Profit bonus

Lloyds has also announced almost 2,000 job losses since september as part its restructuring plans.

New forex bonuses

Lloyds Bank Group cancels staff bonuses after profits slump, profit bonus.

Lloyds is also considering distributing shares to employees in the new year in lieu of a bonus, and earlier this year paid one-off bonuses worth £250 to frontline staff who had worked through the pandemic.

Lloyds bank group cancels staff bonuses after profits slump

Profits were already down 85% to £434m in first nine months of the year

A sign outside lloyds banking group headquarters in london. The bonus cancelation covers halifax and RBS too. Photograph: nick ansell/PA

Last modified on fri 18 dec 2020 19.19 GMT

Lloyds banking group has cancelled staff bonuses for 2020 after missing financial targets and recording a sharp drop in profits during the covid crisis.

The bank told staff across its halifax, lloyds and bank of scotland brands on thursday that it was making an early announcement on bonuses in light of the challenging economic outlook, and with profits already down 85% to £434m in the first nine months of the year.

Last year lloyds cut its bonus pool for the first time in four years to £310m, down from £465m in 2018.

The bank told staff in a memo: “despite the good news about the vaccine rollout, like most of our peers, our year-to-date business performance continues to be challenging.” despite reporting a third-quarter profit, lloyds told employees: “we are not where we expected to be and are short of the commitments we made to ourselves and our shareholders – which I know also includes many of you.”

The decision has not changed fortunes for the chief executive, antónio horta-osório, who is set to leave in june 2021 and confirmed earlier this year that he would waive his 2020 bonus, worth as much as £1.8m. William chalmers, the finance chief, also ruled himself out of a payout worth up to approximately £800,000.

The decision to cancel bonuses means lloyds will avoid uncomfortable questions from UK regulators, which said last week they would be scrutinising cash bonuses for bankers in light of the continued economic uncertainty.

But the cancellation could prove controversial, if the bank decides to pay shareholders dividends in the new year. The bank of england last week lifted its temporary ban on dividend payouts to investors, but told lenders a cap would be imposed until at least mid-2021.

The coronavirus pandemic has put pressure on bank earnings. Record low interest rates have squeezed net interest income, which measures the difference between interest earned on loans v that paid on deposits. The deteriorating economic outlook has also forced lloyds to put aside £4.1bn so far to cover potential defaults on loans and credit cards.

Lloyds has also announced almost 2,000 job losses since september as part its restructuring plans.

Accord, a specialist union for staff in financial services, said: “bad news is bad news and the lack of any group performance share [bonus] will give some individuals real problems next year when many family budgets are already stretched.”

However, unions have reached a tentative agreement to increase salaries by at least 1% for about 80% of lloyds banking group staff. The lowest-paid workers will be guaranteed a pay rise of at least £400.

The group said: “this decision on bonuses in no way reflects the hard work and commitment our people have made throughout this extraordinary year to keep our businesses operating strongly and to provide support and help to our consumer and business customers.”

With-profits bonus declaration february 2020

Our with-profits fund performed well in 2019

We’re pleased to let you know we’re keeping annual bonus rates at the same level as last year for all our customers. We’ll add these to the guaranteed benefits in your plan.

For most of our customers, we’ll increase the final bonus and therefore the value of your plan.

We’re also pleased to announce we have additional money in one of our funds to share with some of our customers. This means some of our with-profits customers invested in our with-profits sub fund will receive a share of this.

You can find out more details on our website at: pru.Co.Uk/aboutadditionalsurplus

How we look after your money

We invest your money in the prudential assurance company limited with-profits fund. This is the largest and one of the financially strongest with-profits funds in the UK. The size and strength of our fund lets us invest in a wide range of assets and individual companies.

Our aim is to secure the highest total return for the fund (after any tax and investment expenses), whilst maintaining an acceptable level of risk and protecting you, our with-profits customers.

How our fund performed

The table below shows what the with-profits fund has returned over the last 1, 5 and 10 years to 31 december 2019. *

1 year fund return %

5 year cumulative
fund return %

10-year cumulative
fund return %

5 year annualised fund return %

10 year annualised fund return %

Prudential with-profits fund (after tax)

Prudential with-profits fund (before tax)

_{Source: prudential. These values are before charges and the effects of smoothing and are for the main asset pool in our with-profits sub-fund, which is relevant to the vast majority of our customers.}

_{*please note, the fund returns don’t reflect the additional money being shared as part of this with-profits bonus declaration.}

For investments in our with-profits fund, the value of your plan depends on how much profit the fund makes, and how we decide to distribute it. When we take these factors into account, the bonuses we’re adding to your plan won't reflect the performance of the underlying fund exactly. You can find more information in your yearly statement.

We can’t predict the future so past performance isn’t a guide to future performance. The value of your plan can go down as well as up so you might not get back the amount you put in.

How we set our bonus rates

For annual bonus rates, we look at the economic outlook and the returns we expect our investments to earn in the future. By keeping annual bonus rates at the same level as last year, we’re maintaining the funds investment flexibility to cope with market volatility which will help continue delivering competitive overall returns. This gives the fund a better opportunity of paying higher final bonuses in future.

For final bonus rates, we aim to ensure the total return on customers’ plans, represents a fair share of the fund’s profits earned over the lifetime of their plans. This is after taking into account, for example, charges, the effects of smoothing and any applicable tax. Any final bonus we’ve declared in february 2020 may be payable if you leave the with-profits fund in the next bonus year, but this isn’t guaranteed.

How we apply a market value reduction

Sometimes, we may need to apply a market value reduction if you decide to take money out of your plan. This will depend on the type of plan you have. This will reduce your fund value, but we’ll do this to make sure you get a fair plan value.

In 2020 we'll continue to manage the fund in a prudent manner, just as we always have.

Types of bonuses: 10 bonus programs for employees

Types of bonuses

There are several types of bonuses. Some plans simply give employees a certain share of the company profits, or perhaps a bonus to the entire company. Other programs give incentives to individuals or teams to perform at or above certain thresholds. And a variety of cash and noncash awards are possible for certain types of achievements in some companies. You can even earn bonuses for being hired or getting your friend a job at your company.

The following article details 10 types of bonuses that are typically seen in the workplace.

One very basic type of bonus program is current profit sharing. A company sets aside a predetermined amount; a typical bonus percentage would be 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary. Such bonuses depend on company profits, either the entire company's profitability or from a given line of business. Sometimes the bonuses are given across the board, and sometimes they are given in larger percentages of compensation the more someone makes.

The purpose of profit sharing bonuses is to encourage employees to understand how their work affects the company's performance and to improve the company's profitability. Learn how your company makes money and how your position can help it make more. The annual report and other statements will give you an idea of how the company is performing. It will also make you look good to your manager if you show an interest in the company's performance.

This type of bonus program is most common in manufacturing plants and is designed to reward productivity and improved product quality. Gain sharing works best when employees become responsible for production quantity and quality and are encouraged to improve the way the product is made. This program reflects a philosophy that employees know their job best.

Gain sharing programs pay out bonuses for statistical improvements in production and quality on a quarterly or sometimes monthly basis, providing a sense of excitement for participants. These programs are often very successful, transforming the manufacturing plant into a center of employee commitment.

Spot bonus award

Some companies reward employees on the spot for achievements that deserve special recognition. Spot bonus awards are typically $50 and up and can be made by your immediate supervisor or any higher-level person in your company. You can get these for just being extra helpful. The math is in employees' favor: companies with spot bonus programs offer approximately 1 percent of payroll and expect to give out such bonuses to 25 percent of the employees eligible for them, allowing them to earn more than one instant bonus in a year.

Noncash bonus

Although the wrong kind of "employee of the month" concept can be cheesy, it's all in the execution. A well designed noncash bonus program can instill pride and improve employee morale. Employees who have done a great job should have to come to the front of a crowded room at a special ceremony as if they are receiving an academy award. The certificate or trophy should be thoughtfully and cleverly designed, and appropriate to the occasion. These awards are sometimes coupled with a token tangible award, such as a gift certificate, a bonus day off, or a great parking space.

You know your company has a good noncash bonus program if these awards are coveted, and if people who receive them display them proudly at their desks or in their homes. Moreover, this type of award may help you get a promotion or a new job, so include it on your resume.

Sign-on bonus

No longer just for star athletes, sign-on bonuses have become commonplace. Their usage now extends to nearly all level of employees, especially when unemployment is low and top talent is hard to find.

Given to new employees who have just joined the company, this award serves two purposes:

Establish goodwill

Buy out any compensation "left on the table" from a previous employer.

The second purpose is important to remember. Before joining a new company, be sure to account for every kind of compensation program in which you participate. If you are expecting a bonus in a few months, ask your new employer to buy you out of it. If you have any stock options, particularly options that are in the money, ask the employer to buy them out (either in cash or new stock options).

Don't forget to include profit-sharing bonuses or defined contributions (for example, a 401(k) match or an employee stock options program (ESOP)) made to your retirement account. Remember, a sign-on bonus is to keep you whole as you trade one set of compensation programs for a new one.

Medium to large signing bonuses may be paid over a period up to a year to protect the company's interests.

Mission bonus (also known as a task or milestone bonus)

Task bonuses are given to a team of employees for achieving a milestone or for completing an important project. Usually, these bonuses are offered sparingly, but they have been used more frequently in software and hardware development to encourage meeting tight deadlines. Sometimes these programs incorporate a quality measure to guard against too much focus on speed.

Mission bonuses can be significant (one month's salary is not uncommon, and certainly no less than one week). This award is for the kind of achievement that deserves mention in your resume.

Referral bonus

In hot job markets, it can be difficult for employers to find qualified personnel. When talent is scarce, many employers retain recruiters to find candidates, typically paying the recruiter 20 to 30% of the new hire's first-year pay. Many employers prefer to avoid this fee, and instead, offer referral bonuses to employees for recommending friends and acquaintances. Employers are comfortable in hiring friends of employees because employees are unlikely to recommend people who will make them look bad. So don't be afraid to invite your friend to work at your company!

Referral bonuses are typically hundreds to thousands of dollars and typically depend on the level of the new hire. Some firms pay as much as $10,000 to $20,000 if you introduce a new senior person to the firm. So if your former boss is a good fit for an opening, it's worthwhile to let your company know.

Retention bonus

Retention bonuses are given to employees in unusual circumstances, such as a merger or acquisition, or when an important project needs to be completed. These bonuses are designed to provide continuity when there is potential uncertainty about an employee's continued employment at the company. The bonus encourages employees to stay until a specified date so that critical activities can continue without disruption. Retention bonuses are usually about 10 to 15% of salary.

Holiday bonus

Holiday bonuses range from small gifts; from cash to the ubiquitous holiday turkey to one month's salary. The amount is usually dictated by the company's practices. If you do receive one month's salary, count it as part of your salary if you look for work elsewhere. This practice is usually referred to as a "13-month salary," and is not a true bonus since no performance is required to receive it.

Sales commission

Sales commissions are awarded to salespeople for selling. Usually, these awards are paid out as a percentage of sales volume. In some cases, commission percentages can increase with higher sales volume. In fewer cases, the percentage can decrease. It all depends on the scheme. Sales commissions are a significant source of income for sales employees, comprising at least 50% of total cash compensation.

If you are accepting a new job or sales territory, ask for the previous salesperson's sales performance. This will help you determine how likely you are to achieve your quota and sales target. Also, don't forget to construct a business plan based on your understanding of your sales territory. This is key to understanding how easy or difficult hitting your goals will be.

With-profits bonus declaration

Over 2019, the prudential assurance company limited with-profits fund returned 9.6% (net of tax) and 11.5% (gross of tax), both before charges and the effects of smoothing*. Please see information specific to your plan to find out more.

*this describes the main asset pool in our with-profits sub-fund, which is relevant to the vast majority of our customers.

Fund returns do not include the additional surplus being shared as part of the PACL final 2020 bonus declaration.

Please remember that past performance is not a reliable indicator of future performance.

On the bonus declaration literature page, you'll find literature and sales aids that you can use to discuss bonus declaration with your clients.

Summary of 2020 annual bonus rates

annual bonus rate
most* unitised (or accumulating with-profits) with-profits bonds	1.50%
flexible retirement plan (including income drawdown) and trustee investment plan (for all new business post 7/11/11)	1.05%
corporate pensions (unitised)	1.75%
with-profits pension annuity	0.25%
most^ unitised (or accumulating with-profits) personal pensions	1.50%

*most refers to prudence bond (optimum return) both no initial charge and initial charge versions, international prudence bond & prudential international investment bond (euro), international prudence bond & prudential international investment bond (US) and PSA/PIB (fund over £6000). With effect from 01/03/2020, the high tier bonus threshold is reduced from £6,000 to £2 implying all PSA/PIB business receive high tier bonuses from that date going forward.

^most refers to all capsil and OPAL personal pensions. It also applies to prudential series A and premier plans (including TIP series A for business sold between 01/01/2003 and 06/11/2011) written on or after 01/01/2003.

Our globally diversified with-profits fund performed well in 2019 and that means:

For all of our planholders, we’re keeping annual bonus rates at the same level as last year, which will continue to add to the guaranteed benefits of our customers’ plans.

Most of our customers will benefit from increases in their final bonus and therefore the value of their plans. Final bonus may vary and isn’t guaranteed.

This year, we’ve also got additional money in the with-profits sub fund to share with some of our with-profit plan holders. Because of this, we’ve increased the unsmoothed value of their plans by 1.25%. This is reflected in our final bonuses from this year. There’s a chance we might have to take back this extra money.

You can find out more details on our website at www.Pru.Co.Uk/additionalsurplus

We aim to provide fair payouts based on what the fund has achieved and we’ll continue to smooth some of the extreme highs and lows of investment performance.

In 2020, we’ll continue to manage the fund prudently. We’ll aim to secure the highest total return for the fund (after any tax and investment expenses) while maintaining an acceptable level of risk and protecting our planholders.

Fund size and rating

The prudential assurance company limited with-profits fund is the largest and one of the financially strongest with-profits funds in the UK. The size and strength of our fund allows us to invest in a very wide range of assets and individual companies.

The total level of assets backing the with-profits business in the fund was £117.6bn at 31 december 2019.

The prudential assurance company limited is rated A+ for financial strength by standard & poor's, as at december 2019. This is one of the highest ratings currently given to any UK life assurance company.

Fund management

M&G treasury and investment office (T&IO) are our in-house asset-allocation experts in the UK. They select a wide range of assets to hold in the with-profits fund, in line with the fund's objective. The aim of the fund is to maximise investment returns while maintaining the financial security of the fund.

PAC with-profits fund - comparative cumulative and annualised returns over 1, 5 and 10 years

1 year return %	5 years cumulative return %	10 years cumulative return %	5 years annualised return %	10 years annualised return %
prudential with-profits fund (net)*	9.6%	35.4%	94.3%	6.3%	6.9%
prudential with-profits fund (gross)**	11.5%	42.0%	115.5%	7.3%	8.0%
ABI UK - mixed investment 20% - 60% shares sector average - life funds***	10.2%	21.0%	58.8%	3.9%	4.7%
ABI UK - mixed investment 20% - 60% shares sector average - pension funds***	10.9%	24.8%	71.5%	4.5%	5.5%
FTSE 100 total return	17.3%	40.8%	104.0%	7.1%	7.4%
morningstar 90 days notice (UK savings £25,000+) net	0.4%	2.0%	4.2%	0.4%	0.4%
morningstar 90 days notice (UK savings £25,000+) gross	0.6%	2.5%	5.3%	0.5%	0.5%
UK retail price index	2.2%	13.4%	33.9%	2.5%	3.0%

Source: prudential, FE. All figures to 31 december 2019

Note: the with-profits fund returns shown don't reflect the distribution of excess surplus.

* with-profits performance is net of tax and before charges and the effects of smoothing. The returns shown are for the main asset pool in our with-profits sub-fund, which is relevant to the vast majority of our customers.
** with-profits performance is gross of tax and before charges and the effects of smoothing. The returns shown are for the main asset pool in our with-profits sub-fund, which is relevant to the vast majority of our customers.
*** ABI UK – mixed investment 20-60% shares – the association of british insurers (ABI) has a classification system whereby the performance of funds that have similar asset allocations are grouped together to give an average performance figure. This is known as the sector average. It's important to note that some if not all of the funds comprising this sector average will already have fund management charges deducted from their performance.

With-profits important information

Overview

With-profits committee

Important information

Overview

With-profits committee

Important information

This is where you'll find your with-profits guides and principles and practices of financial management, which describe how we manage our UK with-profits business. You can also see our most recent reports to with-profits policyholders, investment reports and bonus information.

With-profits guides

There are different guides on with-profits depending on the type of plan you have with us. Take a look at the right guide for you to find out more about with-profits.

With-profits guide for unitised pension plans

With-profits guide for unitised life plans

With-profits guide for stakeholder pension plans

With-profits guide for mortgage endowments and conventional plans

If you are a with profits pension annuity customer, please contact standard life for a copy of the guide for this type of plan.

Principles and practices of financial management (PPFM)

If you’re looking for a detailed description of how we manage the with-profits funds the ppfms can give you just that.

Heritage with-profits fund PPFM

Most with-profits plans are covered by this PPFM.

Read the PPFM (PDF, 225KB)

UK smoothed managed with-profits fund PPFM

If you took out a stakeholder pension plan on or after 10 july 2006 this is the right PPFM for you.

Read the PPFM (PDF, 225KB)

Annual reports to policyholders

The annual reports to UK with-profits policyholders cover a range of topics around your with-profits investment including pay out values and a statement from the with-profits actuary.

These reports relate to 2019 but we understand that you may have concerns about the current impact of the coronavirus (COVID-19) pandemic. There have been no changes to our practices (as detailed in our ppfms) for the management of our with-profits funds. Any guarantees associated with your policy are unaffected by the pandemic. For more information on our response to coronavirus (COVID-19) please go to our dedicated information pages.

Heritage with-profits fund annual report

Most with-profits plans are covered by this report.

Read the report (PDF, 225KB)

UK smoothed managed with-profits fund annual report

If you took out a stakeholder pension plan on or after 10 july 2006 this is the right report for you.

Read the report (PDF, 225KB)

Quarterly investments reports

Our investment reports are a great place to find more information about the asset mix in the with-profits funds and how they have performed.

Life business

Stakeholder pension plans

Other pension business

Bonus information

For details of our latest with-profits bonus review and regular bonus rates.

Latest bonus review

Life plan regular bonus rates

Pension plan regular bonus rates

Other useful information

Heritage with-profits fund inherited estate

Heritage with-profits fund - unitised with-profits pension payouts

More on investments

We can help you learn more about your different investment options and tell you everything you need to know about investing for your future.

More investment funds

We don’t just offer with-profits funds. Take a look at our other options.

Fund out about our full range of funds

Investing guides

Looking for some more information about investing? Our guides can help.

Take a look at our guides

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This website describes products and services provided by standard life assurance limited (part of the phoenix group) and subsidiaries of the standard life aberdeen group. The standard life aberdeen group and the phoenix group are in a strategic partnership – learn more about the products and services provided by each company.

Standard life assurance limited continues to use the standard life brand, but products and services under this brand are provided by different companies:

All the pension products on this website are provided by standard life assurance limited, which is part of the phoenix group.

Standard life assurance limited is registered in scotland (SC286833) at standard life house, 30 lothian road, edinburgh, EH1 2DH. Standard life assurance limited is authorised by the prudential regulation authority and regulated by the financial conduct authority and the prudential regulation authority.

Where we mention financial advice from standard life on this website, the advice services are provided by the standard life aberdeen group.

Our retirement advice service is provided by standard life client management limited. Standard life client management limited is registered in scotland (SC193444) at 1 george street, edinburgh, EH2 2LL. Standard life client management limited is authorised and regulated by the financial conduct authority.

We also refer to advice from 1825 on this website. '1825' is a trading name used by 1825 financial planning and advice ltd, which is part of the standard life aberdeen group. 1825 financial planning and advice ltd is registered in england (01447544) at 14th floor 30 st. Mary axe, london, england, EC3A 8BF and is authorised and regulated by the financial conduct authority.

The standard life stocks & shares ISA and personal portfolio are provided by standard life savings limited, which is part of the standard life aberdeen group.

Standard life savings limited is registered in scotland (SC180203) at 1 george street, edinburgh, united kingdom, EH2 2LL. Standard life savings limited is authorised and regulated by the financial conduct authority.

The standard life self investor ISA and trading account are provided by elevate portfolio services limited, which is part of the standard life aberdeen group.

Elevate portfolio services limited is registered in england (01128611) at bow bells house, 1 bread street, london, EC4M 9HH. Elevate portfolio services limited is authorised and regulated by the financial conduct authority.

Our onshore bond products are also provided by standard life assurance limited, which is part of the phoenix group.

Our offshore bond is provided by standard life international dac, which is part of the phoenix group.

Standard life international dac is authorised and regulated by the central bank of ireland and subject to limited regulation in the UK by the financial regulation authority. Details about the extent of our regulation by the financial conduct authority are available from us on request.

Standard life international dac is a designated activity company limited by shares and registered in dublin, ireland (408507) at 90 st stephen’s green, dublin.

Equity release

Standard life equity release is provided by age partnership limited. Standard life client management acts as an introducer and refers customers to age partnership limited.

Age partnership limited (registered in england (5265969) at 2200 century way, thorpe park, leeds, LS15 8ZB). Age partnership is authorised and regulated by the financial conduct authority. Their FCA register number is 425432.

With-profits investments

The with-profits investments on this site are provided by standard life assurance limited, which is part of the phoenix group.

For more information please read our service and provider information page.

With-profits bonus declaration

*this describes the main asset pool in our with-profits sub-fund, which is relevant to the vast majority of our customers.

Fund returns do not include the additional surplus being shared as part of the PACL final 2020 bonus declaration.

Please remember that past performance is not a reliable indicator of future performance.

On the bonus declaration literature page, you'll find literature and sales aids that you can use to discuss bonus declaration with your clients.

Summary of 2020 annual bonus rates

annual bonus rate
most* unitised (or accumulating with-profits) with-profits bonds	1.50%
flexible retirement plan (including income drawdown) and trustee investment plan (for all new business post 7/11/11)	1.05%
corporate pensions (unitised)	1.75%
with-profits pension annuity	0.25%
most^ unitised (or accumulating with-profits) personal pensions	1.50%

Our globally diversified with-profits fund performed well in 2019 and that means:

For all of our planholders, we’re keeping annual bonus rates at the same level as last year, which will continue to add to the guaranteed benefits of our customers’ plans.

Most of our customers will benefit from increases in their final bonus and therefore the value of their plans. Final bonus may vary and isn’t guaranteed.

You can find out more details on our website at www.Pru.Co.Uk/additionalsurplus

We aim to provide fair payouts based on what the fund has achieved and we’ll continue to smooth some of the extreme highs and lows of investment performance.

Fund size and rating

The total level of assets backing the with-profits business in the fund was £117.6bn at 31 december 2019.

Fund management

PAC with-profits fund - comparative cumulative and annualised returns over 1, 5 and 10 years

1 year return %	5 years cumulative return %	10 years cumulative return %	5 years annualised return %	10 years annualised return %
prudential with-profits fund (net)*	9.6%	35.4%	94.3%	6.3%	6.9%
prudential with-profits fund (gross)**	11.5%	42.0%	115.5%	7.3%	8.0%
ABI UK - mixed investment 20% - 60% shares sector average - life funds***	10.2%	21.0%	58.8%	3.9%	4.7%
ABI UK - mixed investment 20% - 60% shares sector average - pension funds***	10.9%	24.8%	71.5%	4.5%	5.5%
FTSE 100 total return	17.3%	40.8%	104.0%	7.1%	7.4%
morningstar 90 days notice (UK savings £25,000+) net	0.4%	2.0%	4.2%	0.4%	0.4%
morningstar 90 days notice (UK savings £25,000+) gross	0.6%	2.5%	5.3%	0.5%	0.5%
UK retail price index	2.2%	13.4%	33.9%	2.5%	3.0%

Source: prudential, FE. All figures to 31 december 2019

Note: the with-profits fund returns shown don't reflect the distribution of excess surplus.

Bonuses and incentives

Understand the basics of bonuses and incentives, the trends in their application, and how to design and operate schemes effectively and ethically

Introduction

Whether used proactively to influence behaviour or retrospectively as part of a reward package, bonuses and incentives can have various benefits for organisations and employees. However, the success of any bonus or incentive scheme is based on an understanding of the context in which it operates and individuals may respond differently to the same stimulus.

This factsheet explores the types of bonuses and incentives, trends in their use, and their potential benefits and drawbacks. It looks at how bonuses and cash or non-cash incentives suit a variety of contexts, and what to consider when designing and operating such schemes.

What are bonuses, cash incentives and non-cash incentives?

Bonuses and cash incentives are a form of variable pay based on lump-sum payments linked to individual, collective or organisational performance (or some combination of these). They are not consolidated into base pay, though in certain situations (such as due to cost constraints) they can be given as part of, or instead of, a pay rise.

It's important to draw a distinction between the cash incentives and bonuses, although the two terms are interlinked and often used interchangeably.

Incentives aim to influence future employee behaviour or performance, usually using targets: if a specific target is met, the employee will receive a cash payment, typically of a specific size.

Bonuses cover a wider range of purposes and can be discretionary or non-discretionary. Like incentives, they may be used to influence employee performance or behaviour to meet pre-set objectives, but they could also be used to reward past achievements.

It's also helpful to differentiate between:

Non-cash incentives, sometimes known as performance improvement plans, are forward-looking, formal schemes. They aim to affect directly employees’ future performance by awarding prizes or ‘gifts’, such as merchandise, travel or retail vouchers, associated with some performance measure, such as sales volume.

Employee recognition schemes are retrospective as they recognise past performance rather than incentivising future efforts. They may be informal and discretionary. Such schemes may be linked with non-cash incentives.

Our report show me the money! The behavioural science of reward examines recent thinking on how individuals can respond to various kinds of incentives.

The purpose of bonuses and cash incentives

The desire to incorporate bonus and incentive plans into reward packages has been driven in part by the ‘new pay’ philosophy. This advocates that ‘guaranteed’ remuneration (basic pay and benefits) should comprise a smaller proportion of the overall reward package, with a shift towards strategic reward linking employee performance and pay to the wider business strategy.

There's also been a move in certain sectors towards market-based pay, whereby an employee might only receive a pay rise if the market rate for the role had increased: in this scenario, individual contribution could be recognised via a bonus instead of a pay rise.

For the employee, the main benefits of bonuses/cash incentives over consolidated salary increases are:

Greater control over their level of remuneration.

Higher payments are potentially possible.

But the downside for employees includes:

Non-consolidated payments must be re-earned and may not count towards overtime pay.

Payments may be unpredictable or lower than expected if targets cannot be met.

For the employer, the advantages include:

Ongoing motivation as bonuses must be re-earned.

Lack of impact on certain employer on-costs that are linked to basic salary levels, such as pension contributions.

Capacity for maintaining market pay competitiveness without necessarily inflating the annual pay bill.

Flexibility through, for example, the ability to reduce or even halt payments during economic downturns.

There are also challenges for employers. While money influences behaviours, it may encourage the wrong types. So, any financial-based bonus or incentive scheme must be designed carefully and align with an organisation’s business objectives, corporate governance and ethical standards as well as the views of key stakeholders, such as employees, donors or customers. However, this can lead to a proliferation of checks and balances, such as malus or clawback, which then reduces the motivational impact.

The success of these schemes also depends on how effectively performance is defined, managed and ascribed, requiring effective communication and support for both line managers and employees.

Types and coverage of bonuses and cash incentives

Payment of bonuses and cash incentives is generally linked to the quality and/or quantity of work on an individual or collective basis, or to some measure of company performance such as profit levels (or both).

Schemes may be broadly divided into the following categories although definitions vary, may overlap or be linked.

Individual-based - payment of the bonus/incentive is calculated by some measure of individual performance, hence there should be a considerable incentivisation effect. Sales commission could be included within this category (although this may be seen as a distinct form of remuneration in its own right).

Schemes driven by business results - company profit levels or customer satisfaction may be used as measures to help determine bonuses.

Team-based - links the bonus with some measure of collective performance, often with the aim of fostering effective teamworking.

Project-based - might be used when a deadline is important, for example to reward construction workers for completing a building project on time, although such schemes may be open to manipulation.

Department/site-based - payments that could be used to reward, for example, workers who attain productivity improvements in one factory.

Gainsharing - employees share in financial gains achieved through improved performance (particularly enhanced productivity).

Combination - two or more of the above schemes.

There are other more specialised bonuses, for example at christmas or for attendance.

Our 2019 reward management survey found that may employers use some form of cash-based bonus or incentive plan. However, such schemes are far more common in private sector than in the public or voluntary sectors. The most popular arrangements include individually based plans (for example, personal performance or commission), plans driven by business results (such as profit) and combination schemes.

CEO bonuses and incentives

Despite the growth of interest in environmental, social and governance investing, most FTSE 100 executives’ bonus and long-term incentive plans are weighted towards financial measures of company success. By contrast, non-financial measures, such as workforce ones, play a minor, albeit growing, role. See our CEO pay and the workforce report for more.

Bonus payment levels and recent developments

Levels of payments

If they are to affect employee behaviour or performance, bonus or incentive payments need to be ‘worth having’. That means they must be set at a high enough level to have an effect, and consider (though not be driven by) market practice. By contrast, setting bonuses at very high levels needs caution to avoid encouraging undesired behaviours or outcomes, such as the ‘crowding out’ of non-financial motivation.

An important factor in calculating any incentive is that it's kept simple. Ideally, employees in the plan should be able to measure progress against targets and carry out the calculation themselves so they know how they're progressing and what payment level they might achieve.

Employers need to decide how they'll set bonus payments, including whether to use a formula (typically for incentives) and how to express payments (for example, as a salary percentage or a flat-rate payment).

Information tracking specific breakdowns of UK bonus payments over time (by gender, for instance) can be found in the office for national statistics' annual survey of hours and earnings.

Recent developments

Following the 2008 recession, bonuses in the UK became a concern with their whole nature and operation questioned. The financial services authority (FSA) considered that remuneration practices were a ‘contributory factor to the market crisis’. Practices in investment banking in particular tended ‘to reward short term revenue and profit targets’ and, in so doing, ‘gave staff incentives to pursue unduly risky practices’.

A range of measures were introduced to regulate remuneration in the finance sector, particularly for senior pay. The EU’s capital requirements directive known as CRD IV requires finance sector bonuses to be limited to 100% of base pay, or 200% with the approval of at least 66% of shareholders. The regulation covers senior banking employees irrespective of their location, so those staff working for a european firm but based in asia would still be subject to the cap.

While many reward specialists believe there needs to be a continuing clear link between high levels of performance and bonus payments, without rigour in applying this principle, bonuses may reward less-than-robust performance or incentivise inappropriate behaviour. Corruption is one example which, according to a transparency international report incentivising ethics: managing incentives to encourage good and deter bad behaviour, can include fraud, trading in influence, anti-competitive practices and the offering, promising or payments of bribes. For incentives to work as intended and avoid distorted outcomes, it argues that employers should have an open and ethical culture in which staff are encouraged to do the right thing and feel able to challenge management decisions or targets they think are unethical or dysfunctional. See more in our factsheet on ethical practice and the role of HR.

The impact of the COVID-19 pandemic

Our 2020 reward management survey (to be published in 2021) finds a large proportion of employers have made temporary changes to their bonus plans due to COVID-19 and the economic lockdowns, such as moving the emphasis from performance to behaviours, lowering certain targets or suspending them.

With-profits investment

Investing for the medium to long term

The basics

Investing in with-profits funds means investing in a combination of shares, bonds, property and money market investments. Growth can come in the form of regular and final bonuses from the profits the fund might make.

Our with-profits investments

With-profits policies are designed for the medium to long term, ideally at least 5 to 10 years. We pool your money with that of other customers in one of our with-profits funds and that money is invested in a mixture of shares, bonds, property and money market investments.

The value of your with-profits investment can grow through the addition of yearly bonuses and, for most policies, there is the possibility of a 'final' bonus when your policy comes to an end. Bonuses are not guaranteed and bonus rates can go down as well as up. However, once added they can't be taken away. There is a risk that the value of your investment could go down as well as up and you may get back less than you invested.

With profits investment returns are shared out as bonuses, of which there are two main types, regular (or annual) bonus and final (or terminal) bonus.

Regular bonuses can be added to your policy each year (or more often). Many with-profits policies guarantee a minimum payout on specified dates or events and the addition of regular bonuses increases this minimum level of payout.

A final bonus may be added when you decide to cash-in your policy or if you move out of with-profits by switching to another fund.

A market value reduction (MVR) can apply to some types of with-profits funds. An MVR is an adjustment factor that can be applied to those leaving a with-profits fund at times other than those specified in the contract. This ensures that those leaving the fund do not receive more than their fair share of the underlying investment, and therefore enables us to treat with-profits customers fairly.

How we manage the funds

To help you understand how we manage the with-profits fund in which you’re invested, we produce two types of guides.

These guides can be downloaded from our with-profits useful guides page.

There are technical guides called the principles and practices of financial management (PPFM) and there are simplified, more reader-friendly versions.

Independent expertise and oversight

We're committed to treating our customers fairly at all times. To support this, we have a with-profits committee which brings independent expertise and oversight, to ensure fairness is fully considered in our with-profits decision making.

How to develop an employee bonus compensation plan based on net profit

How to calculate PTO

If your business is not currently paying bonuses and wishes to implement a bonus program, you may find that tying the bonus compensation to your net company profit is an excellent way of increasing employee productivity.

Basing bonuses on the net profit of your company also prevents you from having to pay bonuses if your company hits a downturn and does not produce profits. It is up to you, the owner, or your company shareholders to determine how often and how much you will pay for bonuses.

Check for employee qualification

Determine which employees qualify for net-profit bonuses. Typically, employees do not qualify for any benefits until they work for at least 90 days. Some companies do not allow bonus eligibility until an employee reaches his first anniversary with the company, and others use performance criteria to determine eligibility. It is really up to you how you determine eligibility criteria but the rules you develop must treat people consistently and not discriminate.

Determine bonus pay rate

Determine the rate of the bonus pay. You can set a flat bonus rate of a percentage of the profits or calculate a sliding bonus scale based on seniority. A seniority plan rewards employees with a higher bonus each year they work for your company. Create a detailed payment formula that can be applied consistently and that everyone can understand.

Choose a bonus schedule

Select a bonus schedule. You can decide to pay quarterly, semiannual or annual bonuses. Since you are basing your bonus payments on your net profits, it makes sense to schedule the bonuses around your company's profit statements.

Consider your net profit

Calculate how much of your net profit you will pay in bonuses. For example, if you designate 20% of your profits to your bonus plan and your net profits total $100,000, you are going to pay $20,000 in bonuses. Typically, employers who pay net-profit bonuses based on longevity select a low percentage rate and multiply it by the net profit amount.

Allocate bonuses among employees

Split the total bonus amount among your employees in the manner you decided in step 2. If you are paying a flat rate to all employees, divide the bonus amount by the number of employees receiving a bonus. For example, if you have 25 eligible employees, divide $20,000 by 25 to determine that each employee is going to receive $800.

If your plan provides different bonus amounts based on longevity with your company, multiply $100,000 by each percentage rate. For example if your senior employees receive a 1% bonus, each of them will receive a $1,000 bonus.

Bonus compensation plan considerations

The federal government does not require employers provide bonus compensation, but if you do, employees can sue you if you do not pay bonuses as described in their contract or handbook. Include any details regarding your bonus compensation plan in your employee handbook. Specify that the company bases the bonus on company profits and, if there are no profits in a bonus period, there will be no bonuses awarded to employees.