Duncan Brown makes the case for redemption for the variable reward that everybody loves to hate
I had to laugh this week after reading Barclays’ announcement that their new chief executive would be ex JP Morgan US investment banker Jes Staley.
For me, his appointment revived memories of the banker and bonus-bashing period that followed the near-financial crash of 2008.
Of course Staley has promised to continue the customer and ethics-focused culture change that his predecessor Anthony Jenkins started.
In fact, all of the major banks have removed or reformed their sales bonuses as part of a wider change process set in motion by the Financial Conduct Authority, which set out new rules to protect customers from high-commission-driven selling.
Last week, Barclays chairman John McFarlane referred to the potential dangers of large bonuses for encouraging people to ‘cut corners’ in pursuing their financial targets.
And according to the new CIPD Profession for the Future report, 30 per cent of business leaders admit they would continue to reward high performers substantially regardless of the values they demonstrate.
But what about Staley’s own remuneration package? Why yes, it includes a potential £5 million worth of bonus payments, by my calculations.
Bonuses, or variable pay as the Americans like to call them, are very much back in favour at the moment, precisely because they are variable. In these cost-constrained times, chief executives and finance directors love the flexibility it gives to their paybill. Variable remuneration can go down as well as up in line with corporate performance.
The latest figures released by the Office of National Statistics show total bonus payments in the economy are back up at pre-2008 levels.
Finance sector workers received a combined £13.6 billion last year and IT workers £3.25 billion, which is 5 per cent up on the previous year and equivalent to £6,000 each, or 12 per cent of their average salary. And performance pay is now widely applied in the public and voluntary sectors too.
Fresh research suggests that bonuses might have benefits as well as risks, and not only in the profit-focused private sector, but they can also reinforce wider social and public service goals, if they are designed appropriately.
In an article for Sloan Management Review, professor Julian Birkinshaw and colleagues examined how high individual incentives can indeed conflict with social goals.
They found bonuses can block good intentions, ensuring they stay on the typical corporate values statement drawing-board rather than being realised.
However, the article also discusses companies such as Tata Group, John Lewis and Handelsbanken that successfully combine solid levels of profit with a higher and wider social purpose.
These organisations show how reward systems such as profit sharing and share ownership can provide vital support and ‘counterweights’ to ensure a genuine and sustained focus on social goals. Reviewing more than 50 studies on the operation of performance-related pay (PRP) and bonus plans in the public sector since 2007, Zofia Bajorek and Stephen Bevan come to similar conclusions.
In education they found evidence of PRP helping to improve student test scores; in health in a number of studies they were associated with declining mortality rates; and in the Civil Service, team bonus schemes were associated with higher group and individual performance. But they found many examples too of failure, leading the authors to conclude that their “effectiveness is dependent on scheme design and organisational context”.
HR functions in the current climate therefore have a great opportunity. They need to dig underneath the newspaper headlines of generically ‘bad’ bonuses and help their executive colleagues to assess whether and how bonuses can play a part in well-crafted reward strategies designed to deliver their organisations’ strategic goals, rather than as Birkinshaw describes, simply caving in to short-term financial pressures.