1. Bonuses and Variable Pay
Employers are seeing the benefits to employee engagement and cost
management that appropriately designed variable pay plans can
provide
The financial crash and Government austerity drive, in the context of press criticism of high, incentive-
driven pay levels, and critiques from some motivational theorists, do not on the face of it present a
favourable environment for bonus and incentive plans.
But Aon Hewitt's latest research demonstrates that variable pay is undoubtedly here to stay, and its
application is expanding rather than on the retreat. More than a quarter of employers have introduced
or expanded their bonus plans in the past 12 months, and companies are on average spending 14%
of payroll in the form of variable compensation.
Employee Bonus Eligibility:
Variable compensation is more than just a name imported from across the Atlantic. It signifies the
dual drivers which help to explain this expansion: firstly – arising from the recession – a belated
recognition of the benefits of genuine flexibility in pay costs to help organisations to survive whilst
preserving employment levels and human capital investments.
Secondly – as performance recovers – the power of financial rewards to reinforce high performance,
be that collectively as at retailers such as John Lewis, or differentially recognising high individual
contribution. Aon Hewitt’s database of employee attitudes shows that pay has risen to being the fourth
highest driver of engagement in Europe. In higher performing companies bonus payments are more
differentiated and employees also have much higher perceptions of the strength of the links between
pay and performance.
But as bonus payments start to recover, employers need to avoid the commonly reported issues with
plans, including payments coming to be regarded as a fixed entitlement, over-complexity in design,
and disenfranchised employees feeling unable to impact on the plan measures.

2. The Aon Hewitt approach
Our consultants work with clients to diagnose the context for the operation of bonus and incentive
plans and then support them in designing and delivering the most effective arrangements. Three
factors are critical to leveraging the potentially positive effects of bonus plans on your organisation's
performance:
 Strategic alignment and clear objectives
 Well-engineered design and appropriate performance metrics
 World class performance management and employee engagement processes.
Whatever the setting and employee population – be it all employee bonus plans, executive incentives,
sales compensation or call centre rewards – we have the information, tools and experience to guide
you so as to apply these general principles to match your own unique goals and culture.
Typical stages in this process include:
 Work planning and chartering with stakeholder engagement
 Internal and external fact-finding and analysis
 Identification of issues and development of viable options
 Outlining and agreement of optimum plan architecture
 Detailed scheme design
 Plan modelling and testing
 Preparation and communications
 Implementation, ongoing review and refinement.
Client Case Study – European multinational
The client: Large European multinational in the energy sector
The issue: The client was seeking greater consistency and improved effectiveness from its variable
pay programmes across Europe, which had widely divergent characteristics and performance
measures. The business divisions were though at different stages of maturity and growth and there
was a strong and emotive sense of the need for both flexibility and fairness.
How Aon Hewitt added value: After initial discussions, the common reward principles we developed
included:
 Individual contribution should be recognised at all levels
 Plans should be aligned (‘line of sight’) to divisional priorities
 ‘If it ain’t broke don’t fix it’.
Through alignment interviews and workshops, a current state analysis and external benchmarking,
the new reward architecture was agreed. This incorporated a common design framework, for example
in terms of earning opportunities, reflecting both individual and collective performance, and measures
of sales growth and profit performance.
But flexibility within this framework allowed for the different divisions to reflect their own state of
development and their different priorities. Variations in the relative emphasis on profit and growth
Aon Hewitt Contacts: measures was achieved through an ingenious series of performance matrices. High flexibility and
local ownership was delivered with minimum complexity, a high degree of clarity and no loss of overall
Duncan Brown organisational direction.
+44 (0)207 086 9037
duncan.brown@aonhewitt.com
Jackie Waller
+44 (0)172 788 8394
jackie.waller@aonhewitt.com About Aon Hewitt
Aon Hewitt is the global leader in people management consulting and outsourcing solutions. We
Leslie Moss
+44 (0)207 086 9212 design, implement, communicate, and administer a wide range of people management, retirement,
leslie.moss@aonhewitt.com investment management, health care, reward and talent management strategies. With more than
29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients
aon.co.uk and their employees. www.aonhewitt.com