The tobacco industry has always been heavily pay focused, so BAT uses its benefits to bolster staff retention and give it a clear distinction over competitors, says Jamin Robertson
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A visit to British American Tobacco’s (BAT) office in London brings to mind a friend’s recent interview at the company’s offices in Auckland. Part way through the process, the recruitment manager produced a pack of Rothmans, and the two proceeded to bond through a cloud of smoke. It’s an incident few would encounter elsewhere in today’s health- conscious world.
BAT operates in a controversial industry, and claims many of its recruits are suitably liberal-minded. It is also quick to defend its position as a proponent of diversity, and corporate social responsibility. This includes setting out its social report on its company website that pledges to operate responsibly in all the 180-plus markets that it serves.
Some charities and environmental groups believe those pledges are not worth the web space onto which they are uploaded. What investors and the anti-tobacco lobby will agree on, however, is that the international tobacco industry continues to make substantial profits.
In the five years to the end of 2004, BAT produced an average total shareholder return of 29% and sold some 853 billion cigarettes per annum.
In the last few years, any market declines have been more than offset by growth in other areas including Germany, Russia, India and Pakistan. Across Europe, the organisation recorded a £42m rise in profits to £616m in quarterly financial results to 30 September 2005.
In the UK, BAT employs around 1,950 workers, and is headquartered at the smart Globe House in London. Here, there are charms such as a staffroom decorated in American burger bar style, while a F1 racing car is attached to one of the stairwells.
In western companies that enjoy high profits, professional employees typically fare well, and BAT is no exception.
Malcolm Douglas, remuneration and benefits manager of BAT, confirms high wages are a flagship of the total reward package. “The attraction is that we’re a big payer. We’re a profitable business and we pay well. That’s what brings people in to start with and then they might see we have flexible benefits as well, and that builds on it. Once they’re in I think pay becomes much less important, although we do reassure people that we’re keeping that high pay position.”
Of course, competitors also pay well. Douglas claims that its training and development package sets BAT apart. “The real hook is how we develop people. That’s kept our people with us when they have been approached by others,” he says.
There is, in fact, a history of paternalism in the European division of BAT, the legacy of which remains today. For example, employees at Globe House still tuck into a free lunch every day. Douglas explains the ethos. “This is the sort of place where you look out for each other. In some places you are allowed to dig your own hole and fall into it, well that’s not the BAT style. It’s a supportive place of work. We have this long history of being paternalistic, which is not a fashionable thing to be now, but it’s very helpful when the crisis comes. The response is ‘what can we do to help’, not ‘when are you coming back to work’?”
The company ensures it has a finger on the pulse of employee opinion through regular external surveying. The results are pleasing for Douglas. The 2005 survey showed that just 30% of staff would like to see more choice in the range of benefits provided by the company, compared with 52% in the previous survey, while 74% agreed that the level of choice and range of perks is sufficient, up from 57% in 2003.
It is a rubber stamp of approval for the compensation and benefits professional. But despite the positive survey results, Douglas admits the benefits package on offer is not top drawer. “The pay strategy is definitely aggressive, and while the benefits are competitive and varied, we don’t aim to be an upper-range provider. We’re in the middle of what most sensible companies do, apart from the free lunch, which is unusual.”
Philip Hutchinson, director of HR and reward consulting at AWD Consulting, says this fits with the industry trend. “Their industry is quite a mix, they have manufacturing, sales and distribution. Most large companies of their ilk are now looking at smarter ways of spending their money. Organisations are trying to get that right mix, as they can get more value for the money they spend on benefits than they do just giving people cash. The general move is to build some flexibility in there, and a few of them are moving towards total reward, because that’s how they’re going to outsmart the competition. [BAT] will know their audience and maybe the people they’re attracting are happy with cash and pensions. Cash will always be king, but the benefits allow you to differentiate [yourself] from the others.”
A review of BAT’s benefits package reveals that a generous defined contribution (DC) pension scheme and enticing share reward plans stand out among a generally standard package that a profitable company should easily absorb.
Its DC pension, which replaced its closed defined benefit (DB) scheme, offers an automatic company contribution of 10% of salary. Employees have the option of contributing between 1% and 5% of salary, which is then matched by the company. So employees who contribute just 5% of salary will see their pension pot grow by an impressive 20% per annum.
BAT also offers what it terms a flexible benefits package called Free2. Like so many others in the UK, however, it is not a true flexible benefits scheme. The firm does not provide a flex fund for employees, although staff can raise money by trading holiday days. Free2 is essentially a tax-efficient and voluntary benefits package offering choice through salary sacrifice arrangements.
Holiday trading leads the way, with staff take-up of 18%. Dental, critical illness cover and retail vouchers are other benefits that have received noteworthy take-up. Douglas says the popularity of childcare vouchers also soared after tax incentives were introduced to higher earners last year.
The company also offers a matched give-as-you earn payroll giving scheme.
But there has been the occasional disappointment for Douglas such as the low take-up of wine club membership. “I was really disappointed the wine club only had less than two dozen takers because every time I told people about it in the pre-launch publicity it was ‘Wine, oh yeah, what a good idea’. It was a good price too, and delivered to the home once a quarter. We only had 21 staff sign up, including me, and the finance director, so it [must be] a good deal,” he says.
The communication programme is comprehensive. BAT produces an annual pay and benefits newsletter, while total reward statements are available online and benefits material is sent to home addresses. In addition, BAT runs ‘Free2 see’ days where providers hold on-site demonstrations of their products.
Douglas toured the country visiting BAT sites prior to the launch of the Free2 scheme in 2004. “I really enjoyed getting out there to our sites, speaking to groups of two or 12, including those on the midnight shift.”
This year, he intends to introduce free membership of an online priority ticket booking service for every employee that logs on during the mid-year enrolment period.
“We have a problem in that a third of our population aren’t even looking at the site. Rather than spending a lot more on communications, I’ll give them an incentive. If it works it will have been a good piece of expenditure.”
Next in line for benefits is an all-employee car ownership scheme, with BAT planning to use its fleet buying power with DaimlerChrysler to obtain discounts for staff. “They won’t be able to choose from the whole fleet. To get a good price, you focus on the cars they would like to support, and they will offer cars to us at fleet prices even though they’re not actually BAT cars.”
Pension – final salary, defined contribution. DC pension automatic 10% plus matching up to 5%
Core benefits – PMI, restaurant, company cars for business drivers
Payroll giving – Matched donations
Share schemes – Bonus, SIP and SAYE schemes
Salary sacrifice benefits -†A range of free choice salary sacrifice benefits including holiday trading, dental cover and retail vouchers.
Career profile: Malcolm Douglas
Malcolm Douglas, BAT’s remuneration and benefits manager, has been with the tobacco company for 22 years.
“I came in as an HR manager. In 1993, I re-evaluated the grade structure, and we had to have a locum in to do my day job. That really signalled the fact you couldn’t be HR manager and look after the whole of the remuneration portfolio as one job, so I’ve been stuck with it ever since,” he says.
But Douglas is proud of that grade structure he introduced.
“At the time, we had a quarter of the UK employees in one grade at business support level and that didn’t work. We’re still using [the structure], and it has stood the test of a major merger (with Rothmans International in 1999). The other thing I’ve really enjoyed is launching [perks] plan Free2. I went to each location in the UK and I really enjoyed that.”
Douglas says he learned the lesson of how to put a good communications plan together from BAT’s slick marketing team.
He believes that despite operating in a controversial industry, his company maintains high ethical standards. “When you tackle the ‘I work for a tobacco company’ issue, [people] think we all work in the Mafia and would [step on] each other to get on. It just isn’t like that.
“In a fair fight, we will try and stitch up Philip Morris as quick as we can, that’s our job. But I have seen a top performer get a top review one year and be fired the next for underhand ways of dealing with the opposition.”
Employee case study
Carolyn Grant is secretary to central finance. This year, she has used partner coverage in her private medical insurance policy for her husband’s treatment.
An enthusiastic participant in BAT’s share schemes, she is considering taking an annual travel insurance deal. “We normally take three or four trips each year, and I fly up to Scotland to see my mum so that’s something I think that is beneficial to have.” She adds the perks package is generally user-friendly. “It’s easy to find on the [intranet] and to go through all of what is there. I’ve been here for 18 years, and the benefits are different now. You used to have to wait two years to join the share schemes, which have been excellent. The best thing about the package is the choice.”