Yorkshire Building Society has managed to steer clear of the wreckage surrounding the financial sector. FD Andrew Gosling explains how to Clare Bettelley
Yorkshire Building Society’s senior management team has agreed to forego its 2008 bonuses. Andrew Gosling, the society’s finance director and one of four executive directors in the team, says: “We recognised in the current environment, if you do see a reduction in profitability, it didn’t feel right to take bonuses. While we would have seen a reduction in bonuses from prior years, it would still have been a reasonable bonus for the team.”Gosling estimates that the decision will save the society between £400,000 and £500,000.
Nevertheless, he says that a bonus will be paid to other staff, although at an average of 5% of employees’ pay, it is lower than the bonuses received in 2007. He says: “People have worked incredibly hard and there are a lot of people whose basic salaries are not particularly high, so a bonus is helpful.” The society shelled out £4.1m for staff bonuses for 2008, which Gosling says is around 20% less than in 2007.
The executive board’s decision follows a review of Yorkshire’s bonus scheme to ensure it is in line with industry best practice. The review, which was initiated in October, preceded a review by the Financial Services Authority (FSA), which Rachel Court, general manager, human resources and customer service, says fed into the building society’s efforts. “We reviewed all of our bonus structures against that, which demonstrated that we were in keeping with best practice, but we wanted to ensure we were absolutely in line with all the FSA’s guidance,” she says. This involved changing some of the risk measures included in its senior bonus schemes surrounding cash calls and liquidity. There has also been a debate about whether the organisation should change the absolute amount of the on-target payments into the scheme.
The remuneration committee has agreed that the society’s bonus structures will have a different type of target this year. Savings’ growth has replaced mortgage growth, given the recent decline in mortgage business resulting from the housing market downturn and the wider economic malaise. It is the first time savings will feature as a target for the society’s bonus schemes. The society is also introducing profit as a bonus metric. Court says: “It’s never really been one of our key driving metrics; our aim is not to maximise profit as we don’t have shareholders to pay dividends to, but in the current climate where there is a lot of focus on the performance of organisations, we have decided to put in profit as a major measure in our scheme.”
Gosling insists that the new measure does not conflict with the culture of mutuals, which is supposed to focus on protecting members’ savings rather than generating profit. He says: “Our intention is to optimise profit, not maximise it; we need to generate profit because we need adequate capital for the business to comply with regulatory requirements; to keep the rating agencies happy; to keep wholesale counterparties happy; and we need money to invest back into the business.” Accordingly, a cap will be in place to prevent staff from over-achieving the profit target.
Bonuses are part of the society’s standard employee benefits package, which comprises salary, pension scheme – defined benefit plus defined contribution for new joiners; private medical insurance; and a company car or car allowance. Employee benefit costs totalled £71.5m for the 12 months to 31 December 2008, which Gosling claims is in line with the society’s budget. Salary costs, including overtime, totalling £53.6m, with £5.7m being paid by the society for national insurance. Pension contributions totalled £5.4m, with £3.5m paid out for members of the DB scheme, which closed to new joiners in 2001, and £1.9m paid for members of the DC scheme. Following a triennial review of the DB scheme last year, the society now contributes 30.5% into the DB scheme. The society has around 2,100 full-time employees.
Gosling claims that cost control has been a focus of Yorkshire Building Society for many years, but it was only in 2006 that he formalised the process with the creation of a cost control group. Gosling is chair of the group, which comprises his head of finance, Court, a general manager and the society’s head of IT.
“It looks at where we think we are performing well on costs and where we are not, which is when we collectively challenge things,” says Gosling. There is also a committee which meets monthly to consider any staff requests to increase costs, for example, for training. Ultimate responsibility for costs lies with functional line managers within the business.
Mutuals calculate their costs by dividing their assets under management over the year by their costs. For the Yorkshire, this figure has declined from 73p in 2005 to 56p in 2008. This means that it currently costs the society 56p per £100 of assets to run the business, despite assets growing by just 12% year-on-year last year.
Gosling says: “We recognise in our business that it will be quite hard to grow this year, as a result of which it will be very difficult to maintain that ratio. So what we’re in the process of doing is going back round the business and seeing where we can squeeze costs out, so that whatever that ratio is, we feel it’s the best we can do.
“We’re not wedded to a particular number here; what we’re wedded to is squeezing costs in a sensible way, and we are a small enough organisation to be quite nimble on our feet.”In line with the society’s cost control culture, Gosling and Court will review the society’s car scheme this year. Court says: “At the moment we offer a very wide choice of cars, so we’re looking at more efficient ways of managing the fleet. We may consider, for example, a single badge arrangement, so there could be quite a significant cost saving for that particular benefit.”
Career profile: Andrew Gosling, finance director, Yorkshire Building Society
Andrew Gosling started his accountancy career with KPMG in 1977. After qualifying with the firm, he left in 1982 to join London and Continental Bankers where he was an assistant manager in the corporate and investment banking department.
He joined Ernst & Young in London in 1985, becoming a partner in 1989. During his tenure with E&Y, Gosling undertook a two-year secondment to the Building Societies Commission, which is now part of the Financial Services Authority. As assistant commissioner, he had responsibility for a portfolio of societies, which included Nationwide, Alliance & Leicester and National & Provincial.
On completion of the assignment in 1993, Gosling relocated to E&Y’s Yorkshire office, leaving in 2001 to join Yorkshire Building Society as finance director. On arrival, he had responsibility for finance and risk.
He says: “It soon became clear that it was no longer appropriate for me to have control of this area [risk], so I stepped down in 2006.” Thus, risk is now a completely separate function from finance, leaving Gosling to manage finance together with a newly-created tax department, internal audit and the society’s legal department, company secretarial function and facilities.
Company core benefits
• Salary plus bonus
• Defined contribution pension
• Private medical insurance
• Car/car allowance company overview
• Yorkshire Building Society (YBS) is the third-largest mutual in the UK.
• It has 1.9 million members and reported £23 billion in assets under management for the 12 months to 31 December 2008 as part of its full year results announcement on 2 March 2009.
• This compares to £20.5 billion in 2007. Some 2,100 employees work across the society’s divisions, which include mortgages, savings, investment and credit cards.
• Founded in 1864, YBS now has 136 branches.