Special Report: Motivation – Executive pay

Even in the executive arena, work-life balance seems to be taking precedence over pay, says Alison Coleman

Case Study: Tate & Lyle

Article in full

Executive bonus payments are often viewed quite cynically by employees further down the ranks of an organisation, not to mention members of the press and the general public, who generally see them as unnecessary excesses. However, a carefully planned and well-defined bonus scheme can still be an effective and highly motivational component of a compensation strategy.

Before implementing any bonus scheme an organisation must define the goals of the scheme, work out how it fits into the HR strategy, and specify how much weight the bonus carries in the overall reward package. Penny Webb, a partner at business consultancy Whitehead Mann, says: "These schemes are considered to be effective at motivating senior executives as long as they are concomitant with their objectives, and completely transparent." In the wake of recent corporate scandals, shareholders are now monitoring the actions of their respective organisations with renewed interest.

Software company Misys was recently forced to abandon a proposed retention long term incentive plan(RL-tip) following concerns raised by some of its shareholders. The plan provided for two key executives to receive a bonus of £1.2 million each in a bid to prevent them leaving the company if they fail to be promoted to the top job when the current chief executive steps down in two years’ time.

Although Misys had undertaken an extensive consultation process on the RL-tip with its shareholders, it hadn’t anticipated the strength of feeling among some that the plan would set an unwelcome precedent. Ali Gill, co-founder of talent management firm GetFeedback, says companies have to consider shareholders’ views when devising bonus schemes. "Shareholders can and do influence the way executive bonuses are awarded, and organisations need to be more aware of their potential impact on the company as a whole," she explains.

However, given the exorbitant pay and benefits packages commanded by senior executives, Gill believes organisations do have a case for offering generous incentives. "In most cases, these bonus payments are driven purely by the cost of recruiting a CEO or CFO. So companies can justify paying these individuals a huge bonus. These people are key players and the company can’t afford to lose them," she adds.

Few would argue that bonuses are a bad thing, as long as they are awarded appropriately, and as a key component of a well-structured performance-related compensation programme. Bonuses should be viewed as an incentive, not an entitlement. Business advisory firm Deloitte’s Executive Directors’ Remuneration annual report, highlights the fact that companies are placing a greater emphasis on performance-based reward, with a rise in bonus levels and an increase in the introduction of a deferred element, where part of the annual bonus is paid in shares which must then be retained for several years.

Deferred annual incentive plans are now in place in 61% of FTSE 100 companies and 44% of FTSE 250 companies, compared with 56% and 34% two years ago. But organisations must also consider the impact of these bonus payments on the motivation of the workforce as a whole. Malcolm Higgs, dean of Henley Management College, suggests that this should be particularly addressed where there is a noticeable pay differential between the various levels of staff. "In a difficult year, telling people on the shop floor that they can’t have a pay rise, while offering large bonuses to the top execs, is going to demotivate a large proportion of the workforce," he adds. But the stark contrast in fortunes is starting to become blurred. Many experts now argue that when it comes to motivating executives, cash is no longer king.

There has been a shift in attitude on executive compensation, with a greater emphasis being placed on achieving a work-life balance. "Ever since 9/11 people have reassessed their values and views on what is really important. For years, people talked about work-life balance taking precedence over pay; now it is really happening.

The top executives are choosing healthcare benefits, extra holidays, sabbaticals, and commitment to extra education over financial incentives," says Whitehead Mann’s Webb. Large cash bonuses as a reward for performance are not always the best way to motivate executives. "If firms are willing to throw any amount of money at someone to get them on board and performing well, what does that say about the motivation of the executive? I believe the single most important factor for any executive is to have control over their life, and in order to do that they are prepared to give up some of the cash," she adds.

Where performance bonus schemes are put in place, organisations need to think about tailoring the bonus strategy to the corporate culture and operating philosophy. An assertive, rapidly-growing company may, for example, opt to pay a low base salary with a high bonus potential component. While a less aggressive company may prefer to pay a high base with a minimal bonus. Ideally, the bonus scheme should mix short-term and long-term incentives, with the latter being designed to fully engage top level employees with the purpose and values of the organisation.

But to ensure that the rest of the workforce does not feel left out and is also happy and motivated, Higgs suggests introducing a gain-sharing plan, which rewards the entire company pro rata for targets achieved. "The executives still get the biggest share. But to me it is a neat way of getting everyone involved, without the complications associated with other bonus schemes such as share plans," he adds. Most importantly it is transparent and therefore quite defensible.

However, whether executives would be willing to concede the traditionally more generous performance bonuses for schemes that pay them less but motivate a greater proportion of the workforce, remains to be seen.

Comparing bonus payments

Deloitte’s Executive Directors’ Remuneration report highlights a number of trends in bonus payments. Salary increases are slowing, with the median basic increase for executive directors in the FTSE 350 now 6.5%, compared with 7.1% in 2004 and 7.5% in 2003. The number of share option plans being introduced and in operation is decreasing, with performance share plans being used in their place. Performance share plans are now operated by 82% of FTSE 100 firms and 62% of FTSE 250 companies, compared with 64% and 43% respectively two years ago. Carol Arrowsmith, lead partner and remuneration specialist at Deloitte, says: "One reason for this trend is the requirement for companies to count the cost of options towards profits. Also, many companies feel that performance shares provide a clearer link between pay and performance."

Case Study: Tate & Lyle

Tate & Lyle is one of a growing number of FTSE companies to introduce an executive performance bonus scheme that takes a longer term view of motivation. In July it launched a deferred bonus share plan scheme aimed at giving the company’s senior executives an opportunity to defer a proportion of their pay into the scheme.

The objective is to strengthen the influence that the actions of senior executives have on the medium- to long-term performance of the share price, while making it more attractive for them to stay with the organisation through the use of a potentially lucrative performance bonus.

James Stephenson, Tate & Lyle’s head of compensation and benefits, says: "This is about performance-related incentives that puts a direct line of sight between the directors, their performance, and the share price." The scheme, which is voluntary, gives executives the choice of deferring a percentage of their bonus, with 20% of the bonus equivalent to 100 shares. The performance of the shares is then bench-marked against those of rivals and if Tate & Lyle falls within the upper quartile, for every one share owned, the company gives execs two shares, while in the median quartile, the company matches them share for share. In the lower quartile, the company gives one share for every three owned by the executive. "It is too early to assess the impact of the scheme.

But the feeling is that by rewarding executives for helping the share price [to grow], motivation levels will remain high," adds Stephenson.