes can aid in supporting and organization during periods of economic growth, it can often tend to greatly demotivate employees during times of recession. It is therefore critical for businesses to attempt to restructure their bonus schemes to help provide employees with a feeling of job security and stability. This will result in causing the employees to have a consistent feeling of motivation. According to White and Druker (2000), there is evidence of most organizations in the UK seeking to try and insulate themselves from any external form of decision making. In regard to pay terms there has been a clear shift away from multi-employer arrangements towards the increasingly popular establishment-based or enterprise systems which owing to their very nature, are found to generally be more internalized. This system is seen to generally infer a greater control over pay structures by these companies and is now generally becoming increasingly common with most human resource management literature that remuneration schemes, performance-related pay and decentralized bargaining are generally consolidated and are seen to extend the earlier moves by companies striving to develop internal labor markets. It has been argued that the recent developments in pay structures have been relatively weakened by frequent non-individualistic wage bargaining that is a common attribute of various internal labor markets (Courpasson, Golsorkhi and Sallaz, 2012). The characteristic of internal labor markets that makes pay more person-based and contingent has ultimately resulted in a reintroduction of the problems that were commonly associated with the various ‘contract” relations. The new pay literature and systems are seen to emphasize that need for companies to change to external person-related pay from the internal job-related pay structures. Organizations are found to be encouraged to try and abandon the concept of designing their pay structures according to the rate for the job and instead shift to pay individual employee based on the employee’s general value in the external market. This is seen to be precipitated by the risks precipitated by internal comparisons of wages that cause companies to risk producing pay rates that are found to fundamentally not be adequately competitive as they serve to focus the attention of the individual employee on the better paying job opportunities that may happen to be provided by company’s competitors (White and Druker, 2000). White and Druker (2000), point out that in the United Kingdom, the government and other management consultancies have precipitated a shift towards the adoption of a more contingent and strategic system of employment management, especially in relation to pay by continuously encouraging companies to adopt this system. In a survey published by the Confederation of British Industry (CBI), it was found that an average of about 62% of the 704 organizations that had participated in the study had retained their bonus structures during the economic crisis. However, almost a quarter of the participants had implemented measures designed to reduce the average value of the bonus schemes they offered. It is perhaps unsurprising that a number of banks have taken the initiative to reduce the size of the bonus scheme they offer in light of the recent crisis in the country’s banking sector where executives were noted to be receiving generous benefits as bonuses. 5.0 Recommendations BSF should try and introduce Performance Related Pay (PRP) that will essentially be awarded to employees who happen to either meet or even exceed the performance targets that have been set for them by the company. This move will help increase the employee’s job satisfaction and innate motivation. The use of performance related schemes to aid in the motivation of employees is seen to be in line with McGregor’s theory X. The theory purports to assume that people are generally lacking in ambition, resistant to change, indolent, Gullible, indifferent to organizational needs, resistant to change, self-centered and showing a great dislike for responsibility. It can be argued that performance related pay might aid in motivating theory X individuals to try and improve their level of performance (Neely, 2007). BFS could also try to introduce into its system a number of non-financial rewards. The introduction of a number of non-financial rewards for its customers such as the offering job training and enrichment programs and promotions will help the company show gratitude and appreciation for the efforts of all its employees. This will also have the added benefit of satisfying the psychological needs of the company’s employees and be in-line with Herzberg’s two-factor theory that essentially identifies non-financial rewards as an alternative means of motivating employees other than the use of financial rewards and encourages companies to combine the two for maximum benefits (Schermerhorn, 2011). BFS should also strive to give bonuses depending on the employee’s job location, responsibilities and description of the tasks performed. 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