Amid spiralling top-level pay and remuneration, there’s much to consider in motivating talent without alienating the rest of the workforce, says Amanda Wilkinson
The impact of globalisation and an ageing population means it will become more difficult to recruit and retain talented staff in a tight labour market. An increasing number of organisations are fine-tuning their packages to help motivate and retain existing talent by increasing salary levels, reviewing incentives, and putting talent management programmes in place.
Pay and benefits is one area in which organisations must ensure that they offer competitive rates. Russell Hobby, associate director, Hay Group, says: “We like to pretend that pay doesn’t matter much to motivation and performance, but the sad fact is that it does. It is something that you can only get wrong and not right.”
To ensure that key talent is retained, organisations are paying out large salary increases to executives at rates above inflation and those experienced by other levels of staff. According to the Directors’ pay report 2006 from Incomes Data Services (IDS), salaries of all FTSE 350 directors increased by an average 9.6% over the year to July 2006. With annual bonuses received added into the equation, total cash rose by 15.2% on average. However, salary increases for the rest of the workforce were running at a median of 3% for most of the year, and averaging 3.7% for private sector managers and professionals for the three months to April 2007.
These increases for top talent have, in part, been driven by the requirement of publicly-listed companies to disclose details of executives’ remuneration to shareholders for their approval, making salary comparisons more transparent. They have also led to an outcry among unions and the media about the widening gap between the remuneration of talent at the top of the corporate ladder and employees at the bottom.
However, Belinda Hudson, principal in human capital advisory services at Mercer Human Resource Consulting, says: “To a certain extent [these levels are] dictated by the market although there has been this upward ratcheting when everybody compares with everybody else. The other biggest single influence at the moment is private equity.” The lure of making millions turning companies around for private equity firms is prompting executives working for publicly-listed organisations to demand more remuneration in order to stay, she adds.
These factors have also contributed to an escalation in the maximum potential payouts of short and long-term incentive schemes, which are used to help motivate key talent.
The criteria for annual bonuses, which are usually paid out in cash with the amount often dependent on the seniority of employee, are also changing. Historically, recipients had to meet set financial indicators, however, there is now a trend towards including broader measures of corporate performance such as customer satisfaction, employee engagement, health and safety, and corporate social responsibility. According to the Annual and long-term incentives report 2007 from PricewaterhouseCoopers LLP Monks pay data services, the proportion of top UK companies offering annual bonus plans to executives using a combination of financial, non-financial and individual measures rose from 13% in 2005/6 to 31% in 2006/7.
Tom Gosling, a partner in the executive compensation practice of PricewaterhouseCoopers, explains: “Non-financial targets are very important leading indicators of performance and may not feed into profits for a couple of years so you would perhaps rather know about these things earlier rather than later.”
The key motivator for talented senior management is, however, the gains that can be made through the long-term incentive schemes, says Paul Wolstenholme, a director of Halliwell Consulting. “As an individual, if I join a company, I am not really going to be bothered about my salary as long as [it is competitive]. The annual bonus, if it falls within 50%-100% of salary, then that’s competitive. Pension and benefits, I can argue over. The bottom line is, what is the size in terms of the long-term incentive and what are the performance conditions attached to those incentives to make sure they pay out? If they are really tough then I am not going to value those incentives.”
The aim with long-term incentive plans, which can be paid out in cash or equity, is to align the interests of staff in the scheme with those of shareholders by using relevant performance conditions linked to driving business strategy, such as earnings per share. Typically, the performance period will be measured over three years therefore helping to retain staff during that time.
Share option plans are just one such scheme, but these appear to be on the wane, says Hudson, partly due to the change in accounting rules that means the full cost of shares has to be included in the profit and loss account and the fear, a few years ago, of falling stock prices. Performance share plans are another method of providing a long-term incentive. “The advantage is that, subject to performance conditions, there is always some value in shares, whereas if you have a share option you only benefit if the share price goes up,” explains Hudson.
In a bid to mimic the type of packages available in private equity, organisations are increasingly offering co-investment plans, which require senior management to invest some of their own money in the company at the outset. They take on the same risks as shareholders, but have an opportunity of making huge returns. WHSmith put such a scheme in place for the board and senior management when chief executive Kate Swann took on the challenge of reviving the retailer a few years ago.
Whatever combination of incentive schemes are used organisations should try to use rolling payouts to help to prevent staff from simply waiting for one large cash bonanza, and then leaving.
Another way of motivating talent is through the use of recognition schemes. However, Paul Brown, incentives specialist at Maritz, warns: “You have to be careful and mindful of how any kind of perceived or actual separation of the workforce is handled and communicated.”
For talented individuals who have gone through all the standard gifts or experience days, the trick is to offer something unique, he says. For example, Maritz organised a trip for the top sales people at Toyota to see Robbie Williams at Knebworth with back-stage access.
Jonathan Haskell, chief executive officer at gift specialist Michael C Fina, agrees: “Try to have some bespoke programme giving them something that is unique and reflects their interests.”
Beyond reward and remuneration, talented staff should also be offered a challenging and stimulating working environment, where they can see a growth path mapped out for them over the next three-to-five years. “A lot of employers lose talent simply because people can’t see [their path],” explains Hay’s Hobby.
If companies do put in place fast-track schemes or talent management programmes these should be transparent and based on evidence of performance. However, Hobby warns such schemes mean that people who are currently star performers may end up lifting their foot off the pedal, while those who have not been selected and who may yet turn out to be top performers are neglected. “For each person, consider [the] best move they could make that would take their career forward,” he adds. This may entail making training available to help them take that next step, either internally or externally by sending them on a management course. Top talent who are coming to the end of their career could also help train or mentor talented colleagues.
“Managed retirement is another solution to retaining talented people. Helping them wind down into a career where they can support younger leaders without necessarily leaving the profession,” says Hobby.
Work-life balance is an issue that will have to be addressed across the board when it comes to retaining key talent as demographics and attitudes are shifting. Staff may have caring responsibilities for children or elderly relatives, while future generations appear to be placing much more weight on achieving a work-life balance by pursuing outside interests. Part-time work, sabbaticals and flexi-time are all solutions organisations will have to consider to retain and motivate talent.
Case Study: Bank of America
Bank of America offers a recognition programme that rewards employees at all levels of the organisation, but which also includes a strand tailored to senior management.†
Claire Popejoy, reward specialist at Bank of America UK, says: “With the top tier of management, obviously they earn phenomenal salaries so you don’t have to reward them so much on a monetary value level, but when you do reward them it needs to be with something that is quirky and different.”†
Its top management scheme operates on a global basis and recipients can choose their reward from a selection which has been put together by provider Michael C Fina. The items include Dunhill and Mont Blanc-branded gifts and experiences like hot air ballooning.†
An award is made if employees meet certain key targets that have been set at their annual review.†
The bank also operates other recognition streams that are open to everyone, including excellence awards for which people can be nominated by both their peers and senior management provided they meet criteria linked to the organisations’ values and long-service awards. There are also awards for team practices where, say, project work has gone well.†
Line managers personally present the awards so that recipients’ colleagues are aware of what they can receive if they perform well.†