Un­pack­ing Ire­land’s bonus cul­ture

Ir­ish Wa­ter staff are flush with their ‘per­for­mancere­lated awards’, but the prac­tice is quite common

The Irish Times - Friday - The Ticket - - FRONT PAGE - Laura Slat­tery

“Bonus” is a loaded word. “Bonus cul­ture”, mean­while, evokes the load­sa­money ex­cess of in­vest­ment bankers whose pay was linked to how pro­fi­ciently they could pass toxic parcels of debt through the fi­nan­cial sys­tem.

In the wake of the bank­ing cri­sis, a bonus is some­thing to be clawed back from high-rollers who didn’t de­serve them in the first place and whose per­for­mance tar­gets led to fail­ure, not suc­cess.

It is un­der­stand­able, there­fore, that Ir­ish Wa­ter might want to deny that it was part of a “bonus cul­ture” even as de­tails of its per­for­mance-re­lated pay struc­ture were emerg­ing. But ar­gu­ing that “per­for­mance-re­lated awards” are not bonuses clearly doesn’t wash with Ir­ish Water­watch­ers, an­gered by what they see as re­wards for in­com­pe­tency.

Op­po­si­tion to the very ex­is­tence of the com­mer­cial semi-state company com­pounds the ire of many, while some will be dis­mayed by lev­els of pub­lic sec­tor pay more gen­er­ally.

To re­cap, this is how the Ir­ish Wa­ter sys­tem was re­cently re­ported to work. An em­ployee who “does not meet ex­pec­ta­tions” re­ceives a “per­for­mance-re­lated award” of 0 per cent of their salary.

Em­ploy­ees who “needs im­prove­ment” are given awards of 1.5 per cent if they are among the lower paid staff (earn­ing up to around ¤40,000), 4 per cent for mid-rank­ing em­ploy­ees (up to around ¤70,000), and 9 per cent for se­nior man­agers.

Higher per­cent­ages are granted along a scale that con­tin­ues with “fully meets ex­pec­ta­tions”, “con­sis­tently ex­ceeds ex­pec­ta­tions” and con­cludes with “far ex­ceeds ex­pec­ta­tions”, at which point the awards are 4 per cent for the lower paid, 9 per cent in the mid­dle and an eye-catch­ing 19 per cent at the top.

An Ir­ish Wa­ter em­ployee with a base salary of ¤100,000 could there­fore re­ceive an ad­di­tional ¤19,000 – and as 29 peo­ple work­ing for the company are re­ported to earn ¤100,000 or more (with 19 of those in the ¤100,000-¤124,000 bracket), this is not an un­re­al­is­tic ex­am­ple.

The company later sug­gested that the struc­ture, which al­ready ap­plies across par­ent company Bord Gáis (now called Ervia) should be looked at in re­verse. Rather than the sums be­ing added to base pay, bonus-style, a cer­tain por­tion of an em­ployee’s re­mu­ner­a­tion is vari­able, or “at risk”.

We would find that more and more of the com­pa­nies we work with will have an­nual pay reviews, but they don’t have an­nual pay in­creases

Un­less he or she “far ex­ceeds ex­pec­ta­tions”, a per­cent­age of the to­tal pos­si­ble re­mu­ner­a­tion – in in­dus­try jar­gon, a per­cent­age of the “max­i­mum op­por­tu­nity” – can the­o­ret­i­cally be taken away.

It is un­clear how this will work in prac­tice, but in both ex­pla­na­tions of the pay struc­ture, the lan­guage used throws up some jar­ring sce­nar­ios. In the first, em­ploy­ees said to “need im­prove­ment” are given bonuses; in the sec­ond, even em­ploy­ees said to “con­sis­tently meet ex­pec­ta­tions” do not get the full whack.

Also mud­dy­ing the wa­ters is Ervia’s state­ment that per­for­mance pay has been in­tro­duced there in lieu of a sys­tem of salary in­cre­ments that pre­vi­ously ap­plied to Bord Gáis work­ers. This “puts a dif­fer­ent colour on it”, as Min­is­ter for Fi­nance Michael Noo­nan noted.

Mar­ket trends Min­is­ter for the En­vi­ron­ment Alan Kelly said this week that the bonus sys­tem “will be the num­ber one thing” on the agenda of the yet-to-be-ap­pointed com­bined board of Bord Gáis and Ir­ish Wa­ter.

But any changes that are made to re­mu­ner­a­tion in the wake of po­lit­i­cal pres­sure will have to be made in the con­text of labour mar­ket trends as well. And here there is much less con­fu­sion. Pri­vate sec­tor em­ploy­ers love per­for­mance-re­lated pay. “Bonuses” are in vogue.

Ac­cord­ing a survey con­ducted over the last month by re­cruit­ment multi­na­tional Hays, 47 per cent of Ir­ish em­ploy­ers have given more bonuses in the past 12 months than they did in the pre­vi­ous 12. Mean­while, half of em­ploy­ees ex­pect to be paid a bonus in the com­ing year. As re­cently as 2012, a sim­i­lar survey found that only 17 per cent of em­ploy­ees ex­pected a bonus.

“It is some­thing that is re­ally com­ing into play,” says Richard Eard­ley, man­ag­ing di­rec­tor of Hays in Ire­land. It’s partly a func­tion of the eco­nomic cy­cle. Per­for­mance-re­lated pay is of­ten “the first thing to be axed” in a re­ces­sion, and the first thing to be rein­tro­duced as the econ­omy re­cov­ers, he points out.

But even tak­ing into ac­count such ebbs and flows, Ir­ish em­ploy­ers have be­come keener on per­for­mance-re­lated pay over the decades, says Eard­ley. “If you took a trend line over the last 20 to 30 years, you would see sub­stan­tially more em­ploy­ers in­tro­duc­ing vari­able el­e­ments to pay.”

Ac­cord­ing to Eard­ley, em­ploy­ees also like the idea that, if two peo­ple are do­ing a sim­i­lar a job, the one who is “bust­ing a gut” will be re­warded more than the one who is “tread­ing wa­ter”.

“Peo­ple want to be in­cen­tivised for do­ing a good job. I think em­ploy­ees see it as a wel­come ad­di­tion to their re­mu­ner­a­tion, rather than see­ing it as ‘oh, part of my money is not guar­an­teed’.”

Re­cruit­ment company CPL con­curs that per­for­mance-re­lated bonuses are emerg­ing as a key re­ten­tion tool for se­nior, ex­pe­ri­enced em­ploy­ees, and in some cases, they are be­ing used by em­ploy­ers who had blan­ket salary freezes or across-the-board pay cuts dur­ing the re­ces­sion. “Bonuses are back to some de­gree,” says CPL di­rec­tor Peter Cos­grove. “They are a very flex­i­ble way to pay peo­ple.”

Same pay

Still, this flex­i­bil­ity doesn’t al­ways equate to a bo­nanza for work­ers.

“Some­one who used to get ¤40,000 for do­ing a par­tic­u­lar job might now get a salary of ¤35,000 and up to ¤5,000 per­for­mance-re­lated pay,” says Cos­grove. “They are ac­tu­ally just get­ting what they would have got be­fore the re­ces­sion.”

Cos­grove also says that salary in­cre­ments, where em­ploy­ees’ pay in­creases up a pre-set lad­der in tan­dem with long ser­vice, are less fash­ion­able th­ese days. “We would find that more and more of the com­pa­nies we work with will have an­nual pay reviews, but they don’t have an­nual pay in­creases.”

In bet­ter times, of course, both in­cre­ments and bonuses may well have been on the ta­ble. “There’s noth­ing like a re­ces­sion to fo­cus the mind,” he says.

Once the decision is taken to put a per­for­mance-re­lated pay sys­tem in place, re­mu­ner­a­tion ex­perts agree that it is crit­i­cal that the met­rics used to as­sess per­for­mance are cor­rect and gen­uine - and as fair as pos­si­ble. For some roles, such as sales, the na­ture of the ideal per­for­mance tar­gets is much more ob­vi­ous than it is for other roles that in­volve a more com­plex, qual­i­ta­tive set of aims.

Pat Gur­ren has de­signed and con­sulted on per­for­mance-re­lated pay schemes for dozens of com­pa­nies through his firm, Gur­ren Com­pen­sa­tion. He is an ad­vo­cate of per­for­mance-re­lated pay – if the right or­gan­i­sa­tional cul­ture is in place. “Not good” is how he de­scribes the ap­pli­ca­tion of per­for­mance-re­lated pay in the pub­lic and semi-state sec­tors.

“In my of­fice, I keep hard copies of the two pub­lic sec­tor bench­mark­ing re­ports that were pub­lished in the noughties,” Gur­ren says. “I would rec­om­mend them as a use­ful ref­er­ence for any or­gan­i­sa­tion seek­ing to un­der­stand how not to ap­ply per­for­mance-re­lated pay on a grand scale.”

Even in the pri­vate sec­tor, where per­for­mance-re­lated pay can be great for business, the time and re­sources re­quired to get a ro­bust, trans­par­ent process in place shouldn’t be un­der­es­ti­mated. “Clear per­for­mance cri­te­ria needs to be set on an on­go­ing ba­sis and com­mu­ni­cated to em­ploy­ees,” Gur­ren says.

It is, in fact, “a common er­ror or trap” for or­gan­i­sa­tions to award in­creases to em­ploy­ees who are said to “need im­prove­ment”, he says. It’s prob­lem­atic for two rea­sons: the mixed mes­sage it sends, and the missed op­por­tu­nity. “Al­lo­cat­ing bud­get to em­ploy­ees who are not fully meet­ing per­for­mance stan­dards leaves less bud­get to ap­ply to high-per­form­ing em­ploy­ees.”

In other words, it un­der­cuts the stated aim of re­ward­ing good work. Per­cent­age ad­just­ments to base pay should be “mean­ing­ful”, Gur­ren says, which will mean dif­fer­ent things to dif­fer­ent peo­ple and will also de­pend on where the company sets its base pay ver­sus its com­peti­tors (an is­sue that doesn’t quite ex­ist for Ir­ish Wa­ter).

“For bonuses,” Gur­ren says, “I would tend to be­lieve that the tar­get bonus op­por­tu­nity needs to be at least in the re­gion of 10 per cent for it to be mean­ing­ful.”

For some, the most galling facet of the per­for­mance-re­lated pay struc­ture at Ervia and Ir­ish Wa­ter will be the gap be­tween the per­cent­ages paid out for the same level of per­for­mance at dif­fer­ent grades. Se­nior man­agers are on a dif­fer­ent track en­tirely to those at lower lev­els, who ap­pear to be in line for pay­ments in lieu of pub­lic sec­tor in­cre­ments.

It might be ex­pected that a se­nior man­ager would be el­i­gi­ble for a higher bonus in ab­so­lute terms than a ju­nior worker, in or­der for it to be mean­ing­ful to them. But why is there such a chasm in per­cent­age terms? In this case, the process serves to widen the gap be­tween the high­est and low­est paid worker in an or­gan­i­sa­tion.

Two tiers nor­mal

The two-tier ap­proach is not un­usual.

“You can de­bate whether it’s right or wrong, but it is nor­mal. You will see that in the pri­vate sec­tor,” says Eard­ley. “If there is any per­for­mance-re­lated pay at ju­nior lev­els, it will then tend to make step-changes rather than in­cre­men­tal in­creases as you be­come more se­nior.”

In the stratosphere of the FTSE 100, chief ex­ec­u­tives are rou­tinely paid bonuses that dwarf their base pay. Since the fi­nan­cial cri­sis, the num­ber of met­rics against which per­for­mances are mea­sured pro­lif­er­ated as ac­tivist groups called for ac­count­abil­ity, though the more elab­o­rate cri­te­ria doesn’t seem to have spoiled the party for most.

KMPG’s most re­cent survey iden­ti­fies the me­dian “max­i­mum bonus op­por­tu­nity” for FTSE 100 bosses as 180 per cent of base pay, while the me­dian per­cent­age ac­tu­ally paid out in 2013 was 119 per cent – or 60 per cent of the pos­si­ble bonus.

More than a quar­ter of com­pa­nies in the FTSE 100 and more than a third in the FTSE 250 paid their chief ex­ec­u­tive a bonus in ex­cess of 80 per cent of the max­i­mum.

Share­hold­ers have not been silent on the is­sue, re­ject­ing re­mu­ner­a­tion pack­ages con­sid­ered to be es­pe­cially egre­gious.

In­deed, the boss of one UK pri­vate wa­ter company, Severn Trent, faced ob­jec­tions over the sum­mer to her to­tal pos­si­ble award after a bonus cap of 70 per cent of salary was in­creased to 125 per cent.

Should Ervia even­tu­ally be pri­va­tised, the days of 19 per cent bonuses for se­nior man­agers may seem like the good old days.

De­spite Alan Kelly’s con­tention that the bonus is­sue will be a top pri­or­ity for the Ervia board once it is formed, the De­part- ment of Pub­lic Ex­pen­di­ture and Re­form is sup­port­ive of the prin­ci­ple of pay for per­for­mance within semi-States.

Min­is­ter for Pub­lic Ex­pen­di­ture and Re­form Bren­dan Howlin told the Dáil in Jan­uary that per­for­mance-re­lated pay was “the norm” in the com­mer­cial sec­tor and im­plied that this should be em­u­lated by semi-State com­pa­nies. He re­it­er­ated last week that al­low­ing semi-States “to do their business in a com­mer­cial way” was “the way to go”.

Ir­ish Wa­ter’s sta­tus as a mo­nop­oly with cap­tive cus­tomers does not ap­pear to di­lute the Gov­ern­ment’s en­thu­si­asm for per­for­mance-re­lated pay. Not­with­stand­ing all the huff­ing and puff­ing of the past week, it is, ul­ti­mately, pro-bonus.

An of­fer you can’t refuse: ‘Should Ervia even­tu­ally be pri­va­tised, the days of 19 per cent bonuses for se­nior man­agers may seem like the good old days’

Newspapers in English

Newspapers from Ireland

© PressReader. All rights reserved.