How to tackle pay, bonuses and rewards

How to tackle pay, bonuses and rewards

Having a coherent, finely tuned remuneration package could be the key to attracting and retaining quality employees. The IoD’s Information and Advisory Service shows you how to tackle pay, bonuses and rewards

Ever since the financial crisis struck in 2008, bonuses have been a dirty word. But for many small businesses, bonus culture – as well as the right remuneration package – is an essential component of recruiting, and retaining, those people with the right skills.

One of the first things business leaders must do is to establish the market rate for salaries. The IoD’s Business Information Service has a comprehensive collection of online and hard-copy salary resources and can provide members with salary range information according to role, location or company size.

The UK’s national minimum wage rates went up in October, and are currently fixed at £6.70 per hour for workers aged 21 and over, £5.30 for those aged 18-20 and £3.87 for under-18s. Apprentices are entitled to £3.30 an hour. Above this, you can decide exactly how much you pay your employees. For an up-to-date guide – plus a minimum wage calculator – head to Bear in mind, too, that weekly wages are best suited to companies with a fixed working day and short working hours – and it’s important to consider overtime rates.

As for incentive pay, the IAS’s advice is clear: it is only effective when it relates to specific achievements, and incentives based on competition have a tendency to backfire if the same employees always succeed. Typically, bonuses should be between 10 and 25 per cent of salary in order to motivate employees. To prevent complacency (incentives can lose their appeal once employees become accustomed to them), companies should change the schemes whenever they can.

For employers looking for a non-divisive incentive, profit-related pay – which reflects a whole company’s achievements with the entire workforce receiving a bonus – is worth considering. Incentives can also play a role in preventing key staff from being poached by rival companies. Share schemes and share option plans in particular are crucial here, as they encourage staff commitment by allowing employees to have a stake in the company’s growth. Shares and options could be free of income tax and NI, provided they are granted under HMRC-approved employee conditions. The Directors’ Tax Line can advise IoD members on tax obligations and how to best structure your incentive scheme.

A Sharesave scheme, in which all employees participate on similar terms, getting the right to buy a number of (usually discounted) shares every three, five or seven years, could also be worth considering. However, offering shares in your business is a more complicated process than paying cash – for example, any gains will be subject to capital gains tax.

Benefits can be hugely attractive too. High on employee wishlists are healthcare schemes, company cars and parking. Such schemes are worth considering if companies can’t afford to incentivise staff via shares or bonuses. In this smartphone age, mobile phones can also be an incentive, with many business leaders seemingly unaware that there is no tax to pay on mobile phones provided by an employer. There are reams of other non-taxable benefits too, such as long-service awards, annual parties and company bicycles.

Employees, especially millennials, increasingly desire non-financial incentives. Holidays and additional unpaid leave could be weaved into the employment package, as could the temptation of all-expenses-paid foreign trips. Staff could also be rewarded via benefits such as time off on their birthdays and flexitime working. Sarah Watts, head of IAS services at the IoD, says small-business directors have many advantages over corporate bosses when motivating staff: “They may not be able to match all the benefits larger companies provide, but they can offer staff more rewarding and interesting jobs.”

How could the IAS help you?

The IAS provides IoD members with free business intelligence and advice to help them run their companies more efficiently and successfully.

The Business Information Service is able to investigate questions on behalf of members and supply them with valuable information ranging from market forecasts and industry trends to trading abroad and employee remuneration.

The Directors’ Advisory Service provides confidential, independent advice from specialists on issues ranging from raising finance to board and shareholders’ disputes.

Members can receive prompt and confidential business, personal tax and legal advice through using the IoD’s telephone helplines.

To find out more about the Information and Advisory Service, visit

Email the Information and Advisory Service

Telephone: 020 7451 3100

Benefits IoD members are entitled to 25 enquiries a year to the Business Information Service, 4 sessions with an IoD adviser, 25 calls to both the legal helpline and the tax helpline

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Director magazine

Director magazine

Director is the magazine for business leaders. Free to IoD members and available to purchase through subscription, each edition is full of insightful interviews with entrepreneurs and company directors.

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