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Reinventing Gratuity | A Merit Money Scheme

Reinventing Gratuity A Merit Money Scheme

Gratuity = Merit Money 

Besides salaries or wages, many organizations also provide some kind of bonus as an incentive to their employees. Great! That should motivate people, right? In and of itself yes it would. However, as the financial crisis of 2007-08 made painfully clear, bonuses or other financial incentives without proper regulation can cause a whole lot of trouble.

Management 3.0, therefore, proposes a bonus system with better controls. But first, a name change. In the same way that the Ministries of War were renamed Ministries of Defence after World War II, and propaganda is now public relations, we renamed our bonus system Merit Money to remove the bad connotation caused by greedy bankers.

There are dozens of ways a merit money system might be devised, but to avoid the slippery slope to a free-for-all money grab it’s essential to put some rules in place, like he following six:

Merit Money ‘Rules’

✔  Don’t promise rewards in advance;
✔   Keep anticipated rewards small;
✔   Reward continuously, not just once;
✔   Reward publicly, not privately;
✔   Reward behaviours, not outcomes;
✔   Let peers reward each other.

Let me explain how each of them should be applied. The first rule, to not promise rewards in advance is also the most important one. The main issue with most bonus systems which led to the crash of 2007 was that they were mostly annual bonuses. Be-cause of this people came to expect a (huge) bonus at a specified time regardless of a bonus would actually be justified. The bonus wasn’t a bonus anymore, it had become part of the salary, a bit like how in the US a part of the wages in the service industry are reliant on tips. By not setting fixed pay-outs of the merit money, you’ll avoid your staff becoming reliant on their bonuses and make sure the bonus is just that, a reward for good performance.

The rules to keep rewards small and to reward continuously, go hand-in-hand with the first one. By building up one annual bonus pay-out, expectations and in-head spending will grow incrementally. So, instead of one lump sum at the end of the year, it would be better to pay-out smaller bonus-es at unannounced intervals throughout the year. Not only will this diminish expectations and reliance, it will also reinstate the feeling of having earned a bonus within your staff.

The fourth rule, to reward publicly, is a bit more controversial. Most people don’t enjoy being praised or rewarded in public; it makes them feel uncomfortable. However, this rule doesn’t mean putting the spotlight on someone and making them the centre of attention. What means is that bonuses should be transparent. Like with the salary formula, it should be crystal clear how much everyone gets and what they did to deserve it. As mentioned before, not knowing who gets how much and why often breeds discontent.

Number five, to reward behaviours, not out-comes, can be a bit tricky depending on your line of business as in most industries bonuses are by definition outcome-based. Most salespeople, for example, will receive their bonus based on the number of sales they make. But as I’m sure you can imagine, this might easily create a culture in which the sales department will do anything to make a sale, regardless of the ethical consequences. It would, therefore, be better to base the bonus on the kind of customer a salesperson brings in or the expected lifespan of that customer.

Finally, rule six to let peers reward each other. This is probably the most interesting and unusual rule. Traditionally management decides the value of the bonuses. We propose to take this out of the hands of management (remember management is a group responsibility) and involve everybody. How? Let me show you this by means of the merit money scheme we put in place at the Naked Espresso Café, a small Hong Kong coffeehouse.

A Night at the Races

Merit Money

 

Unlike in some countries, where service workers are paid artificially low salaries so that they need to heavily rely on tips (thus breaking all the rules laid out above), this is not the case in Hong Kong and so gratuity = merit money. The question is, how do we apply those six rules to it?

Like most restaurants and cafés in Hong Kong, Naked Espresso adds a ten percent service charge to a customer’s bill. Before adopting more creative practices, the amount collected this way was simply equally divided over the Front and Back of House staff once a month. Fair in way (and covering rules two and three), but not quite fair enough to encourage staff to work harder and provide out-standing service.
After some observation and a lot of discussion we came up with the following scheme. At the be-ginning of every month, each member of staff, from the freshest greenhorn to the CEO, gets a hundred kudos points. Throughout the month (until a couple of days before payday), staff can award their kudos point to any other staff member who they believe deserves it.

There are no rules other than that they should have awarded all their points by the end of the month. It could be to a colleague who helped them out, maybe covered part of their shift, or any other imaginable reason. To reward their points, staff use an app developed in-house which requires them to enter the person they reward to points to and give a reason why. This can be seen by all and so provides full transparency.

Of course, they can’t award the points to them-selves, otherwise the monthly results wouldn’t be very surprising. In lieu of a person, they can also award points to either the Front of House, Back of House or management/admin. At the end of the month the points awarded to these departments will be equally divided over their respective team members.

Okay, let’s visualize this by putting some numbers on it. For simplicity, let’s assume that the café collected HK$ 10,000 in service charges for the month and let’s look at Zhifeng, one of the kitchen staff, to see how his merit money is calculated.

At the end of the month we’re looking at in this example, Zhifeng has been awarded a total of 88 kudos points by his colleagues and the Back of House department he’s part of received another 109 points. With HK$ 10,000 service charges collected and a total of 16 staff at the café, this means that 1 kudos point is equal to HK$ 6.25 (10.000 / 16 / 100).

As Zhifeng was awarded 88 points, he will receive HK$ 475 as his gratuity. To this is then also added another HK$ 170.31 from the Back of House department (109 points x HK$ 6.25 / 4 team members). So, Zhifeng’s total merit money for this month will be HK$ 645.31.

As you can see, by using the kudos points this merit money scheme already covers rules two, three, four, five and six. But how about the first rule, arguably the most important. Well, they have a night at the races.

Every last Wednesday night of the month, the whole team meets up at the Happy Valley Race-course. Together they pick a winner for one of the races. If their horse wins, they’ll get their bonus and if it doesn’t, they don’t (rule one). They don’t lose the bonus though, instead it will roll over to the next month, making next month’s race even more exciting!

[T]here you are.

Philosopher-in-Residence | Executive Coach | Workshop Facilitator
Reading great thinkers, thinking deep thoughts, and whiling away the days surrounded by books, a hot mug of coffee, and some inspiring jazz in the background.

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