All-employee bonus schemes can work well in a recession, helping staff to identify with company performance and objectives, says Peta Hodge
Summary:
- All-employee bonus schemes can help manage the pay bill in a recession
- They help staff identify with the business’s overall performance and so are a useful communication tool
- Profit-sharing feels equable and can promote a team-based culture, but can be something of a blunt instrument
- Individualised bonus plans suit a performance-based culture, but can take up a disproportionate amount of management time
Last month, staff at rubbish collection operator Sita proved that bonuses are not just the preserve of highly-paid bankers when it was announced they would receive a share of a more than £2 million share payout from the firm’s parent company, Suez Environnement.
This followed similar moves at Sainsbury’s, where 12,000 workers received a share of £60 million in May, and Tesco, where a £93 million bonus pot was divvied up among 207,000 staff. In the depths of a recession, such pay-outs might look anomalous. But it could be argued it is in a tough economic environment that all-employee bonus schemes really come into their own.
Having an element of variable pay dependent on business performance is a sensible way of managing the wage bill in a recession. Good plans are self-funding, so will pay out only where performance has created value for the business. Christopher Johnson, head of Mercer’s UK human capital business, says companies have learned important lessons from previous downturns and are now reluctant to take short-term action, such as cutting back on variable pay schemes, “which could indirectly hamper their readiness for recovery once the economy improves”.
Colin Evans, head of reward at Hay Group, agrees, pointing out: “Where there is pressure on budgets, employers tend to think first about [limiting] salary reviews before they would think about attacking the bonus scheme.”
All-employee bonus schemes
An all-employee bonus scheme can be an indirect but powerful communications tool for organisations suffering a decline in business. Take Royal Mail’s colleague share plan, for example. Mark Childs, director at Total Reward Solutions, says: “I think this year it paid out about £200 to each and every postie, but several years ago it was paying out four-figure sums.”
This can be an effective way for a firm to communicate its relative performance to staff. “When all is stripped away, a reward scheme is, in essence, a vehicle for communication,” says Childs.
This touches on another, and arguably key, attraction of all-employee bonus schemes – that they feel equable. This is particularly important in organisations, such as larger retailers, where the emphasis is on teamwork. Evans says: “If you can make it part of what you do, and part of the ethos and culture of the organisation, then I think it can be very powerful.”
But he suggests company-wide payments are not always appropriate. “They can be seen as quite a blunt instrument with quite a high cost,” he adds.
For example, if an organisation with 100,000 staff had a scheme that paid everyone £100, that would cost it the not-inconsiderable sum of £10 million. “It is questionable what sort of return you get from that,” says Evans.
Bonus schemes in a recession
A recession is not necessarily a bad time to set up an all-employee bonus scheme, says Childs. “When the economy moves out of recession, there will be mixed signals,” he explains. “There will be quite uneven data about how fast or slow we are coming out of recession. In those circumstances, profit-sharing is quite intelligent because it does not load up employers’ fixed costs, but allows them to respond to employees’ appetite for an improved package.”
Childs’ advice for an organisation setting up a scheme now is that it makes sense to operate it as profit-share, rather than individualised bonus schemes, especially for larger organisations. “Generally, if you have got staff working in teams, it can be quite hard to assess individual contributions, and the management time and effort involved can be disproportionate,” he says.
Equal reward
But not everyone agrees. Mercer’s Johnson says many employers are using the recession as an opportunity to review and re-energise incentive plans, which typically means shifting from equal treatment towards a focus on top talent, with bonus deferrals to lock in individuals, manage risk and increase affordability.
Although Evans has reservations about the “blunt instrument” of all-employee profit-share, he suggests bonus schemes based on anything other than pure profitability are potentially more hazardous in tough economic times. For instance, employers could have a situation where targets are met, but the coffers are not full enough to keep the promise.
Tailoring staff bonus schemes
The best way to approach all-employee bonus schemes depends on a range of factors, including an organisation’s size and culture (for example, whether it is driven by individual performance or teamwork). The key – whether it is funded through lower fixed pay increases or business performance – is that a scheme is affordable and any performance criteria reflect the objectives and values of the business.
One option is to operate a scheme that pays out in shares rather than cash, especially in the current climate where shares are generally undervalued and likely to deliver staff significant profits. But the problem with shares is they are generally not as well appreciated by staff as hard cash. Communication, as ever on reward issues, is key.
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