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.

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.

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.

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.

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.