Paying Bonuses In a Downturn? The Thorny Question

We have heard so much about bonuses for the wrong reasons lately as banks seemed to think that high-flying employees had to be paid them even though the banks in question have lost, quite literally, billions of pounds. These cases may be clear cut to us, but in the real world, when should we hold back on paying bonuses?

Part of the problem relates to the fact that many firms have just incorporated bonuses into their employment contracts without a great deal of thought and certainly none relating to a catastrophic failure in markets. I mean, if you are writing your employment contracts for the first time in the middle of a recession, bonuses may not actually enter into the whole equation and if they do, you can bet your life they would be crafted in such a way that if performance was not good then there would be less or none paid.

The trouble is, most companies write bonuses into their contracts when the going is good and while the gurus in HR and management have their rose-tinted specs on, the contracts tend to be sloppy.

There is a further complication. Many firms, particularly American-owned ones, have very deliberately changed contracts to put an element of earnings for all staff 'at risk', as they put it. Often this can be done at review time and it could mean an employee in a function other than sales or marketing, where personal performance can be more easily measured, actually sacrifices part of their basic salary to make it 'at risk' but with the potential of some upside. The complication here, if that has been done correctly and within the law, is that it previously was part of the basic remuneration and so is assumed in the employees' minds to be a 'given' or virtually 'guaranteed'. Naturally, in good times, there are few cases where that would not be true but in a downturn or recession, the employee may still expect the bonus and the company does not want to pay it.

Good Compensation Governance

It comes down to a process of good compensation governance. Very often, in administrative or back office functions, the targets can be less meaningful in terms of overall company performance although just as important - for instance, cash collection targets - and many managers simply use Management By Objective (MBOs) targets which are very subjective in most cases. So when the company performance goes down and the Board are looking for savings, too often the bonus bill remains static in general staff despite the under performance of the business as a whole. It easy to see how sales or even management might lose their bonuses as measures can be personal and direct but for others it may not be easily so.

In the banking crisis, much of the bonuses at lower levels were based around such woolly targets or MBOs and so became very difficult not to pay. As much as we all got exasperated, it wasn't always the big-earning executives who were getting the money. People manning the tills or answering the phones or passing payments were the people getting the money - and why should they sacrifice what they would normally just get even if the top earners were earning £millions or not? They still did their part, as asked - so why should they be penalised? And this is where bonus schemes can go awry

Good compensation governance is the art of crafting bonus packages and commissions for all staff, fairly and contractually so that there are no surprises - but far more importantly, so that the whole business is aligned.

Companies who ask employees to take sacrifices of basic and put some on risk, often by force rather than consensus, are risking their staff. The reality is that there is always another high-flier but the guy who knows the logistics back to front is worth a great deal should they become disgruntled enough and leave, as often they have many of the secrets that save money in terms of cost and accuracy.

Backroom and administrative staff get the grubby end of the stick on bonuses anyway and so hitting them when the downturn comes, is only going to cheese them off. And some represent the lifeblood and backbone of the organisation - losing them could cost you more then its worth by not paying them what they deserve.

Handling The Bonus Question

I don't have much sympathy for salespeople, managers and executives when it comes to bonus. Pretty much, we know the score - if the company does not perform than we are used to 'at risk' compensation. I was always very hard on the Reps who would come into my office and say that can't live on no or low commission as they have mortgages to pay - so the targets are too high or whatever their excuse was. I had a ruse of pointing outside the office and asking hypothetically, 'Point me out the person you would like me to sack in order to pay you what you don't deserve. And if you can do that, you can have the job of telling the person.'

Obviously, it's an illustrative thing and needs to be done in that spirit but salespeople and managers do not often understand the word 'accountability' and so believe they are owed their money no matter what. On their performance, others are at risk - sometimes they need to be reminded of that.

But not so backroom or administration or shop floor. These are the engine room of the organisation - while parts may be replaced, each part has a specific function and is trained to do it. Every time you have to replace a part there is incremental cost in acquiring talent, suffering while the part is not there, training time etc. These people are often easier to motivate via bonus but it needs to be incremental - merely putting part of their existing earnings at risk is pretty stupid in the long run.

Also, in my opinion, as costs are looked at line by line, make sure that these sorts of bonuses are the last to go. My advice always, when faced with such hard decisions which could affect goodwill and motivation profoundly, is to communicate the problems widely, allow consultation and allow staff to make suggestions on how to save equivalent amounts of money before just cutting a swathe through it. More importantly, I would be more inclined to ask permission to 'defer' bonuses and pay them later if there was a question over whether they were earned or not.

Legal Issues

There is a legal issue at the heart of all this. If bonuses are in contracts and are to be given against certain criteria and if the criteria is more subjective than objective, then you HAVE to seek agreement either directly or 'implied' in order to make a change - you cannot simply not pay it. The former is obvious but the latter is more risky as it is by 'stealth', i.e. you may rescind bonuses but no one says anything and so it is 'implied' that agreement was given. This can be argued in law and can easily become an issue in an unfair dismissal case.

Commissions are different as ofter they are paid at the discretion of the company and are subject to change as and when. It's the nature of the job.

Obviously, it pays to have good compensation governance and to have thought through the issues of a downturn beforehand and sought wide agreement from the workforce. However, it is a fair assumption that as firms are hit hard in this recession, managers just reach for any old cost line and assume they can slash it because the problems are obvious to them. Very often, because of the non-inclusive way in which companies are managed when it comes to overall performance and how each department and individual contributes beyond the 'elites' in the salesforce who are revered with their 'Chairman's Clubs' etc, staff not in sales can feel very much unconnected from overall performance and so have trouble seeing what they had to do with bad performance.

It would be easy to think, 'If the salespeople get all the credit, applause and big bucks for the upside and we get none of that, why is it that I have to pay on the downside?'

It's a good question.

Moral Questions

It can come down to a moral question. If you hit all staff at the same time after poor performance instead of the high-fliers first, then it is easy for the 'non-elite' to become disillusion and unmotivated.

My advice is, in the absence of good compensation governance and in a downturn, think long and hard about how you tackle the bonus issue in the same way as you should about redundancies. At the extreme end, you can land yourself in legal trouble with claims for 'unfair dismissals' while at the better end you still can achieve upsetting and demotivating your staff.

Good, open and honest communication as early as possible, joining people into the issues is the best way of tackling this thorny subject. Don't put the baby out with the bath water.

Motivating Workforces in Downturns

The 'B' word has very much been in the press lately and I have blogged about bank bonuses with some gusto. Let's get things into perspective, I am not talking about the multi-million bonanzas we see mediocre executives picking up, I am talking about the reality of performance-based pay incentives which are used up and down the land and all across most enterprises.

Many businesses have used the trick of putting a percentage of, often, their entire workforce's total compensation at risk. Over the years this may have been done with stealth by, say, award a minimal or no pay rise but offering a bonus incentive to earn it instead or some have just used a bludgeon and changed packages to make part of what staff previously earned as an at-risk element.

During good years, firms have generally got away with it. Performance has been good enough to pay the bonuses anyway and/or if staff leave there has been a plentiful supply of willing workers who accept the new performance related methodology.

I have seen it apply right down to administration and reception staff highly rigorously - makes you wonder if the receptionist is on an incentive to let more or less people into the building but let's not go there on the measurements.

Downturn Effects

The problem arrives when the business experiences a downturn or recession. Much of the staff would have been expecting the total compensation package. In many instances, because the performance related elements are really about doing their job, they actually easily score the required performance level, particularly for non-sales, marketing or finance related staff. So companies often use the caveat - that performance related pay is awarded at the discretion of the company and if they point to overall performance they can 'legitimately' say that there is not enough profit to pay bonuses.

At this time, many of the bonuses that banks are awarding are to the lower grade staff, the ones who were never involved in the fiscal mayhem that their senior executives and prima-donna investment staff participated in. They did their jobs according to the letter and they get vilified the same way as the top brass. That must gag in their throats to see senior executives still at the top, still earning enormous salaries and driving plush cars while they get the full face of the negative PR and people like me trying to deny them what really is a normal compensation package.

Often, in a downturn, it is far too convenient to forget the backbone of the company, the vast majority of staff who make sure the business survives in good times and bad.

Staff Motivation

The problem is that as money gets tight, senior executives start handing the controls to accountants and cost-cutting consultants who only have one thought in mind - numbers. The easy rule is that if you have 10,000 staff, then it would cost a damn sight less if there were only 9,000 and those 9,000 are paid less.

The mathematics is simple.

However, the reality is very different. Cost cutting and particularly lowering pay or refusing to pay bonuses is highly demotivating, particularly if staff have come to depend on them for basic living. In sales, it is always argued that you should live off your basic salary and earn the upside and I have had many terse conversations with salespeople over the years who claim that they should earn their commission just because they cannot live without it. It's different in sales - that argument does not wash.

But for administration staff it does hold water.

Think Creatively

As sure as a downturn is hard to survive, if you can batten down the hatches and ride the storm, then an upside will come and can be enjoyed.

The trick is to make sure you keep your staff motivated and ready to take advantage of the upturn when it comes. If staff are still haggling over pay and job cuts when the upturn comes, then they will be in no position to help you take advantage of it.

So before you hand over your controls to accountants make sure you set parameters. And here are some tips:

1. On bonuses, make sure senior executives surrender bonuses first as this will have the biggest effect. Make sure that bonuses are waived completely at this level and none are handed out 'just for turning up'.
2. If company cars are still used, make sure leases are extended and no new vehicles arrive during a downturn - nothing demotivates staff more than seeing a nice, new car on the parking lot and an executive climbing out proudly.
3. Even if targets have not been met generally, make some element of a bonus award to general staff and make it as 'gesture' for the hard work and performance they have put in. Possibly let them know you have had to hold some back to due the current climate but promise to give that back as and when the company returns to acceptable levels of profit.
4. Look at sales commission plans and adjust the plans - you should always have the caveat to change commission schemes so make sure you have. Try to stop paying out just for minimal performance and compensate by adding in accelerators for above target performance which are far more aggressive than normal. Tell the staff why they are having to do this. For those staff who are only hitting minimal performance levels, put in place Personal Performance Plans (PIPs) in conjunction with standard HR procedure and make sure you help them to try and increase performance. Use this as a tool with HR governance to weed out poor performers - hangers on are not a good idea in sales, particularly in downturns.
5. Communicate with staff - never underestimate the loyalty of staff if you communicate and let them know how tough the situation is. Ask them for creative ideas for cost cutting measures or on compensation so that they have a say - reward them for good ideas that can get implemented and measured.
6. Don't take away small, but symbolic perks. I fell into the trap of taking away monthly pizzas which were bought for the company and realised that I saved a few hundred pounds but lost the symbolic 'thank you' to staff for working hard. It was a stupid thing to do.
7. If you simply cannot afford to pay bonuses because you are so short of cash then tell everyone why that is the case. However, make sure that HR is on hand for any staff with a pressing problem such as a mortgage or car finance issue because of it. Listen and think on each case.
8. Keep investing in people - it is too easy to let all the simple things staff enjoy as part of working at your company go in the interest of saving money in the short term. Many such perks never return - I remember in my first job at HP when they withdrew free staff biscuits never to return. Still to this day it is an in joke of how the 'HP Way' was eroded at the first sign of trouble. Company culture and ethos is something money cannot buy but can be easily lost due to lack of money - remember that as it is often the little reasons why staff enjoy working for you and they have a habit of remembering that when the market upturns and jobs are easier to get.
9. Keep near your gems - if you have staff who are high quality and good performers, make sure you keep very close to them and take a special interest in their motivation. If you have to be selective about bonuses - albeit on a scale that is fairly based - make sure that these people have something and make sure any reward is sent directly to their home address with a personal letter explaining why they received the reward and how valued they are.

The Grading Trap

The last tip is very sensitive and should be played very carefully and within the rules of good HR governance - now is not the time to risk being brought to book for ill-advised staff issues that favour some over others for reasons solely based on personal subjectivity; it has to be for the right reasons within the bounds of running merit schemes.

There is an obvious trap. Grading can be your worst enemy in a downturn as very often companies look at grading and reviews in order to assess where to invest most money in staff. Often, investment money is polarised toward the 'high performers', those who score highest on the grading and review system. Conversely, the people who score lower get a lower investment. It makes sense in HR and management terms particularly in the good times.

Things start to fall apart when the downturn comes. Lower grade staff have been less invested in, probably are behind the earnings curve and are less likely to hit bonuses due to the way the system works. Often these people are trained less, given less skills, get less perks and are generally discriminated against when management sit down and consider staff matters in general, such as redundancies. Too often, such staff will be the victims of poor management, lack of training or mentoring, poor recruitment techniques, and can even be in the wrong job for their experience and skills sets.

So when the downturn comes they are right in the firing line.

The problem is that they are usually the staff who make up the back bone of the company, the dependables who turn up and get things done. They are just as likely to be as important in keeping the company going in a downturn as in an upturn. So having them demotivated by lack of investment as you go into the downturn is not a good idea and treating them differently to those you assess as better than them will further alienate them. When the upturn comes, they will likely be the ones who turn on you, slow you down and haggle about pay and conditions almost as a gun to your head just when you don't need it.

My advice is to watch grading systems carefully. If you live by them, make sure that you are implementing them rigorously and with care, that managers are not subjective in the process. Then, when the downturn comes, ease your policy - don't make staff decisions based around grading alone. You only have to have one situation where a person believes that management graded them subjectively to upset an entire apple cart and cause potential lawsuits and tribunals.

Tread very carefully and try to invest in staff as equally and as objectively as you can during a downturn. They are the key to your survival and future success.

Cold December - and I'm Not Talking About The Weather

I think it's fair to say that the British Chamber of Commerce's (BCC) report on December's trading was about as icy as the weather. Together with the British Retail Consortium's (BRC) view that retail sales dropped 3.3% on like for like sales and 1.4% in total it paints a picture of what has been described as the worst December in 14 years for retail sales.

Sales Galore

It wasn't for the lack of sales and promotions, that's for sure. Just about every major store, bizarrely including banks, offered some sort of seductive crash in prices and still we did not get out and buy in numbers. Even the lure of the weak pound, Gordon's VAT giveaway bonanza and big discounts did not lure enough foreign shoppers to British shops to give us their nice fat Euros. It was indeed a bleak Christmas.

The BRC survey of its 6,000 company members who employ around 680,000 people, has indicated that trading confidence rapidly declined at the end of the year. I get no satisfaction stating what I felt was the obvious but the BCC report basically says that the 'UK economy is facing a very deep recession and that the downturn is continuing at an alarming pace'.

Recession-Proof Businesses?

I come back to my point from previous articles - if you think you have a recession-proof business you are living in a dream world.

Even if you are set to benefit, it will affect your busienss and you need to plan for it accordingly. However, the vast majority of businesses will be adversely affected by this recession and if they haven't felt its full force yet, the next quarter may come as a severe shock.

What these reports say echoes my beliefs - the recession will hit hard and at alarming speed. One minute graphs and confidence will be up, sales going fine and the next the world turns upside down and you face a fight for survival.

The only areas in the BRC report to show growth was food in general with Sainsbury's, Greggs and Tesco fairing very well while on the hybrid side John Lewis showed excellent growth possibly at the expense of its rival M&S who have rather publicly been forced to shut several of their newer Simply Food outlets and lay off over 1,000 staff.

When Will It End?

It seems we get wave after wave of gloomy news and no real substantial comment from the fools that got us here as to when we might expect relief. It annoys me that Economists/Financial-types speak rather blandly about this being 'just another recession' as their industry has been shored up by vast bail outs which means executives will still get their bonuses while they shed thousands of staff. Further, a friend said to me recently that her Event, Conference and Corporate Jolly business has never been so good and that all new business is coming from - wait for it - the Finance Sector as they jet off to swish resorts and huddle together to discuss how they can make money in the future on expenses paid by the taxpayer bail outs.

I don't think we can trust Politicians - George Bush called this 'An Adjustment' while after 10 years of drivel that we have a stable economy, Gordon Brown, in King Canutesque lunacy, declared that Britain was better placed than any other country to weather a downturn as our Finances were so good.

The fact is we are going to have to batten down the hatches and weather this one out. While on business here in Italy, there is no local sympathy for the exchange rate getting bashed by the Euro or Britain getting into a mess - the feeling is that Britain and the US were perpetrators of this Economic False Boom of the last 10 years and while Italy has got sucked in, they can smile that despite their 'unstable economy' at least their currency has stood the test and there are signs of recovery.

As the US ebbs toward the Inauguration of its new President, all eyes will turn to Barack Obama. He arrived on a wave of disillusionment with the status quo but I don't think even he thought he would be clearing up this big a mess when he started out as a fresh-faced, hopeful Candidate. The world just hopes he can shoulder that burden of responsibility and expectation and really save us rather than Gordon Brown's version of 'saving'.

What Have I Been Trying To Tell You?

You write a blog, you have a website, you write articles and send them to nice Editors about how good talent is being overlooked and they ignore you. Then one of them goes on a course and suddenly they can't wait to say exactly what I have been trying to say.

Rant Over

I am exaggerating, as usual, but I picked up this month's Director Magazine from the IOD while waiting for someone to turn up on Friday and there was a good article by Jane Simms on page 27 entitled 'Leading Questions'. It appears Ms. Simms had an epiphany when she attended a training course for a profiling tool while doing some research for an article. She found the results to be startling and spent most of the two day course in 'denial' (yes I have a bit about that before) of the results.

As a self-employed journalist she believed her core attributes were innovating, promoting and producing. The test revealed she was a control freak, most interested in inspecting and auditing. She rightly points out she must have been hell to work with at her previous jobs as an editor manging people and I have to say I wouldn't have liked to have been on the receiving end of those 'attributes'.

But Jane Simms also points out that she was one of the many thousands of people 'who are thrust into management positions and expected to understand intuitively how to manage others'.

I couldn't agree more.

Personal Experience

My first 'big' management job I have written about before - due to resignations I had a 'dead man's shoes' role managing a £13m revenue business with some 56 reports. I was rightly chuffed but as the country lurched around recession and our main vendor did a volte-face on strategy we rapidly found that around 70% of our main vendor's business was at risk as we added little value. The business plummeted and staff got demoralised, some left, some I had to 'let go'. After a year of hell, we managed to shore up the business and survive. I was 27 at the time.

It had been a bad time to find out that I knew nothing about managing a business - but I did learn an incredible amount over the course of that year and I also learnt a lot about myself. One thing was sure, the cockiness of thinking I knew it all prior to taking the job had been rapidly beaten out of me and I had found myself vastly under prepared. In the end, I was certainly to blame for sticking my neck out to take on such a job but equally the senior executives were daft in putting an unprepared and untested person into such a big role at that time.

Lessons Learnt

During that year, I certainly did learn something of great importance. While Richard Branson is right that business should be fun, I rapidly found it it isn't always fun. Looking into the eyes of a grown man crying as I made him redundant with his boss pleading with me to not do it was a memory I have found hard to forget. I also learned that planning is the best way to avoid disaster. It's difficult to plan for all eventualities but you have to know what it is you are trying to achieve, work out what is required to achieve it and think about as many things that might get in the way as possible. And above all, think about what might happen in your market place that makes the plan most vulnerable - the golden assumption that becomes the Achilles Heel of any business.

And people. I had thought beforehand that I was nice enough chap, got on well with people, had some leadership skills and was ambitious enough to make things happen. How dumb I had been. Leadership skills are the crux of it all and this was the point of Jane Simms' article.

Leadership

I have turned off watching things like 'The Apprentice' mainly when Ruth Badger became a revered 'leader' for apparently just making scowls when other people are talking. I hate that - such disrespect no matter what tripe people are talking is just disgusting, and I am sure she would have hated it if she had received similar treatment. But that's the kind of leadership revered in such programs, perhaps as there seems to be a reverence toward the leadership styles of Alan Sugar, Philip Green and Donald Trump - I don't know. But there is this thinking of sling the person into a few situations under TV spotlight, get them to out-slag-off the others and you will know them. Leadership is about managing people to get the right results.

Apprentice-style management may work when business conditions are good, but when things go slightly awry, the core attributes of individuals bubble to the surface and they revert to type. I have blogged about this before. Why is it that when recession bites so many business leaders hand the company to accountants and external cost-cutting executives and let them cut the company to ribbons before handing it back in no condition to take advantage of any upturns? But they do. Fair weather managers, perhaps.

Many such leaders are strong personalities who lead by sheer dominance of character but many lack the planning and people management skills to work businesses when times are hard. Such people seem to be brilliant when sales are vibrant and leading bold acquisition plans or fabulous trading in banks, but when the downturns bite they retreat into a shell and mumble things about 'Global Market Conditions'.

Getting The Best Out Of People

I agree with Jane Simms - often forceful characters at the top of business are useless when downturns arrive. They are so used to managing things their own way that they have ignored the power of the people below. It was the big lesson I learnt about people when I was in that fateful first big role. People have much more to offer than you think and getting the best out of them is something that doesn't come natural to 'big personality leaders' as so much revolves about them.

I remember an older Product Manager who worked for me. I thought he was not performing well as he largely ignored what I told him and plodded along his own way. I felt he was a Luddite so we should get rid of him. But having attended a short course on Interviewing Techniques run by an Australian and thinking I knew it all beforehand, I realised you needed to know what made people tick to understand their real abilities. So I sat this PM down and we just talked about what he did in his spare time. To my amazement, every year he organised the second largest Regatta in the UK - from planning to budgeting to executing. It was a far bigger job than my day job and he did it in his spare time! From that day onwards our relationship changed and I valued his opinion and took time to understand how he was working. Sure we had our differences but I adjusted his responsibilities to get the best out of him and, for that matter, me.

When times are harder, you need to turn to your people as they have many of the ideas, innovations and skills to help you survive - owning those common goals is crucial to making the sacrifices and changes required to help a business manage a recession and take advantage of the upturns on offer at the end of it.

My Point

Similar to Jane Simms, I believe that innovation comes as much from within the heart of the organisation as from the leadership or outside and most managers have little clue how exploit the talents, skills and capabilities of their people as they have had little direction and help themselves. Ms. Simms also points out that many look to HR to get direction on this but frankly HR are probably the least equipped to do so.

The skill of any manager is to keep looking and understanding to find the inner qualities of their people and listening to their thoughts and ideas. Very often signals for opportunities or threats can come from people in the firing line but managers often will have just a few 'pet' workers they listen to. Grading staff rigorously doesn't help as most systems tell you there are elite and then also-rans by grade and only the elite are worth grooming and listening to. How foolish, when the downturn comes, it is the majority or also-rans of the workforce who will save you by their extra efforts but you have already alienated and trained them less by grading.

The mark of any manager in a downturn is not how fast they handover the keys to the shop to the accountants for cost cutting but how they planned in advance to avoid it.

We are seeing businesses going belly up within short trading cycles as they Hit The Wall and yet simple people like me highlight a little planning can a) help you survive a recession and b) help you thrive on the upturn and, heaven knows, may be even during it.

I have talked a lot about reviewing business pipelines, talking to customers, checking the Value Proposition, making tough decisions early, spending less etc but these are not the things that many leaders and managers like to do as a) it makes them look not too great and ego is important and b) they have no idea where to start.

Jane Simms highlights that line managers and leaders need the skills to get the best out of people particularly in a downturn. I have highlighted before, the biggest cost to any business is poor recruitment and the management of the process afterwards. How much money could be saved, profit earned and businesses have survived if only more managers were better skilled in managing people?