MoD bonuses – why the fuss?

Much heat and great indignation in the media today as it becomes known that the MoD (an arm of government that has overtaken the Child Support Agency in the public ordure stakes) is paying £47m in bonuses to its staff. Most of the critics seem not to understand the nature of this scheme. Essentially it uses a pot of money (possibly around 3% of payroll) accumulated by withholding small amounts from earlier pay reviews. It is distributed among staff as a non-consolidated payment based on annual appraisal ratings (it looks as though around two thirds of staff shared the pot). As it is not consolidated into basic, contractual pay it is not an addition to the annual paybill. It should be similar in amount to what was paid in previous years – just (potentially) distributed differently each year.

Careful what you wish for – Bonuses

There is much heat, and less light, everywhere on the topic of bonuses. Mostly it is aimed at the banks but now the spotlight has fallen on the CIPD with a decision to allow the Chief Executive to retain her 20% performance bonus (on her salary of £300,000) at a time when the organisation has been reducing jobs and stopping bonuses for lesser staff (qv. articles in Personnel Today). I do not know enough of the facts to comment on this particular issue but there is a general clamour against bonuses. This has its dangers.

Executive bonuses are generally based on achieving quantified targets (in the case of the banks it was the nature of the targets that were wrong, rather than the concept). So what happens if bonuses are banned? Will the executives not try as hard to meet those targets? Well possibly. There are a great many pressures on executives’ time and attention and target-based bonuses help maintain focus on those specific metrics. More significantly what, otherwise, happens to basic pay?

Bonuses are not just a top-up reward for the employee. They also provide a safeguard that an element of cost will vary with a key performance measure, usually income-related. Normally, zero bonus will reflect poor performance and maximum bonus better-than-can-be-expected achievement. Standard performance will lie somewhere in between. So, assuming the CIPD remuneration committee got its research right, the market rate for the job, and the person, under a bonus-free contract is not £300,000 but somewhere between that and £300,000 plus the maximum bonus (possibly 20% in this case). Flat salaries will inevitably cost more than bonus-free contracts; but without the same guarantee of results.

Not all cats are fat – executive pay

The CIPD has launched a 10-point set of guidelines to help HR Directors and Remuneration Committees set executive remuneration. The guidelines are considered and temperate and have avoided the temptation to rush to simplistic solutions (unlike much press and political comment). The first four points discuss the appropriate characteristics of executive reward structures and, in particular, the variable elements and the need to avoid schemes that encourage inappropriate risk taking. All good stuff.

Interestingly, the remaining six points focus on role and responsibilities of remuneration committees. They discuss the factors they should take into account, stress the need for the committee to be knowledgeable on reward matters, if necessary, calling upon appropriate independent expert advice (my favourite, that one) and to be prepared to exercise judgment.

At the present time, when you read of ‘executive remuneration’ and ‘remuneration committees’ the words ‘fat’ and ‘cats’ leaps to mind. But it is not just City firms and large plcs that rely on remuneration committees to set directors’ pay. Just about every charity, not-for-profit organisation and many quangos report to a board of trustees from which a remuneration committee will be formed. These committees normally take direct control of the Chief Executive’s pay and, in most cases, the rest of the executive team as well.

Committee members in these organisations can often have a harder task than their counterparts on big company boards. Here boards comprise people from a wide variety of backgrounds; sector specialists, representatives of funding organisations, local or national government representatives, and many others. Unlike on big company boards, many will come from backgrounds where pay is highly structured right to the top of the organisation. In some of the smaller organisations executive pay is definitely not in the fat cat league and can be well below that of some board members. Very few board members in this sector have any experience of individual-based pay. Whereas commercial organisations can link pay to audited business metrics success, in this sector, can be much more complex to quantify.

All these factors can lead to an over-cautious approach being taken, especially when it comes to bonus or incentive pay. While the world is pre-occupied with working out how to restrain City bonuses this is a sector where linking executive pay to performance is often viewed with suspicion and seen as too difficult.

“My bonus is bigger than yours” – open pay systems

Should everyone know everyone else’s pay? The CIPD have a mini poll on “should you share your pay details in the cause of transparency”. The current tally is 57% saying yes. There are calls from a range of pressure groups for open pay systems either in the cause of equality or to highlight where public sector cash has gone.

In most blue-collar jobs the main variation between employees’ pay arises from either output payments or overtime. Public sector jobs, mostly, have published grades and pay ranges, often with pre-scripted progression through the range; as do many private sector organisations. So where are the ‘secrets’?

Smaller organisations will often pay individual salaries to reflect the employer’s view of the job weight and the contribution of the individual (which does not mean it must be inaccurate or prejudiced). But, for the most part, it is pay differences based on some form of performance linkage that are not made public. Performance assessments can determine pay progression or bonuses; some having mathematical linkages between performance and pay; others based on senior opinion.

In such circumstances, therefore, revealing salaries or earnings is equivalent to revealing performance assessments. It is one thing for individuals to boast about their own high ratings (not very British, though). But should the employer effectively announce who has a good appraisal and, more importantly, who a bad one? Many companies have an employee of the month award. Few have a worst employee award.

Try answering these two questions. Can you logically answer yes to both?

Reward & recession

To a CIPD reward forum this week on the topic of “Rewarding in a Recession”. The scene was set by John Philpott of the CIPD with a number of highly depressing going-downhill graphs followed by general advice on how to get value for your non-pay benefits from Mark Eaton of Personal Group. Chris Johnson of Mercer then gave an all-round view of what is happening in larger companies. I will post some more detailed comments at another date but here are four key points that I brought away with me.

Bonuses – the mark of Cain?

Yet again the press pick up on bonus schemes for staff in newsworthy organisations and write them up as if they have discovered a scandal. The latest was the Agency in charge of the SATs fiasco this summer “Almost every civil servant at the Government’s National Assessment Agency ….. will be awarded performance-related pay next month”

But hang on; why should they get anything after that mess-up? After all, in the commercial world (investment bankers excluded) such a mess up would probably have meant there was no money to pay out anyway. However, we are not talking about Goldman Sachs sized payments and we are not, for the most part, talking about those making the strategic decisions. Subject to performance, these bonuses are going to all staff, many quite junior. The article also reports that staff can get “between £512.50 and £3,905″. If, as the article implies the scheme includes the Chief Executive, that is probably around four or five percent. And, in these schemes, that is not a pay rise it is a non-consolidated bonus that probably costs the same as last year. It just gets distributed differently among individuals according to their appraisal rating.

If there is anything to question about these schemes (brought in as an alternative to linking performance to progression through pay ranges) it is how much they really do reflect relative performance in any realistic way; or are just paid to almost everyone.

What (starting) price your bonus next year?

Employee benefits magazine reports that BT is planning to offer its top 400 top-level employees (in some businesses) the chance of gambling a minimum of 10% and a maximum of 50% of their contractual rewards in return for the chance of additional bonus. If they meet targets they get their ‘stake’ back. Beyond that they can get up to 200% of the amount gambled on a sliding scale. Obviously, for this to work, BT has to be confident of its target-setting processes and the staff be confident of their abilities (or believe that the targets are somewhat soft).

We do not know how many will take this offer up or how many will risk the full 50%. Many fewer, I suspect, than might have been the case when the scheme was being devised (ie, before the financial world imploded). But it is interesting to think how this might be applied in other areas. MP’s invited to gamble part of their salary, or gold-plated pension, on increasing their majority? Newspaper editors gambling theirs against reducing the number of retractions they have to publish? Bloggers gambling on increasing the number of hits? Maybe we should forget that last one.

Bonuses not all bad – hold the front page

Yet again bonuses are attracting a bad press this summer. Nothing new there but, in the current financial climate, payouts to the popularly undeserving – City fat cats, BBC executives, civil servants and the like, are especially tasty targets for the red tops.  Bonus payments are reported as though they are a discretionary, additional cost. However, they only represent extra cost to the extent that they exceed previous levels and are only discretionary if they could simply be cancelled without any adjustment to basic pay. But many would have to be consolidated to maintain pay market competitiveness and motivation: incurring extra pension costs and raising the starting point for future percentage pay awards.

Good schemes help focus effort on key priorities but for many commercial organisations bonus and incentive systems also provide a mechanism for reducing costs when sales and profits dip. Very valuable in difficult times and hard to achieve otherwise without headcount reductions and redundancies.

Much of the bad publicity attaches to payouts that appear to reward failure or to be giving away taxpayers’ money. The first can be difficult to avoid. Private sector executive bonuses are inevitably announced some months after the year to which they relate by when fortunes may have changed. Other popular targets, such as BBC executives or civil servants, suffer the double whammy of working in easy-to-criticise organisations and of being paid from public funds. For the most part their bonuses relate to achieving targets that, however demanding, are usually based on spending money rather than earning it so they do not have an easy ‘pays-for-itself’ defence.

Job titles (again)

After ‘bonus’ one of the search terms that often lead people to my main site is ‘job titles’ where they land on an article (“A Rose by any Other Name“) archived from my client newsletter (also reproduced here in March). So, out of interest I googled job titles. Even limiting the search to the UK, it found 700,000 references. Many are lists of titles that link to job advertisements (such as ijob) or salary databases (usually expensive and confusing). Jobtitles.org lists about 10,000 titles and provides a job description (and pop up ad links) for each.

I also found a number of articles, extolling the motivational benefits of giving staff more elaborate titles and, in an article in iVillage, suggesting how you can get your boss to give you a more prestigious-sounding one. Personally, I was happiest with the link I found to the Plain English site where they debunk the preposterous lengths that some organisations go to in naming and describing jobs. My favourites there were flueologist and Knowledge Navigator (chimney sweep and teacher).

There is a balance to be struck between sticking rigidly to a pre-set hierarchy of simple titles and Hyacynth Bucket-like pomposity. If someone really is doing a lot more than is implied by their job title try to reflect that into his or her title (and their pay?) but be very careful that you know who else could make an equally valid case before you do. A secretary who also helps to organise sales conferences is still doing the secretary work; what extra work are the other secretaries doing?

My preference is for titles that mean something to strangers. Of course, there are industry-specific titles that are totally appropriate but need explanation to outsiders (‘best boy’ in film credits?) but overall I recommend ones that enable staff to answer the “what do you do” question by just quoting their title. Above all try to avoid titles that equate to rank.

Must go now. I have to attend to my other job of Domestic Beverage Facilitator.

Appraisals – can everyone really be outstanding?

Recently, while Googling for something else, I came across the Cabinet Office evidence to the Senior Salaries Review Board. This reminded me that, among Senior Civil Servants at least, a robust approach is taken to performance pay. Annual bonuses for this group (paid out of an accumulated pot) are distributed strictly in line with appraisal ratings.

So do many organisations, I hear you say, but what is different here is that they openly use a forced distribution. The top 25% of performers receive the highest bonus (at least 10% of salary), the next 40% typically receive a more modest bonus (5-10%). The rest get nothing and, amongst them, remedial action will be taken for the bottom 5-10% of performers.

Over the years I have had numerous discussions with managers as to whether, for example, ‘excellent’ or ‘outstanding’ ratings are relative or absolute. The consequence of taking the absolutive approach is that, theoretically at least, everyone could be ‘outstanding’. “This company only recruits the best people” is the argument often put forward to defend over-generous marking. If that really is true then it should be reflected in pay rates not bonuses or appraisal scores. Just as awarding too many A* GCSE awards dilutes the currency of that mark too many top box appraisal ratings will reduce the incentive to achieve or maintain that level of performance.

Grumbles about appraisal ratings, especially from managers, are among HR departments’ most frequent irritants. There is an article on my website that goes into this in more detail but it is good to know that some parts of the Civil Service have their priorities right.