When you want to encourage staff to raise their game you can turn to carrot or stick. Most businesses take the carrot approach by offering employee incentives to enhance performance. In this article, we explore the range of incentives available, we take a look at employee share ownership schemes and consider what you need to think about when introducing incentive schemes.
There’s Plenty of Choice When It Comes to Employee Incentives
There are three main categories of employee incentives ranging from less to more formal schemes:
Letting your staff know you value them can be achieved in many different ways including staff parties, team building days, family events, birthday celebrations and team lunches to name but a few. These one-off activities can often be provided in response to a specific achievement, like a team delivering a major project milestone successfully. Or they can become part of the way you engage staff and create a pleasant and appreciative working environment. For example, by providing a cheese board or cake to celebrate birthdays.
Thanking employees for their hard work via a monetary reward of a simple vote of thanks is a great way to ensure employees’ ongoing engagement. Recognition often takes the form of a company-wide recognition scheme that rewards a framework of specific activities and/or behaviours designed to support the business’ strategic objectives.
Recognition can also include programmes like:
- long service awards that reward loyalty to the organisation usually for milestones like 5,10, 15 years of service and beyond
- employee referral schemes that encourage staff to introduce job candidates – this helps the organisation save on recruitment costs, a proportion of which is passed on to the staff member making the referral
Pay increases aren’t always about keeping pace with the salaries other companies are paying. Compensation can be used to reward top performers for their contribution as well as ensuring your business retains their services.
Bonuses are another, less expensive, way to reward individuals as – unlike a pay increase – bonuses do not increase the cost of the individual’s benefits like pension contributions. Bonuses are usually calculated on the basis of the business’ and the individual’s performance as a percentage of employees’ pay. More senior employees with greater impact on the business tend to be entitled to larger bonuses than less senior staff.
Profit sharing is another option that we’ll explore in more detail next.
Employee Incentives Ownership Schemes
As a business owner you have a vested interest in how well your business performs. But if your employees turn up simply to secure their base pay and their job, they have less reason to care about your business’ success. That’s where employee ownership schemes come into play.
They allow employees to acquire shares in a business giving them an additional financial reason to care about the performance of your business. The better the business does, the more individuals’ shares are worth. Which provides an added employee incentive for staff to enhance their performance and productivity.
Big businesses like Royal Mail, ASDA, Tesco and Morrisons all provide share ownership schemes for their staff. But this doesn’t exclude smaller businesses from offering these kinds of programmes as there are a range of schemes – including tax efficient options – available.
Employee ownership schemes fall into three categories:
- Share option schemes – employees can buy shares at a set price on a specific day.
- Share gifting scheme – your company can choose to give shares to staff for free. The shares are usually held in trust for a period of time.
- Share purchase scheme – where staff can buy shares in the company, normally at a discounted rate.
Most schemes require staff to hold onto their shares for a fixed period of time – this makes it more likely that the share price will increase providing larger payouts and it also supports staff retention as any profits are usually forfeit if staff leave before the vesting period.
What Should You Employee Incentives Be?
Employee incentives should reward activities and/or behaviours that support your business’ goals for the short and long term. However, incentive schemes can have unintended consequences, so you need to carefully consider what you want to reward people for.
Employee ownership programmes need careful communication to ensure staff understand how the scheme works and how they can impact the business’ – and therefore their shares – performance.
Any programme needs to be communicated clearly and should have transparent processes and rules so all staff have the opportunity to engage effectively with the scheme. This will also ensure you get the best return on any payments you make.
Setting up an employee incentive scheme can be tricky so it’s worth working with an experienced HR consultant to ensure you consider every angle including the legal and tax perspectives.
We are very honoured to have Emma Spandrzyk of Keelys Solicitors share this guest blog with us. Her piece addresses some of the key insights many of you will have been thinking about when it comes to IR35.
I have recently joined Keelys in the employment department. I have been working as an employment solicitor for 9 years and, most recently, I have worked in-house for the police.
Some of our clients have been asking us about changes to the law on IR35 next year so we’ve taken some time to explain some of what is happening.
What is the current position?
If someone works on a self-employed basis but, in reality, they are an employee, HMRC can recover the underpaid tax and national insurance from the organisation that they work for.
Sometimes, the individual will set up their own personal service company to provide their services. If HMRC decides that the arrangement is a sham and that, if the individual was engaged directly by the client, they would be an employee, HMRC can recover the underpaid tax and national insurance under IR35. Currently, that is recoverable from the individual and/or their company rather than from the end-user. The exception to that is in the public sector, where the end-user will be liable for the tax and national insurance.
What is changing?
From April 2020 businesses with more than 50 employees or a turnover of more than £10.2m will be affected by the new rules. They will, therefore, be liable for tax and national insurance if they are found to be engaging people through personal service companies who, in reality, ‘are’ employees. If your business is smaller than that, you do not need to worry although we would not be surprised if, in future, these rules apply to smaller companies as well.
How to tell if someone falls within IR35?
If you are a larger business who will be covered by the new rules, the first step is to identify the contractors that provide their services through personal service companies.
To assess whether contractors fall within IR35, businesses will need to look at a range of criteria including the following:
- Control – how much autonomy does the contractor have in terms of how they deliver their work? If the business retains full control over how, when and where tasks are completed, this is indicative of employee status and the contractor is likely to be caught by IR35. If the contractor has full autonomy over the completion of tasks, they are more likely to fall outside the scope of IR35.
- Personal Service – does the contractor have to undertake the work themselves? The ability to send a substitute helps point towards a contractor being genuinely self-employed and outside the IR35 rules.
- Mutual Obligation – is there a requirement for both parties to continue to offer and accept work? If the business has an obligation to provide work and there is an expectation that the contractor accepts it, then this will indicate that the contractor is caught by IR35.
As part of the assessment, businesses should also consider factors such as the degree of integration that the contractor has with the business, the level of financial risk they assume and who provides the contractor’s work equipment.
What does this mean for your business?
Businesses will need to show HMRC that they have taken reasonable care in undertaking their contractor assessments. When reviewing assessments, HMRC will look at the size of the business. The bigger the business and the greater the resources available to it, the more effort HMRC will expect in relation to the process.
There is a useful tool on the HMRC website that you can use to assess whether someone is genuinely self-employed or should be treated as an employee: https://www.gov.uk/guidance/check-employment-status-for-tax
Please let me know if you would like further advice on this, which will be covered under your subscription to our Employment Healthcheck Plan. You may also want to speak to your accountant for advice on whether you are taxing staff appropriately.
Performance management used to be a once a year event or twice at a push. Managers set objectives at the start of the year, gave feedback six months later and at the year-end provided an overall rating. If employees were really lucky, they were asked about their career aspirations and development needs.
Following years of feedback, it emerged that this style of performance management wasn’t as effective as employees or employers would have liked. In fact, only two in ten employees believed that annual performance appraisals motivated them to do outstanding work.
Now organisations around the world are trading in their annual process for continual performance management. An approach that’s better suited to modern businesses seeking improved employee performance and enhanced results. We explore what continual performance management is, why it’s favoured over annual appraisals and how to implement it in your organisation.
What Is Continual Performance Management?
Continual performance management is a human resource (HR) process that takes place throughout the year. It’s an ongoing, holistic approach to appraisal that replaces infrequent with regular feedback leading to a more natural employee-manager conversation and healthier, more authentic workplace relationships.
What Issues Does It Seek to Address?
Can you remember exactly how you delivered a piece of work two weeks ago? How about three months ago? What about half a year?
The whole premise of continual performance management is that it’s difficult to remember exactly what we’ve delivered and how we’ve delivered it a long time after the event. This makes it tough on employees to give an accurate account and difficult for managers to make an accurate assessment of performance.
In addition, modern agile businesses move much faster which often results in objectives set at the start of the year no longer being relevant six or twelve months later.
Why Is Continual Performance Management Proving so Popular?
Continual performance management enables organisations to be far more flexible in how they set and evaluate performance. By creating objectives for the next quarter, they’re far more likely to be relevant and aligned to changing strategic objectives. And, by regularly reviewing performance, it’s easy for managers and employees to recall what’s been done and how it’s been achieved. Which should lead to more accurate performance assessments.
Regular reviews also mean that managers are encouraged to provide on-the-spot feedback. This is much more powerful than waiting several months to deliver insight and it enables staff to quickly correct their performance ensuring problematic actions or behaviours are nipped in the bud and minimising the potential for poor performance to spread to other team members.
Feedback about good performance also means that staff are more likely to keep doing more of the right activities in the right way. Which can only be good for business.
How Can You Implement Ongoing Appraisals?
Continual appraisals often include check-ins between the line manager and each employee every month or at least quarterly. These sessions cover:
- Progress against objectives
- Personal development
- Issues or concerns
- Any new or amended objectives
- Agreed actions
Between each check-in, employees work on their objectives and get feedback from their line manager to keep them on course. One of the major benefits is that managers and staff aren’t bogged down completing lengthy forms in one sitting, an approach that many people dread.
If continual performance management sounds like a lot of additional work, it isn’t. Implemented correctly, ongoing performance appraisals offer a more frequent but lighter touch that provides more benefit to the organisation.
What Will Your Managers Need to Implement It?
One of the major concerns among leaders around introducing this style of appraisal is the ability of line managers to have meaningful conversations. That’s why it’s important to train and educate supervisors and managers at all levels before implementing this new approach.
Remember: performance management needs to be followed by every manager at every level of the organisation. If you’re the most senior leader in your organisation, how you performance manage your direct reports will cascade down the organisation. To ensure you get a great return from introducing this change, the new process needs to start with you.
If you need a little more persuading that continual performance management is for you, research shows that high performing companies are more likely to provide more frequent performance feedback and align their objectives closely with strategy. Making continuous performance appraisal a step closer to even greater business success.