Incentive, Burden

Globally, various bonus schemes are used to keep employees satisfied and motivated. This strategy is increasingly seen adopted by banks, insurances and corporations in Ethiopia. It is becoming common to witness banks and insurance companies showering two to four months of salaries on employees as bonuses. Although these companies are benefiting from the strategy, there are still concerns, as EBR’s Ashenafi Endale writes.

Many large companies, especially financial institutions operating in Ethiopia, have started to explore ways to get the most outstanding performance from their employees. As the companies close out the financial year with large profits, employees are starting to benefit from bonus schemes, designed by management as a way to achieve their ultimate visions.

Even though larger companies in the country have been utilizing incentives and bonus for years, performance-based bonuses are becoming more of a norm across businesses and industries. In particular, big financial institutions, especially banks, managed to harness astonishing returns in 2017/18 financial year, despite notable economic slowdown and political unrest observed in the country over the last three years as well as a chronic foreign currency shortage. Part of the reason was employee incentives such as bonuses.

Oromia International Bank (OIB) has amassed a gross profit of ETB700 million last fiscal year, ahead of the ETB450 million it targeted for the year. “Each employee reached the top of their potential in 2017/18, more than any other year,” explains Gelana Leta, director of Human Resource Management at OIB. “When we disclosed our targets, we proposed an attractive bonus scheme. We evaluated the performance of each employee at each step. Motivating employees was our only option to push against the issues that were slowing down business.”

Gelana says each employee went the extra mile to bring in new depositors and exporters who generate hard currency, and engage with customers to support their businesses. “Two of the bank’s branches in Addis Ababa contributed the lion’s share of profits. The bank rewarded the 40 employees at the two branches, and all high performing employees at the other branches, with bonuses of four months’ salary.”

Bonuses, along with other incentives like insurance and medical coverage, transport, attractive salary, housing loans with low interest and other benefit packages, have also helped Dashen Bank register one of the top profits in the banking industry, according to Mulugeta Alebachew, the Bank’s Marketing and Corporate Communication director. “Employees are usually distressed when there is no bonus. I am personally motivated to work harder by bonuses,” he says. Dashen’s gross profit in the last financial year stood at ETB1.2 billion, up from ETB980 million in 2016/17.

But the view of bonuses is not the same across the banking industry. Fikru Woldetinsae, director of Marketing and Corporate Communication at Wegagen Bank, which grossed a profit of around ETB1.1 billion in the past fiscal year, has found that the contribution of performance-based bonuses at Wegagen is different from Dashen. “Bonus is just like the annual profit sharing for shareholders. They are recognition for employees’ performance in the ended year and incentive for next year.”

However, Fikru agrees that bonus-targeted performance evaluations have highly improved workflow efficiency, explaining, “Every employee is given work parameters, together with the banks overall objectives. Based on the stock cards, each employee must bring in a certain number of new customers, boost deposits and hard currency, and work on customer outreach. This reduces the boss-employee conflict and creates a quality, individual driven work system.” An employee who fails to meet parameters receives a lower bonus. Employees with discipline issues, and poor performance are not eligible for bonus. High performers at Wegagen are given two and half months salary as bonus, while one month is for average performance.

While employees’ associations in firms usually negotiate bonuses and other benefits, the final word is passed by boards or by the owner.

Particularly in the banking industry, which is known for a shortage of professionals, bonuses are used as a retention factor. The banking industry also compete on salaries, to keep their employees from going to the next bank. Many banks revised their salary scales over the last three years, shooting the top salary as high as ETB130,000. “Retention and motivation are the sole purposes of bonus,” argues Gelana.

Literature written on the subject defines bonuses as rewards paid in addition to what is expected. Since they are payments over and above salaries given to employees, bonuses are regarded as incentives. Globally, there are two common types of bonus schemes: performance and discretionary. Performance based bonuses, which are highly related with employee and company performances, only become possible when performance targets are met. When it comes to discretionary bonuses on the other hand, payment is dependent on the willingness of the employer.

While financial institutions such as commercial banks make use of performance based bonus schemes, manufacturing companies like Kaliti Metal Factory employ discretionary bonus schemes. In fact, for Mathewos Asele, CEO of the Factory, bonuses are a kind of corporate social responsibility, and aren’t just a matter of accomplishing targets. “We give bonuses so employees can keep up with inflation and cost of living. Especially at New Year, they have to buy materials to send their kids to school, in addition to celebration expenses,” says Mathewos.

Kaliti Metal Factory gave bonuses of two months’ salary at the beginning of September 2018, totalling close to half a million birr. However, at Kaliti, the New Year bonus is stated in the collective agreement of the employees with the company, which states that the company will always provide bonuses if it achieves targeted production, sales and profit. The company also gives ETB2,000 each to their 470 employees during other holidays. The salary at Kaliti, which revised its scale three years ago, ranges between ETB2,000 and ETB42,000.

Mathewos says the company kept up the bonuses despite production and sales dwindling over the last couple of years. “We cannot talk about profit right now. The factories have been idle, because of a lack of raw materials. Out of the USD38 million letter of credit we requested from the Commercial Bank of Ethiopia to import raw materials in 2017/18, we accessed only two million dollars, although we managed to find an additional five million dollars from private banks.”

Mathewos’s company is not the only one that pays bonuses even though it is not earning as it should be. “Many companies give bonuses even with no profit. Some of them do so just because the staff ask for it,” argues Zelalem Tilahun, founder and general manager of Zelalem Tilahun Certified Auditor. “I know a private company that gave a minimum of ETB50,000 in bonuses with ETB250,000 going to the CEO. There are no problems with giving bonuses, since the tax due is paid. However, usually the bonus is disproportional to the profit registered.”

Of course, companies may use bonuses to motivate and help workers adjust to rising costs of living. However, inappropriately designed bonuses can have negative and unintended consequences for the company in the form of financial crises. In fact, behavioral scientists caution that bonus schemes can bring about unintentional cost that ultimately harm the organization rather than help if they are not planned and implemented carefully.

Similarly, studies reveal that bonuses can backfire if not coupled with the complex web of connections between employee and employer, including frequently discussed efforts like flexible work hours, and entertaining company events. As a result, scholars argue true motivation comes through good connections between employees and workplaces, better communication, the feeling of being heard and feeling empowered to speak up. They even argue the bonuses should be given as a team, rather than to individuals. Their point is financial reward is less effective as a motivator than the sense of belongingness, ownership, and the marching to a higher purpose, as a team.

Tihtina Legesse, board member at the Ethiopian Institute of Corporate Governance, sees bonuses as a positive encouraging factor, but also argues they need cautious implementation. “It is logical that if the company succeeds in its targets, the employee must benefit from the pie. However, all employees cannot have equal contributions,” Tihtina stresses. “Therefore, a formula is needed to evaluate the contribution of each employee.”

7th Year • Oct.16 – Nov. 15 2018 • No. 67

Ashenafi Endale

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