Bonus culture has been under the spotlight in the infrastructure sector in recent weeks, with two separate reports investigating the rewards that were paid to senior figures at collapsed Carillion and troubled Interserve.
Interserve chairman Glyn Barker said in the firm’s 2017 annual report that financial performance had been “extremely poor”. Yet the same report goes on to say that Debbie White, who joined the firm as chief executive in September last year, was rewarded with a bonus of £270,089 for four months work, 125% pro rata, on a base salary of £216,667 for that period. The firm’s remuneration committee said it was “comfortable” with the sum “in light of the improvement in the underlying financial position of the company”.
Shortly afterwards a report published by two government select committees detailed the £245,000 bonus received by former Carillion chief executive Richard Howson in 2016 “despite meeting none of his financial performance targets”.
Many people who work hard for the good of their employer without receiving anything like these kind of rewards will understandably question the bonus culture in the industry.
It must be remembered that leadership jobs can make or break a major company and often come with long hours, time away from family, high pressure, lots of stress and the risk of public shaming if things go wrong. Linking an element of pay to performance is a key way to attract, retain, motivate and direct the best, most driven people to these critical jobs.
So bonuses are not intrinsically bad, but they do need to be carefully considered and used shrewdly. Here are the main factors we advise our clients to consider when they ask our advice on setting variable pay.
1. Individual v collective rewards
The first thing to think about is how tightly you want to link a person’s reward to their individual performance. Some directors earn bonuses solely on the results of the small team they manage, while at least one employee-owned infrastructure consultancy pays out a uniform amount to everyone on a certain pay grade worldwide based on global outcomes.
An advantage of linking all employees’ bonuses to group performance is that they will be motivated to cross sell services for other countries or practices to clients and do what is best for the business. On the other hand do you risk making them less focused on the performance of their business unit, relying on other areas to dig them out of trouble if they miss target?
To strike a balance, many infrastructure firms use multi-layered bonus schemes. As an example, you could make a quarter of variable pay down to personal performance, a quarter related to the individual’s business unit, a quarter to their country’s results and a quarter based on company-wide figures. Understand what you want to achieve and come up with your own breakdown.
2. Subjective v tangible objectives
The measures you use for bonus calculations become professional targets for the individuals within your business.
The concept of SMART objectives has been around since the 1980s and is still widely used in modern business leadership training. The theory demands that individuals should be set targets that are specific, measurable, achievable, relevant and time-bound. Basically, you want bonus measures to be as tangible as possible.
Make it really clear and fair what you want someone to do to earn extra pay – and then don’t be surprised when they act accordingly. If you are rewarding a Bid Director solely for winning a contract, expect to see them focus purely on that, possibly at the expense of winning contracts at profitable margins.
There is an argument for some subjective assessment of bonus payment to factor in exceptional circumstances that could significantly impact the achievement of targets, either positively or negatively. This would have helped the case of the housebuilder Persimmon this year when £500m in bonuses were paid to the 140 senior staff after the ‘Help to Buy’ subsidy sent profits soaring way beyond predictions.
But this case shows the need for clarity and measurable targets when setting bonuses. I’ve known people get into huge rows over bonus payments when the rules were too subjective; companies have lost good people over this. Keep bonus objectives tight and for executive roles consider the time period over which performance is measured.
3. Flat v staggered payment structures
Huge bonus payments for senior directors often come about as a result of the double whammy of being able to earn a higher proportion of a higher salary compared to lower-ranked managers.
So a chief executive on £500,000 might be able to earn £500,000 in bonuses, while a colleague on £50,000 might earn a maximum bonus of £3,000. In other companies, bonus levels might be shared out equally between 10-40%.
Decide which is right for the culture you want to promote in your organisation. Do you want a collective, ‘we’re all in this together’ vibe or more of an American Dream where employees are heavily incentivised on their individual performance?
My experience working with clients, contractors and consultants to fill senior roles in this industry is that giving high rewards linked to measured, targeted objectives is a key factor in getting the right people doing the right thing for your organisation. However, mindlessly throwing money at people regardless of individual and organisational performance is a recipe for disaster on all sorts of levels.
Put some time and thought into the best way to shape your bonus structure to get the kind of results you want. And remember we are here to advise if required, so feel free to get in touch HERE.
