Incentives and bonuses have a tarnished image in the current environment but experts say now is the time to reform rather than ditch them, writes FRANK DILLON.
FOR SOME, the very word “bonus” now conjures up images of greedy senior bank executives paid obscene top-ups on their already lucrative base salaries, despite destroying the value of their organisations. Yet, for many, the bonus element of their pay constitutes a significant part of the remuneration package they rely on to meet their basic needs.
During the boom years, many organisations paid bonuses automatically and these rose in steady increments. With corporate retrenchment in vogue, bonuses and other non-basic pay incentives are under threat.
“People are now more motivated by job security than by incentive-based schemes. Bonuses are now definitely out and people see this as a negative incentive,” says Prof Cary Cooper of Lancaster University.
Yet many experts feel this may be the very time that organisations need to incentivise their top performers. Moreover, there is evidence that organisations could shoot themselves in the foot if they routinely slash benefits.
The economist Truman Bewley interviewed human resource leaders at more than 200 US companies after the 1990-91 recession. Most told him that they believed wage and benefit cuts destroyed morale, reduced productivity and added to their problems. While redundancies at these firms didn’t help morale either, some felt they were actually a better alternative. As one manager insensitively put it, they “get the misery out the door”.
Michael McDonnell of the Chartered Institute of Personnel Development says that key people need to be incentivised and that there is a cohort of employees within most organisations that will respond positively to appropriate bonus packages. “It would be short-sighted to throw out bonus and incentive schemes,” he says.
Patrick Robertson of benefit consultants Mercer agrees that taking a blunt instrument to bonus packages is not a good idea. “The key issue is retaining and incentivising key talent. The danger in a recession is that the talent gets disengaged or lost, perhaps at the very time that you need it most.”
One of the biggest changes in bonus and incentive schemes at the moment is a move to better performance-differentiation measurement – in other words, identifying the key people and rewarding them. If organisations have a limited pot of funds for incentives, they should target this at the talent rather than spreading it too thinly, Robertson advises.
Gerard McDonough of PricewaterhouseCoopers says that organisations should look to make “surgical interventions”, targeting both high and low performers.
This may not be as easy as it seems. “One of the problems many organisations have in this area is that they are not very good at identifying their talent. When you ask managers, they struggle beyond identifying one of two key people,” he says.
In reviewing bonus packages, McDonagh says there is also ample scope for organisations to get better value from those supplying benefits such as healthcare if they shop around. Also, organisation should clearly communicate all the benefits they provide. “People naturally focus on the bottom right column of their payslip. When they leave an organisation they often only then realise what’s been provided for them when they have to pay for it themselves.”
While pay has been a traditional focus of employee incentive schemes, another view in human resources circles is that organisation should take a more holistic view of benefits. One entrepreneur who has profited from this approach is Claire Burrows, a banker turned therapist. Burrows established Natural Onsite Wellbeing to provide stress-management training and therapies.
Burrows says she has noticed a big increase in the stress of employees she has treated in the last three months. She says the organisations are beginning to see the return on investment in anti-stress therapies in terms of decreased absenteeism and improved health and morale.
One of the most popular ways of rewarding staff in public companies in recent years has been was share options. With most shares plummeting in value, many of these options are worthless. But because share prices are so low, with massive upside potential, long-term stock options could actually result in a massive bonanza. Robertson says that many organisations are revising their schemes, changing the metrics to take a longer-term approach to the creation of shareholder value.
One approach, which is equally valid for cash-strapped SME, is the notion of a deferred incentive, where the company recognises that a reward is justified and agrees to pay it a later date, or in instalments, as cashflow allows.
Another area that organisations are looking at is the contribution that executives make to team performance, so bonus structures are being adjusted away from being weighted towards individual contribution.
There is also a growing feeling that variable remuneration is a process that works both ways. A new notion gaining currency is to include a structured claw-back option on promised bonuses where performance does not meet expectations. There is broad agreement, however, that whatever performance measures are put in place, above all, they need to be more transparent.
As one observer put it, the much maligned used-car salesman not alone has to sell a car before he gets his commission but has to have the funds safely banked before he’s paid his reward. Those setting remuneration for executives in the financial services industry might well take note.
