“They can't have it
You can't have it
I can't have it too
Until I learn to accept my reward”

So went a classic 80s pop song.

But in post-recession Britain, who does accept their reward? Not politicians, that’s for sure! Amidst the doom and gloom circulating in the economy, what topics are going to hit the headlines during 2010? These are the major issues we foresee will remain at the top of agendas in both the public and private sector, irrespective of the colour of our new Government:

• Total reward
• Flexible benefits
• Performance-related pay
• Executive reward and bonuses
• Non-cash rewards, recognition and praise
  

TOTAL REWARD
Why do you bother turning up each day?
Whilst we recognise people at work are motivated by different things there is no doubt that cash is king in some organisations right now. However, many organisations believe that they are offering a competitive compensation and benefits package but have either been unable to quantify it or have just not communicated its value to their employees.

A definition

According to the Chartered Institute of Personnel & Development (CIPD) total reward is the term that has been adopted to describe a reward strategy that brings additional components such as learning and development, together with aspects of the working environment, into the benefits package. It goes beyond standard remuneration by embracing the company culture, and is aimed at giving all employees a voice in the operation, with the employer in return receiving an engaged employee performance.

 

Why is 2010 the year of total reward?

Both public and private sector employers currently have to rethink their reward strategies. Traditional companies had a paternalistic approach to reward; one benefit for employees was that they could be relatively confident of staying with the same employer for as long as they wished, possibly for their entire working careers. Newer companies (particularly those in the hi-tech sectors) rewarded employees with exciting and challenging surroundings, but with no guarantee of job security. They have also offered significant financial rewards, in the form of stock options. Now that the stock options have to be expensed on the profit and loss account, and traditional companies can no longer provide a job for life, both have now to look at new ways of attracting and retaining talent. Demographic changes have resulted in a more diverse workforce demanding different returns from work. Total reward is a mindset that enables employers to look at the bigger picture.

 

What sorts of things normally get covered in total reward schemes?

Broadly, total reward encompasses pay and benefits (generally in the form of a flexible benefits scheme), the working environment, and career and personal development. In more detail it may include some, or all, of the following elements:

• flexible benefits
• access to professional and career development
• a challenging role at work
• freedom and autonomy at work
• opportunity for personal growth
• recognition of achievements
• preferred office space
• being able to raise matters of concern
• being involved in decisions that affect the way work is done
• preferred office equipment and mobile phone
• flexible working hours, home working or mobile working
• secretarial support.

Clearly some of these rewards are more easily provided than others, and some are more quantifiable than others. One difficulty in a total reward package, beyond the challenge of supplying these less tangible rewards, is attempting to balance them against one another.

 

What benefits do employers experience after implementing a total reward scheme?

In our experience we find savings in money and time through:

• easier recruitment of better-quality staff
• reduced wastage from staff turnover
• improved productivity
• enhanced reputation of the organisation as an employer of choice.

Making a statement
Communication is the most important element of any total reward system and organisations may achieve this by designing a template reward statement that will incorporate all of their benefits which they then complete electronically for every employee. These statements are typically distributed at the time of the annual salary review so that employees can clearly see their new base salary and associated benefits together with the value of allowances paid over the previous twelve months.

 

Implementing total reward
Contrary to expectations, it is not essential for organisations to determine an exact value for every element of their total reward package. We believe that the most important aspect of Total Reward is communication and whilst a reward statement identifying a value for each of the paid elements of the package as well as some of the benefits (e.g. company cars, private heath insurance) is an ideal approach, this would be much harder for the less tangible elements. For example, it would be almost impossible for an organisation to quantify career progression in cash terms, but providing that employees are aware of the structure and can clearly see what they need to obtain/learn to progress (e.g. through published job descriptions and person specifications) this will highlight the opportunities available. Likewise, developing a set of corporate values and introducing recognition schemes are examples of how to promote the company culture.

In terms of the logistics of implementing a total reward philosophy there are three key stages in the process, starting with an analysis of the existing offering and determining whether it is still effective. The second stage is designing the new total reward package (which may just be a re-packaging of the current offering) and the final stage is the implementation of the new scheme – possibly involving a pilot launch in one area of the business or rolling out a few elements at a time.

 

 

FLEXIBLE BENEFITS

Organisations want to get the most from their investment in people, and flexible benefit programmes have grown up around the belief that they will help employers achieve that goal: by tailoring their company benefits to individual needs, while containing their cost, they can increase the attractiveness of the remuneration packages being offered and improve their ability to attract and retain talent in their organisation.

 

The basics

Many organisations have always allowed a limited form of flexibility for just one or two benefits, but it is only within the last five years that comprehensive flexible benefits schemes have started to become more common in the UK. Although generally welcomed both by employers and employees, flexible benefits schemes have often been avoided because of the cost of introducing and administering them.

 

Flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') are formalised systems that allow employees to vary their pay and benefits package in order to satisfy their personal requirements. They are not the same as voluntary benefits schemes (where employers arrange bulk discounts with external providers) or net pay schemes (where employees pay for extra benefits), both of which have been used for several years. Under true flexible benefits schemes, the dividing line between pay and benefits becomes less rigid than in standard reward packages.

 

In most schemes, employees are able either to retain their existing salary and simply vary the levels of benefits within their allowance, or else to adjust their salary up or down by taking fewer or more benefits respectively.

 

Advantages of flexible benefits schemes

1. Employees choose benefits to meet their needs, and value these benefits more highly.
2. Employers and employees share the responsibility for providing benefits.
3. During periods of change (including merger and acquisitions) flexible benefits can help to harmonise rewards.
4. Employers provide benefits at a known cost that is fixed regardless of the choices that employees make, so allowing them to cap future benefit costs.
5. Employees have a true idea of the full worth of the benefits package they receive and employers do not provide benefits that are not valued.
6. Employees are given a sense of control and involvement by having a choice.
7. Dual career couples avoid having benefits duplicated by their respective employers.
8. Employers are seen to be more responsive to the needs of an increasingly diverse, demanding and ageing workforce.
9. A competitive benefits package is valuable in attracting and retaining key personnel.
10. The awarding of benefits such as company cars becomes less divisive.
11. Employers' demands for flexible working practices are more justifiable if employees enjoy flexible benefits.
12. Helps to align the total reward strategy to the HR and business strategies.

Four stages to consider
In our experience these are as follows:

ASSESSMENT AND FEASIBILITY
The first and critical step in considering whether to implement flexible benefits is to take a step back and ask the question: ‘What do we want to achieve through our benefits strategy, what do we expect our benefits package to do for our employees and for us?’ One of the conclusions that might come out of a critical review of strategy is that flex is not the answer, or maybe not the whole answer. There are a number of options for employers to review, ranging from introducing a voluntary benefits scheme to a complex flex arrangement that is part of a broader reward strategy.

Guiding principles should be established at the outset, with a clear idea of the scheme’s aims and objectives clearly linked to the company’s business, HR and reward strategies. It is also important to agree measures of success from the beginning – for example, will these be purely financial and focused on the ROI, or will there be some measurement of the less tangible benefits such as employee engagement and attitude.

A feasibility study should involve internal fact-finding across a number of areas, including an audit of current benefits and communications to understand any gaps and improvements to be made. A review of IT infrastructure and admin processes is also important for understanding the scope of any changes, while establishing employee attitudes and preferences, through surveys and focus groups will inform the decision-making about the potential design of the plan.

A key part of the assessment stage is to build a business case, incorporating the data from the reviews and audits. A good way of measuring costs and benefits is to use a return on investment model that captures all the costs, savings and risks associated with developing the new flex programme and plots the net effect over a defined period.

At the end of the assessment and feasibility stage a report should be produced for review and decision-making by senior management. The report will bring together all the strands of the feasibility study with some recommendations on key issues such as:

• Scheme design and financing, including cost sharing between employer and employees.
• The range of benefits to be included.
• Administration processes – out-sourced, in-house or co-sourced?
• Assessment of tax and employment law implications and overview of any changes required.
• What resources are required for the implementation project?
• The cost/benefit analysis.
• Identifying the proposed success measures.

The final outcome of this stage will then be a decision to proceed (or not!) with the programme, and the project team will be formed to move the programme to the implementation stages.

 

DESIGN
The scope of this phase of the project will be shaped by some key practical considerations:

1. Timeline for implementation.
2. Administration processes.
3. Benefits to be included in the programme.

The main issues to be resolved during the design phase will be around funding and the benefit structure. Decisions about which benefits to include will need to be finalised – there are a huge range of benefits that can be included in flex, however, for the initial launch most employers are conservative in the range of benefits initially on offer and tend to introduce more choice and potential complexity as the programme matures and employees become familiar with it. The choice of which benefits to include will also depend on the financial impact – for example, salary sacrifice benefits that deliver NI savings back to the employer need to be included where the original business case is predicated on their inclusion.

Another key design consideration is how much money will be available to employees to spend on their benefits. There are several approaches to this but a common one is to set a benefit allowance at a level that will allow employees to replicate their pre-flex package. This allowance is usually set to include the cost of core benefits. However, the basis of funding can be changed over time and the employer allowance can also change, allowing employers to future-proof their risk by enabling greater cost-sharing with employees should this become part of a future strategy.

Total reward statements may be included in the design where the employer wants to communicate to employees the full value of pay, benefits and other reward components of their package.

BUILD
This stage is all about putting in place the practical building blocks to enable the flex programme to operate as planned. So the key elements are:

System build.
The admin system needs to be configured with all of the design options and needs to be bench-tested against the specification. All connections to other systems such as payroll, HR admin and provider systems need to be established.

Communications plan.
The brand, look and feel, key messages and communications media need to be prepared. This work will be done around the systems build as the ‘look and feel’ of the flex portal is integral to the system build. Project management of the communications activity is vital as this activity starts before the launch of the programme and runs right through the benefit year. There is very solid evidence that employees value benefits in direct proportion to how well they are communicated.

Benefits brokering and sourcing.
All of the agreed benefits need to be arranged. Depending on the scope and complexity of the programme it may be desirable to tap into a range of pre-agreed, ‘off the shelf’ benefits. For more bespoke programmes this stage will normally involve a market review and brokering process for insured benefits to ensure that best terms are secured. For those lifestyle benefits where there are fewer providers, a ‘best match’ approach is more practical. The necessary data flows need to be agreed with providers so they receive timely notification of the benefits employees have selected.

OPERATE
This stage covers the launch of the programme when enrolment and operation go ‘live’. The processes and support for this stage will have been agreed in the design stage and, depending on the size of the employee population, could include outsourcing support to a call centre operation as part of a package of outsourced administration services – or, if not outsourced, enrolment would be supported in-house by the HR team.

Reporting for payroll and providers will need to be produced at the end of the enrolment period and then on a regular basis to capture leavers, joiners and changes. In addition, management information reports will need to be produced on a regular basis to provide an overview of how the programme is operating.
Looking forward, these reports will also be a vital source of feedback to loop back into the design phase when the next renewal of the programme is due, when the opportunity can be taken to make any refinements to the programme and the benefit options being offered.

 

Cash or points?

Some schemes show each of the benefits with a cash value and the employee uses this as the basis for calculating the effect of changes. The advantage of showing a cash value is that it gives employees an idea of what the benefit is truly worth and the cost that the employer is bearing. The danger of a cash system is that it may encourage employees to feel that they are being forced to buy benefits out of their own salary. Other schemes use a points plan, where each benefit has a points rating and the employee has an allowance of a certain number of points.

 

Regardless of whether a points or a cash value scheme is used, all schemes make a clear distinction between notional salary and the final value of salary that is actually paid in the year (regardless of whether this is higher or lower than the notional salary). The notional salary continues to be used as the basis for items such as pension calculations and salary reviews.

 

Deciding on the amount of flexibility

When schemes are being introduced, it is important to estimate the likely take-up of specific benefits. This will enable employers to obtain the most accurate possible quotations for the provision of each benefit. One problem associated with the introduction of flexible benefits is that the process of making selections actually changes the profile of the group requiring a particular benefit.

 

All schemes are costed on the basis of predicted selections; where employees make significantly different choices, these are regarded as 'adverse selections'. For the success of the scheme, the relative values of the benefits should be set so as to avoid too many adverse selections. They should also be arranged such that employees are not encouraged to make imprudent selections that will jeopardise their own security provision. The inclusion of core benefits guarantees a minimum level of protection. There must be a compromise between excessive flexibility that encourages inappropriate choices and too narrow a choice that does not meet the employees' expectations.

 

Before implementing a flexible benefits scheme we advocate the use a paper-based or electronic survey to determine what type of benefits employees favour and value. This would also assist in maximising the value of the package to both employer and employee.

 

Choosing and changing benefits

Once the scheme has been agreed, the choice of benefits is presented to the employees. To ensure a positive reception, it is important that the choices (and the implications of those choices) are clear. If the options are too complicated, or the method of making the choices is perceived as being difficult, then employees will simply default to their existing benefits package and much of the time and money spent in introducing the scheme will have been wasted.

 

Many of the computerised systems that are used for administering such schemes include an option that allows employees to model their own choices. Various selections can be made until the employee is satisfied with the outcome.

 

Most schemes allow for changes in benefit selection to be made by a fixed date, once a year. Prior to this date, employees are sent a personalised document reminding them of their current selection and benefit allowance for the forthcoming year, and giving them the opportunity to amend the selection. It is important that this document is simple to use with the costs of the options laid out clearly. If the document is not returned by the specified date, the benefit package will typically remain at the previous levels or default to a standard package. Organisations should consider how to deal with those staff that will be off work during the selection period, for example on maternity leave, on extended holiday or secondment.

 

Schemes may restrict the amount of change between one year and the next. Typically if there are several levels of available benefit, employees may only alter benefit by one level at each renewal. In addition, benefits (such as life assurance) for a spouse or partner may not exceed those for the employee.

Although reviews take place annually, most organisations will allow changes to be made to the selection outside the normal renewal dates in exceptional circumstances. These typically include:

• marriage or divorce
• birth or adoption of a child
• death of a dependant
• long-term sickness absence
• promotion.

Core benefits in a typical scheme

The contents of any scheme depend on local circumstances, but core benefits that appear on many schemes are:

• holidays
• life assurance
• private medical insurance
• critical illness insurance / long-term disability insurance
• personal accident insurance.

Communication and education

The most important elements in ensuring the success of a flexible benefits scheme are effective communication and education. If employees are made aware of the reasons for, and benefits of, introducing flexible benefits they are less likely to dismiss the scheme as simply a means of reducing costs. In general new schemes are more likely to succeed if they are introduced on a cost-neutral basis (i.e. no overall gain to either side).

 

Before setting up a new scheme it is advisable to consult employees over what type of benefits they would like to be offered. All suggestions should be given fair consideration, but care should be taken not to encourage undue expectations that it will be impossible to meet. By incorporating the views of employees, the scheme is more likely to receive a positive welcome. Once the scheme is in place, good communication is still essential so that employees are able to understand fully the benefits offered, and make appropriate choices. For instance, pharmaceutical firm Astra Zeneca adopted a phased approach when it brought in its flexible benefits scheme. They began with 'awareness' for six months, followed by 'engagement' for a further three months, and then 'enrolment' for another three months, with the full embedding of the policy by the end of a year.

 

Examples of communication methods

As many means as possible should be used to communicate the details of the new scheme. Possible methods include:

• road shows and open days
• intranet, including bulletin boards
• CDs and DVDs
• newsletters
• individual letters to employee's home address
• meetings, Q&A sessions, focus groups
• demonstrations with computer modelling
• telephone and e-mail helplines
• one-to-one consultations.

Flexible benefits and anti-age discrimination legislation

There is currently no exemption for employers that allows them to make distinctions between employees of different age groups in providing insurance related benefits, such as private medical cover, income protection and life cover.

 

There may be scope for a challenge if the availability and cost to employees of such benefits under a flexible benefit scheme is dependent on their age.

 

PERFORMANCE-RELATED PAY
The integrating of reward with performance management processes allows organisations to ensure that employee increases are fair and equitable. In addition, it makes it easier to provide incremental bonuses and manage raises during promotions. The end result for the business is that it can accurately identify and reward top performers, while fairly distributing consistent salary adjustments based on merit.

 

Pay-for-performance is the fair and equitable way to reward and retain talent within an organisation and is even more crucial during the current economic crisis when budgets are under pressure. We believe that the only way to guarantee the integrity of a compensation plan is to link it to the employee performance management system, which will provide the tools required to manage, monitor and measure employee performance accurately at every step in the process.

 

One of the best-known strategies in this area is performance-based pay and links the employee’s reward to their performance and contribution to the company’s success. Executing this strategy successfully relies on HR resources merging periodic performance reviews with the compensation process.

Performance-related pay motivates employees and encourages learning, innovation, creativity, problem-solving and empowerment. Being able to identify top performers within an organisation is key to its success. Appraisals should reflect true performance and not be subject to anomalies caused by the different approaches of individual managers.

 

The retention challenge

Since for most employers there will be a relatively small pie to divide in 2010 it needs to be distributed proportionately among the people that will help the business to grow. In the long-term, any successful human capital strategy must retain top performers. Factors that can help with all of this include:

 

1. Automate compensation management and link to performance appraisals

No compensation system is complete without sound performance management data. Calculating the effect of an employee performance management system is not always so cut and dried. If a business is concerned about how its current performance management processes affect compensation, it must leverage compensation surveys and map them to the positions the company currently employs. If this reveals that the organisation is drastically overpaying its workforce, an employee performance management system can help close the gap.

 

2. Improve compensation alignment

Most organisations claim to pay at market rates and some organisations purposely pay a premium, but in our experience most employers leave some money on the table for negotiations. Compensation specialists often rely on market data and subjective review ratings to determine salary adjustments. This is flawed because many performance reviews aren’t objective and consistent among groups. As the cycle repeats itself, compensation becomes increasingly poorly aligned, ultimately affecting the bottom line. Most performance management systems result in a fairly flat distribution of ratings, making it difficult to differentiate pay and other incentives enough to motivate top performers or change the behaviour of poor performers. A system that supports calibration (adjusting the performance measurement to match a known standard), a wider rating scale, and/or comparative rating, results in a fairer and more accurate distribution and helps employees understand where they stand.

 

3. Beyond financial reward

Of course, it must always be recognised that money is not the only motivator for engaging and retaining a workforce. Particularly in the current economic climate, employees may be more worried this year about job security than their annual increase. In this context, spending extra time on talent assessments and other succession planning activities to look for development opportunities, such as training or an increase in work responsibilities, is not time wasted. These alternatives reflect the company’s faith in key employees while defining paths for career growth.

 

4. Avoid errors

Human capital is an organisation’s greatest cost – yet too many businesses continue to manage employee data and calculate salary adjustments using basic Excel spreadsheets riddled with errors. Compensation data will need to be checked and rechecked carefully, and stored confidentially.

 

EXECUTIVE REWARD

There remains widespread anger towards bankers who have received significant bonus payments in circumstances where the banks have performed badly, in some cases so badly that they have been bailed out by the government and ultimately the tax payer. In December last year Alistair Darling announced his “bank payroll tax” calculated to raise £550M by imposing a 50% tax rate on bonuses which exceed £25,000.

 

What is the legal position?

Employers may be under a contractual obligation to make bonus payments. Such terms may have been negotiated by an employee when they joined the employer and may provide either for the payment of a fixed amount of bonus at a particular time, or if an individual meets a particular target. In this way they act as a huge motivator. Other bonus schemes may be worded as discretionary payments, but may gain contractual status, either because of the drafting of the scheme or as a result of the employer’s custom and practice in making payments.

 

If the employee has a contractual right to a bonus and the employer fails to pay, the employee may have a number of claims including breach of contract, unlawful deductions from wages, constructive unfair dismissal and, if an employee can point to inconsistent treatment between employees and they belong to a protected group, potentially also claims for discrimination.

 

Whilst the general public believe that those who are being rewarded for failure are under a moral or social obligation to repay bonus payments or other payments which are seen as reward for failure, in reality there are few who would feel bound to do so. A notable example of this was last year’s controversy involving Sir Fred Goodwin who left Royal Bank of Scotland with a pension arrangement which was seen by many as unjustified. However, there is little scope for employers to compel employees to repay unless they have very clear contractual wording which places an obligation on the employee to do so. As such wording would have been devised at the outset of the employment relationship and would have to provide for a number of different potential scenarios, so such provisions are relatively unusual.

 

Strike a balance

Whilst the banking crisis has brought the issue of rewarding failure into the spotlight, the issue is not unique to the banking sector. Stakeholders involved with private and public companies alike are now actively seeking more stringent checks and balances on employee’s pay. The message is that employers want to take a closer look at how employees are rewarded, and how they can strike an appropriate balance between attracting high calibre recruits and satisfying shareholder interests.

 

So what guidelines should employers consider when negotiating financial terms and for employees?

1. It is vital to establish a balance between fixed and variable pay in an employee’s reward package and to link variable pay to predetermined and measurable performance criteria;
2. Employers must be much more prescriptive at the outset of the employment relationship about what will be paid to the employee in the different circumstances that the employment relationship may end;
3. Employers should impose limits on the amount that an employee may receive on the termination of their employment and link such payments to success, rather than expressing them as automatic entitlements;
4. Where stock options are used as incentives in place of cash reward, the scheme should put in place minimum investment periods and encourage performance over the long term; and
5. Employers should consider including claw back provisions in contracts of employment to give them the power to reclaim elements of variable pay if certain conditions are not fulfilled, including that economic circumstances have changed, or that the employee’s performance is insufficient.

Any other options?

There is no doubt that in view of the competitive world we live in, employers may have to rise to the challenge to find more innovative and diverse ways to incentivise employees. Other incentives which are not cash based may be valuable to employees and less expensive for employers. Some studies show that recognition is at least as important as pay and benefits. However, this is not an easy concept to ‘sell’ to a potential new recruit. Here are some other non-cash options to consider:

1. Establish a corporate social responsibility scheme which allows employees to play their part in their community or to assist charitable objectives ;
2. Adopt flexible benefit packages which allow employees to manage their own benefits package and have control over what benefits are important;
3. Establish flexible working schemes and give employees enhanced family friendly rights to benefit those with families;
4. Grant above average holiday entitlement, or establish holiday buy-back schemes;
5. Introduce recognition schemes which formally encourage better performance and motivate employees; and
6. Introduce health and well being programmes such as gym membership, medical and dental services and health advice sessions which can contribute to reducing absenteeism and raising performance.

It is important to promote the value of the reward to gain long term recognition of the advantages of such schemes over cash payments.

 

BONUSES
Politicians seeking to score points prior to the forthcoming General Election talk passionately about the fact that the bonus culture has veered out of control. However, there are real dangers from calling for the end of bonuses in business. Some critics believe that the whole system of bonuses is fundamentally wrong and unfair. They believe that people should simply be paid for the job they are doing and nothing more. However, this approach can betray a communist mentality or worse still, a culture where reward, recognition and the pursuit of 'the extra mile' are frowned upon.

The rationale for bonuses
Bonus arrangements have become an increasingly common element of remuneration packages. The main reason for this is that they have been an effective tool to motivate and incentivise employees - a lawful performance enhancer.

Bonus schemes come in various guises. The main ones are:

• Non-contractual bonus arrangements
• Contractual bonus schemes with discretionary terms
• Contractual bonus schemes with contractual terms

The courts have increasingly been persuaded that bonus schemes, designed to be non-contractual or discretionary arrangements, actually do give rise to contractual or quasi-contractual rights. Consequently, legal advice on the terms has increasingly played an important part when disputes arise.

For employees, their ideal scenario is a contractual bonus they can enforce. However, many employers prefer the discretionary approach, believing it can provide flexibility to pay less and reduce the scope for an employee to pursue claims.

With discretionary arrangements, the employer is trying on the one hand to reassure the employees they have a good opportunity to earn a bonus, and on the other hand using the bonus as a carrot to recruit employees or retain them. At the same time the employer will want to avoid giving any guarantees to a bonus.

However, a discretionary entitlement could become a contractual one if custom and practice come into play. If an employer has paid bonuses on a regular basis, assessing it on a similar basis each time, an employee can argue they now have an implied contractual entitlement to the bonus.
To achieve certainty, many employees have negotiated contractual bonuses, assessed against certain achievements. The employees then have the ability to enforce their entitlement to a bonus on the terms they negotiated.

Human nature
We must remember that we live and operate in a capitalist culture where organisations are managed by people with all of the foibles of human nature. Individuals mostly respond to reward and recognition. In many instances, bonuses can be hugely beneficial to businesses as part of a carefully considered rewards package - helping increase competition, motivation, productivity and business performance.
What is clear is that bankers' bonuses, and indeed any bonus scheme, must be linked to performance, which goes beyond the basic requirements of the job. In recent years, companies have got it wrong. They have used bonuses as a short-term retention tool in place of a long-term employee engagement strategy.
The whole idea of a bonus being an unexpected payment for outstanding performance seems to have been forgotten along the way, with bonuses being an expected part of the remuneration package. We have heard of many people talking about 'guaranteed bonuses', but this is a contradiction in terms. It cannot be regarded as a bonus if it is guaranteed. Over 2010 very large bonuses with tenuous or, indeed, no links to performance will be greatly reduced and in some cases disappear.

Shareholders and the regulators will not tolerate this. Hopefully, we will see a more realistic approach to bonuses where they are more proportionately linked to salary levels and payments. Let's hope also that businesses go back to basics and reward bonuses only for additional efforts and results attained by individuals or teams over and above expected performance levels.

Fit for purpose?
If the bonus arrangements have been designed well then they should incentivise the employee, and the employer should benefit from their good performance. In addition, if the employee's productivity is poor due to the economic climate or their own performance, the employer should not be exposed to the downside.

Problems can occur when the bonus schemes have been poorly negotiated and/or been badly drafted. The employer could then find it has a bonus scheme that has become a drain on the business and in some instances a magnet for bad press.

What can an employer do if they want to change the bonus arrangements?
Ironically the first thing that needs to happen is that you have to find out what you are dealing with. If a director is involved then this should be an easy task. The Companies Acts, the Listing Rules and the Combined Code place certain obligations on companies to disclose the director's emoluments, which includes their bonus arrangements. Any bonus information therefore should be easy to locate.
Junior staff are unlikely to have tailored individual bonus arrangements. Therefore staff handbooks are usually the most likely place to find any applicable bonus arrangements for this group.

The main difficulty is the mid to senior management tiers, where specific individual bonus arrangements may have been negotiated on joining or when they have been promoted. The bonus terms may be contained in an offer letter and variations set out in subsequent letters. Alternatively the arrangements may have been agreed verbally and an 'understanding' exists as to the terms.

If there is no record of the bonus arrangements then you would need to ascertain from line managers what the arrangements are and what has in fact been paid over the years. From this you should hopefully be able to determine if there is an implied contractual entitlement.

If there is a contractual entitlement to bonus, either implied by custom or practice or expressly set out in the contract, the employee must usually agree to vary the arrangements. If this consent is not given then the employee could claim:

• There has been an unauthorised deduction;
• They could resign and claim they have been constructively unfairly dismissed; or
• Continue to work on under protest.

By working on under protest the employee protects their position. The employee preserves their right to resign and/or bring a breach of contract claim at a later stage.

Obtaining an employee's agreement to vary their bonus terms, even in a recession, is not always easy to achieve. The employee may seek an incentive to agree to such a change. For example, in return for giving up part or their entire bonus the employee may want a higher basic salary. This could have an impact on other benefit entitlements in their package as well. To a large extent the negotiating strength of each party will have a significant impact on the outcome.

During a recession, employers will want to retain the best employees, and in order to achieve this they will still have to consider the overall packages they offer their staff. Incentivising their employees will remain an important, if not most important, factor in managing the business through tough times.
It’s not all about cash

But let's not forget that bonuses are not the only way of rewarding performance - companies should think about alternatives, such as implementing well-planned recognition programmes, which can be positive and profitable. Financial remuneration is not always the answer, particularly if the rewards are carefully tailored to individuals in the company.

Small business owners have never had the luxury of being able to pay out big bonuses, but very often have long-serving and loyal staff because they value them and often build relationships based on mutual respect and trust.

Companies with high retention rates are generally those that make a long-term investment in their staff. They see them as individuals and tailor reward packages to them; they ensure they have a good work-life balance, involve them in the business, empower them to make decisions and thank them for their contribution. Bonuses of course contribute to employee retention when added to this mix; however, they are not an effective way to keep staff long term when used in isolation.

Many companies who saw bonuses as being central to their employee retention strategy no doubt have to change their thinking in light of the financial crisis. But, if they are scared that they will start to lose people because they are no longer paying out large bonuses, then they arguably hired the wrong people in the first place.

It is also a myth that companies think they have to pay the most and give out the biggest bonuses to get and keep the right people - the current mess in the banking world suggests they had attracted the best, but they were not good enough.

Some commentators argue that we need a bonus culture in the future that is more long-term, transparent, performance based, proportionate and less widespread, and companies need to go back to basics and ensure that bonuses are just a small part of their employee reward strategy.

 

NON-CASH REWARDS, RECOGNITION & PRAISE
Non-cash rewards

 

DEFINITION AND BACKGROUND

Non-cash incentives are a means of incentivising higher performance among employees by the awarding of prizes or ‘gifts’ – such as merchandise, travel or retail vouchers – linked to some performance measure (such as volume of sales).

 

While the incentivisation industry is more highly developed in the U.S., it is also growing in popularity in the U.K. Typically found in customer-facing industries, schemes may be based on the use of a single prize to be won by the highest-performing individual employee (such as a Caribbean cruise for the highest sales target). Alternatively, they might encompass a range of awards recognising different levels of achievement (for example, every employee reaching a given target receives a particular item of merchandise).

It is helpful for the purposes of this analysis to differentiate between the following:

 

Non-cash incentives (sometimes known by other terms such as performance improvement plans)

These are forward-looking, formal schemes that aim to directly affect employees’ future performance. They are often formulaic in that they set in advance the targets required to achieve a particular reward outcome – in effect ‘if you meet this particular objective you will receive this particular prize as a direct result’.

 

Employee recognition schemes

These are retrospective (in other words, they recognise past performance rather than aiming to directly incentivise future efforts) and may be informal and discretionary – that is, they may be made without the use of any formal or informal goals or targets.

 

RATIONALE

Cash may not be the most effective means of motivating employees, it is argued by advocates of non-cash incentive schemes. While adequate cash remuneration may in this analysis be seen as a ‘hygiene’ factor that deters employees from seeking alternative employment, it does not necessarily motivate them to ‘go the extra mile’ in their current role. And whereas employees often spend cash bonuses on essentials (groceries or utility bills, for example), the receipt of a gift or prize is arguably more memorable and exciting, hence the greater incentivisation impact.

 

TYPES OF NON-CASH INCENTIVES

The main types of non-cash incentives may be broadly divided into the following categories:

• Merchandise-such as MP3 players, mobile phones, perfume, camcorders, bottles of champagne or watches.
• Activities/special events-such as meals out, hotel spa accommodation/treatments or hot air ballooning trips – which may be provided for an individual employee (or an individual plus a partner or friend) or could reward teams (team meal out, for instance).
• Travel-for example, all-expenses paid trip to Australia.
• Retail vouchers-which are often obtainable at a discount to ‘face value’.
• Awarding of points-under a points-based system that may be converted into a range of awards.

It is worth noting that under some stricter definitions, the latter two categories might not be regarded as ‘non-cash’ items.

 

LINKS WITH RECOGNITION SCHEMES

It is important to briefly consider the main types of employee recognition schemes as these are sometimes used in conjunction with (or instead of) non-cash incentives.

Unlike non-cash incentive programmes, as already noted recognition schemes may operate on quite an informal basis, indeed some experts believe it is best to have a completely informal system to help ensure that awards are perceived as a special ad hoc reward rather than becoming something that is expected. The impact on the employee is greater when the award is unexpected or made at the suggestion of colleagues, it is argued.

 

Recognition schemes also differ from non-cash incentives in their capacity to focus on more intangible aspects of performance that cannot easily be incorporated into formal targets. Brief definitions and examples of differing recognition schemes include:

• Day-to-day recognition - simple acts of recognition such as saying thank you or sending a hand-written note.
• Public recognition schemes - including employee of the month schemes and the recognition of featured employees in company magazines.
• Formal recognition schemes - these methods could include the retrospective awarding of similar gifts to those used within formal non-cash incentivisation programmes. They could also encompass non-financial measures – as opposed to non-cash measures, which inevitably have some financial cost – such as time off (informally giving an employee the day off, for example).

BENEFITS OF NON-CASH INCENTIVES

These include the following:

 

Affordability: For employers, non-cash incentivisation programmes may be more affordable than alternatives such as cash bonuses. Even during difficult economic times, employers still need to motivate staff – but may not be able to afford high cash bonuses, let alone substantial increases in direct basic salary costs with the inevitable add-ons in terms of pension contributions and other costs. Moreover, given that cash bonuses may need to be set at fairly substantial levels to have a significant incentivisation effect for employees, it may also be possible to achieve a greater impact with the same budget if non-cash incentives are used. Indeed the return on investment is often disproportionate with employees placing particularly high value on relatively low cost recognition awards.

 

Simplicity: There is a potential simplicity in the use of gifts or prizes when compared with cash incentives or bonuses – as the latter may involve complex formulae or encompass multiple targets that may seem remote or confusing to an individual employee. By contrast, it is very easy for a sales employee to understand that, say selling so many insurance policies will result in the receipt of a new flat-screen television.

 

Psychological impact: On a psychological level, one fundamental advantage for non-cash incentives is that it is acceptable for employees to speak openly with pride about the winning of gifts in a way that would be considered by many to be socially unacceptable it they were seen to be ‘bragging’ about cash bonuses. Indeed many companies restrict personnel from sharing information on bonus levels with their colleagues. The use of non-cash incentives can in this way help with personal and public recognition and reinforce the impact and value of the award.

 

Employer branding: There is potential for reinforcement of positive employer branding via the use of non-cash incentives, as the provision of an item such as a camcorder provides a constant reminder of the employer and the achievement – whereas the receipt and use to which a cash bonus is put is often quickly forgotten.

 

CHOOSING AND DELIVERING REWARDS

Rewards provided under non-cash incentive programmes need to fit well with corporate image but also be able to meet the needs of a potentially wide range of employees.

 

Employees often prefer a gift of their own choice hence one popular method is the use of points or voucher systems. Many specialist providers can produce company branded brochures or online shopping platforms. Voucher systems offer certain advantages such as greater potential for employer branding by means of a well-designed certificate.

 

It is alternatively possible to set up an automated system so that employees can log their progress towards points totals online, with different levels of targets achieved translating into different levels of points. These points can then be redeemed into a gift of the employee’s own choosing. An additional benefit of this type of system is a potential positive retention effect as employees may be anxious to remain in their post to accumulate all the points required for a particular prize.

 

Technological advances have brought with them new ways of delivering incentivisation awards. For example, where gifts are chosen from a department store or similar supplier, it may be possible to set up a system whereby winning employees are given their own code to type in and choose gifts.

 

On the downside, however, vouchers or points systems may seem rather more impersonal than a gift or prize that is selected for the employee.

 

It may also be possible to customise or personalise incentives in other ways, for example if someone enjoys the theatre the reward could take the form of theatre tickets.

 

SETTING UP AND RUNNING SCHEMES

As well as the issue of choosing rewards, there are a number of other practical issues for employers to consider when setting up and running a non-cash incentive scheme, including the following points.

Planning scheme objectives and budgets: managers should decide on the objectives of the scheme and set a clear budget for the programme. This should help ensure that a robust evaluation is possible and help keep programmes on target to meet their aims. It is also important to appoint someone with overall responsibility for managing the scheme.

 

Setting and communicating employee targets

It is important to set, and communicate, clear and achievable objectives, as there is unlikely to be a positive impact on motivation if employees do not understand how to achieve the awards or believe the criteria are unattainable. There should also be a clear and prompt line of sight between the achievement of an objective and receipt of the award so making of awards preferably needs to be close to the event (for example, some firms run weekly events or competitions).

 

Branding rewards

It is widely recognised that many people would prefer to avoid having a gift with a company logo on it (for example, a company-branded watch). One way round this is for an accompanying communication such as an award certificate to feature the employer branding prominently rather than the gift itself.

Selecting a supplier

It is worth noting that numerous suppliers of non-cash incentives are in operation. Such organisations often provide a wide-ranging service encompassing not only employee non-cash incentive programmes but also other employee schemes such as recognition and team-building activities, together with programmes aimed at clients or customers such as customer loyalty schemes or client hospitality programmes.

 

RECOGNITION
Forward-thinking employers have discovered that they can build employee commitment and productivity by making frequent, powerful emotional connections with their people. They have found the correlation between employee recognition and corporate success and are benefiting from well-documented increases in employee satisfaction, productivity and profitability.
But what makes up great recognition?

Strategic alignment
While it may sound mercenary to some, recognition is used for one reason — to drive more business. It's a fact of life: every year costs rise, employees want raises, shareholders demand greater returns. This means the company must make more money every year. Thus, carrots should be dangled to:

• Improve profitability and productivity by helping employees understand company goals and what's in it for them if they help meet those goals (It's vital to communicate often and be specific)
• Reward achievements that further corporate values. Reward often with informal rewards and after special achievements with formal, lasting awards
• Build a culture of recognition and make sure good employees know they are valued and needed. The formula is simple and time-tested: satisfied employees equal satisfied customers

Great presentations
Skilful award presentations can turn ordinary, common a garden carrots into solid gold. Remember the 2010 Winter Olympics when the unlikely heroine Amy Williams became the first individual gold-medal winner since 1980 through success in the skeleton bob?

Corporate recognition awards can truly be enduring symbols of achievement, but the best organisations have learned that they must make a recognition event something memorable — with almost as much ceremony and emotion as an Olympic-medal event. Employees work just as hard for organisations as Amy did training for her event in a country where facilities are obviously limited by the weather.

For presentations, remember to:

• Talk about the company. Keep focused on the company's goals and how the employee contributes to the organisation's success
• Be specific about the individual. Employees will replicate the behaviour for which they have been recognised
• Highlight the award. Just as Olympic medals carry significant meaning to an athlete, corporate awards that feature your logo or symbol can also have immense meaning to your employees

Symbolic meaning
When people devote most of their waking hours to a company, they want to feel a connection. Your company's logo can help make that connection.

A corporate symbol can be featured on a recognition award in a variety of ways — through engraving, stitching or embroidering or through the use of an emblem made of precious metals. In fact, when employees receive awards featuring their corporate symbol crafted in gold with diamonds or other fine gems, the awards become, in effect, corporate 'gold medals.'

PRAISE

When I go to parties and people ask me what I do, they have said in the past “so how do you help organisations reduce staff turnover?”

 

My typical response is to think of the things that cost nothing, such as praising someone who has really done a good job in front of his or her colleagues.

 

Praise is a tricky one to get right: good praise is even more of an art form than good criticism, and bad praise is worse than none at all. Even good praise loses its oomph if is there is too much of it. As with all addictive substances, there is a level for safe use, after which it gets dangerous. Two units of alcohol a day are deemed safe; two units of praise are far too many. If one gets praised every day, then one quickly stops experiencing any rush; yet any reduction in the dosage leaves one demotivated.

 

Last month I attended an event where I met a university student who talked about Sir Alan Sugar, who I consider one of the UK’s most effective praisers. Here is a man most famous for the nasty way he tells people that they are a complete waste of space. The correct praise dosage is gender dependent, as it is with alcohol. Men tend to take all praise at face value and so are sustained by less. Women reject half the praise as being insincere or misdirected or offensive and so need more to get by.

 

It is not just the quantity of the praise but the quality that is hard to get right. There are three pieces of advice commonly given to managers to make their praise more effective but all are terrible. The first says that praise must be public. This is downright irresponsible. While it is never certain that praise will make the ‘praisee’ feel any better, it is always certain that public praise will inflict heavy collateral damage on everyone else who hears it.

 

Second, praise must be specific. Again, this is catastrophically poor advice as the detail chosen by the praiser may not be the thing for which the praisee wishes to be commended.

Finally, the praiser is usually told to smile. This is also a bad idea. The point of good praise is that it must look deadly serious in order to seem sincere. If it comes from some grinning fool, one knows to disregard it altogether.

 

Good praise can be ruined in any number of ways. A surprised tone of voice wrecks it while any hint of negativity, no matter how tiny, wipes out all positive impact. Because praise is a mind-altering substance, we are not rational about it and the wisest oracle on praise was dog trainer Barbara Woodhouse, whose approach can be easily adapted for use with humans. She argued that dogs do not mind which words you use: it is the tone of voice that counts. So if you say “rhubarb, rhubarb” in a drippingly soppy way, the dog will be pleased.

 

This is why e-mail is no good for praise, as it has no tone. It is also why most managers – who tend to be bad at modulating their tone of voice – struggle so hard to produce a ‘praise rush’ no matter how they try.

There is an alternative. A handwritten note always hits the spot nicely. The fact that someone has gone to the trouble to hunt down an envelope and a stamp supplies the right tone of voice. So long as the words in the letter are not actively insulting, the recipient will be delighted. They will also have a copy of the letter to keep so, even if the next ‘praise event’ is a long time coming, they can reread to top up their praise levels as needed.

 

We’re all busy and at times we sometimes don’t take the time to communicate effectively. In these times of economic turbulence employers should recognise the importance of communication at all levels.

As we emerge from the recession, head hunters will be targeting high-achieving individuals as the job market picks up. How can we motivate and enthuse our top performers to maximise the chance that they will stay put?

Fluid
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Mobile: 07751 536043  Email: tim@fluidconsultinglimited.com  Web: www.fluidconsultinglimited.com