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.

Appraisals – tasks or traits

I recently came across an organisation that would quite like to vary an element of pay to reflect individuals’ performance but felt that they should not do so because their appraisal system was not appropriate. In fact the system did produce a rating (an essential element for linkage) but was based on ‘soft’ factors such as behaviours and values rather than performance against annual targets. They thought this ruled out using the appraisal ratings to moderate pay or calculate bonuses.

Increasingly, organisations are assessing performance against such characteristics because they think this will better drive long-term performance. That is fine but then be consistent and accept them as a valid measure of performance. If the definitions of the softer factors are such that people can score highly against them while performing their duties badly you have the wrong definitions. Change them or appraise against task performance.

The appraisal should be an employee’s main source of formal feedback about their performance – the annual stock take. If major elements of working life such as pay (and, possibly, promotion) appear to be based on factors unrelated to those discussed at appraisal time why should they take the appraisal seriously?

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.

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.

Who gets paid overtime

Staff working extra hours for no extra pay is a frequent news topic these days so I was interested to read an ONS statistic that around a quarter of full-time employees work paid overtime and that the median amount is four hours per week. Typically this is paid at time and a half during the week and on Saturdays; double time Sundays and Bank Holidays (sometimes also Saturday afternoon). The parable of the workers in the vineyard never has applied much in the modern world.

This looks very much like the traditional manufacturing pattern that has been around for many years where workers would typically do one or two hours mid-week and a four-hour shift on Saturday mornings (harking back to when men did not help with the shopping and football matches were always at 3pm on Saturday afternoons). I might have expected a greater change.

Of course that was a statistic for full-timers and nowadays there are many more part-time staff who may work extra hours (but at flat rate), people putting in unpaid hours and all those working in 24/7 organisations where weekends and evenings are now simply contractual hours.

Paid overtime needs to be carefully controlled but is a tried and tested mechanism for flexing costs to demand. Used too readily it can simply bloat your cost-base. Used sensibly it helps over-staffing for the base level of demand or too frequent lay-offs. In many ways it is a type of performance-related pay.

Pin your pay slip on the wall

The recent escapade in which the outgoing Italian government put everyone’s tax returns on the Internet (here we just loose the disks in the post) has spawned a rash of articles and radio discussions about the benefits of open salary details within companies and organisations. Some claiming that such a policy would improve motivation and team spirit (less suspicion) and others that it would help reduce the gender pay gap. That last point assumes that differences between individuals in the same organisation make a significant contribution to the ‘gap’. I have my doubts. But should pay be a secret personal to you and your employer?

More reward facts

It is obviously survey season. This time it is Thomsons Online Benefits’ “Employee Rewards Watch 2008″. Covering some 755 organisations they claim it is the UK’s largest reward survey. The survey ranges quite widely across the reward environment and provides some useful insights into the business and HR challenges respondents face. Some of the findings that I picked up on include:

• that more than a third of companies believe their basic salaries to be in the second quartile (ie, below the median) which is pretty much what you would expect statistically;
• more telling is the finding that a quarter did not know where they stood in the market;
• two thirds of respondents are planning to pay a bonus over the next twelve months;
• the commonest factors on which bonuses are to be paid include company performance (80%), individual performance (75%) and business unit performance (45%) which means that most are paying on business success but flexing the amount to individual performance;
• around a third of respondents also thought their reward strategy was not valued by employees or not well communicated to them – so communicate it then.

Will you get a pay rise this year?

Most of what you hear in the news about pay settlements centres around whether this or that group of (usually public sector) workers is getting a big enough pay rise this year. Consequently, you might be surprised by one statistic in the summary table of the CIPD’s annual reward survey. It finds that only 54% of the 600+ organisations surveyed apply an annual general pay rise.

So what is happening in the other 46% of organisations? Some of them, of course, will just not give rises if the business cannot support the extra cost. Some will base pay levels on movements in market rate and only adjust pay when they need to, and then not necessarily treat all staff the same. Others will give non-consolidated bonuses instead (usually based on company performance). Many will give annual rises determined on an individual-by-individual basis to reflect market movement and personal performance in a single, undifferentiated increase.

The survey breaks this down by sector (table 8). This shows that annual general rises are, unsurprisingly, most common in the public sector with over 85% of employers in the public services and over 80% in the voluntary sector paying them. Manufacturing and production are in the 45% – 50% range. The lowest proportion is in the category ‘private sector services’ at around 35%. This group will include the City banks and large professional services firms together with lots of smaller owner-managed businesses and partnerships – the organisations most sensitive to individual contributions.