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.

Publish and be damned – local government pay

I read that the Government is proposing the remuneration of senior local council employees be published in the annual accounts. The intention is that “…. this will put a brake on spiralling pay packets and perks” (John Healey: Local Government minister). Well, I wonder. I suspect the law of unexpected consequences will have something to say about that.

The idea that publishing the fact that Council Chief Executives can get more than the Prime Minister will generate an unstoppable public backlash, or shame them into accepting less, is optimistic at best. Highlighting the differences in senior salaries between councils is just as likely to result in claims from those in the less ‘generous’ authorities as restraint among the ‘fat cats’.

Salary benchmarking is the basis of all good reward practice but, once you have the data, it must be moderated by a whole range of specific factors such as the true demands of the posts, the quality of the individuals and affordability. When the jobs in question are your most senior executive ones there is a natural tendency to overestimate the demands, avoid facing down the individuals and, as the salaries represent a small percentage of overall costs, play down the cost issues.  Local authorities are probably more susceptible to these tendencies than many other organisations.