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.

Save your local bin man – reacting to the recession

Personnel Today* reports on one local council that is asking staff to work fewer hours, or take unpaid leave, “to help save jobs”. In the same article they quote the CIPD, the CBI and the Bank of England as cautioning (not necessarily referening to this council) that this sort of action may only be delaying redundancies rather than saving jobs. I would add another concern.

By taking this approach the council is implicitly assuming that all its jobs are needed and that as soon as the economy picks up the status quo can resume. If you are manufacturing widgets and orders turn down there will be a fairly simple correlation between orders and production hours. In administration and the public sector the connections are much more complex.

The danger is that, if the economy does not pick up as hoped, the council will be forced to make savings quickly. If this happens the cuts will have to be in the larger staff groups. These, of course, are the ones that deliver the ‘real’ services that we all want – refuse collection, gardeners, teachers, etc. – not all those nice-to-have jobs with obscure titles that proliferate across local government. These latter jobs, often resulting from one political pet project or another, are scattered around in smaller groups so any culling inevitably takes longer. To protect real services they need to start reviewing these areas now.

* I’m eternally grateful that this publication has avoided the temptation to become HR Today

“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.

Please sign my Xs, boss – expense claims

Thanks to the shenanigans of our elected representatives, expenses are hitting the headlines as much as bonuses these days. Human Resources Magazine website currently has three contrasting headlines about expenses. “Bogus expense claims average £17 a month per employee” claims a survey by Travelodge; “Business travellers frequently end up out of pocket because of complex expense procedures” claims a survey by KDS and research by CIPD and KPMG finds that “74% of private-sector and 50% of voluntary and charity employers have reduced their travel expenses“.

It would be interesting to know whether the Travelodge findings are the product of staff with fixed overnight allowances choosing budget rooms and pocketing the difference – surely not. The KDS survey has a marketing flavour as they are providers of on-line travel bookings and expenses management. The CIPD survey reflects organisations cutting back on actual journeys.

I have only ever worked for organisations where all expenses required receipts and matched the cash spent; and nowadays I have to be prepared to account for all out-of-pocket expenses to either clients or HMRC. Fixed allowance systems (traditional in the public sector and writ large for MPs) have apparent benefits, avoiding the need to challenge claims and being seen as even-handed. But they take away the need for the employee to be prudent and can, for some, become an income source (MPs again). Significantly they affect the role of the line manager who is also discouraged from being economical, having merely to confirm the trip genuine; leaving HR or Finance to approve or refuse the money claimed. This can encourage line managers to see themselves in the ‘us’ half of ‘them and us’: never conducive to effective leadership.

Communicating the reward package

One aspect of reward that came up several times, from both speakers and delegates, in this week’s Reward Forum seminar was that of communications to employees about the true extent of their reward package. Never easy, but charities and voluntary organisations (the focus of the seminar) can have their own set of difficulties in this area.

In many cases employees are personally and emotionally involved with the organisation’s work in a way not found in the private, or even public, sectors. This, together with their typically longer service, can lead staff to assume a greater right to have their say, if not their way, on matters of pay and conditions. Coupled with, in many charities, a workforce that is geographically spread this makes getting the message across more than usually difficult. In particular, all those non-pay benefits, terms and working conditions can be taken for granted and their actual cost, or true worth, dismissed. This is often accompanied with an exaggerated view of what is on offer in the private sector: all contributing to a general feeling of dissatisfaction.

Many organisations in the sector are some way off introducing a full-blown total reward system but that is no excuse for not trying to get the message across. There is lots written on this subject but one key factor is language. Avoid HR speak. For example, avoid the word ‘reward’ in communications to employees. This is another of those everyday words that HR has appropriated and assigned a different meaning to. It is fine amongst us professionals but to most people a reward is something akin to a prize and certainly nothing contractual. Talk about ‘pay and benefits’ or the ‘employment package’.

One element that can always cause trouble is not coming clean about where you position yourself in the pay market. Aiming to pay at around the median is sound practice for many charities but do your staff understand this? Or do you have to explain this means you expect their to be higher payers every time someone runs into HR waving a better-paying job ad? But do not talk about the median. It is a well-known fact (well, an urban myth at any rate) that only 30 per cent of the population know what a percentage is so guess what percentage understand ‘median. Just say you pay around the average. It is only a white lie.

Third Sector seminar

To a CIPD Reward Forum seminar this week. The session focused on the voluntary sector under the title of Managing Reward in Turbulent Times. I expect that nearly all conferences and seminars over the next few months will be re-badged under one recession-related umbrella or another. In practice the downturn has happened so quickly and so recently that all that really emerged in relating to the recession was a general level of nervousness. In practice, that did not matter and we had a worthwhile seminar about reward challenges in the sector. One element that has changed since previous recessions is the very much higher level of government funding going into the sector. Some of this is for new services but much is to pay for work that previously fell to public sector bodies themselves. Perhaps this will ameliorate the effects f teh recession for some.

In terms of reward structures generally the sector has its own range of problems; but it is also very diverse and gneralisations need to be avoided. I will pick up some of the thoughts generated by the seminar in subsequent posts.