Rewards for fairness: how much bonus is enough?

Market-driven and performance-related pay have dominated the reward agenda for the past 30 years. But in tough times, demands for fairness come to the fore – just ask Louis XVI.

Labour MP George Mudie wondered at the Treasury select committee inquiry into the banking crisis last month, “for all that we need incentives, why does a cleaner get 9% and the chief executive 150%? If there were some morality in it, we would not operate in this way”.

Minding the gap

While some see the current reaction against high pay as simple jealousy or a cyclical blip, HR functions need to be cognisant of this wider change in sentiment. “The public mood is shifting, the gap between rich and poor is too wide,” observes Guardian columnist Polly Toynbee in her new book Unjust Rewards. This fairness agenda has a number of dimensions.

First, there is the financial crisis and the role of banking incentives. Gordon Brown spoke of the need “to bring an end to rewards for failure”, French economy minister Christine Lagarde attacked “perverse pay structures (encouraging) greedy and blind behaviour”, and Luxembourg’s Jean Claude Junker blasted “the social scourge of excessive pay”.

Second, is this wider sense that executive pay remains out of control. Boardroom pay increases in 2008 fell back to under 6%, but this is still well ahead of average earnings. Since 1990, FTSE 100 chief executives’ pay has increased from 17 to 75 times that of the average employee.

In the US, Barack Obama is supporting legislation to give investors a so-called ‘say on pay’. The last Democratic party administration introduced a $1m cap on executive earnings.

Third, there is equal, or rather unequal, pay. The female-to-male earnings gap has more than halved since the Equal Pay Act in 1975 to 17%. Yet it remains at more than 40% for part-time workers and in sectors such as financial services. Recent Equality and Human Rights Commission (EHRC) research found women at senior levels had lost ground over the prior year in half the occupations studied. The forthcoming Equalities Bill will increase the pressures on recalcitrant employers, with measures to improve pay transparency, and give wider powers to tribunals.

Finally, there is the growing body of evidence from researchers that UK employees display low levels of engagement by international standards. Dissatisfaction with pay and fair treatment is a key contributor to this.

Fair-pay strategy

So how can we achieve fairer pay in the UK?

The first step should be to develop a written reward strategy that asserts the importance of fair, non-discriminatory pay in your organisation. Of course, you need to reflect the external market and performance in pay, but fairness is just as important in engaging employees.

Follow this up by conducting an equal pay review. Start simple, by looking at gender pay gaps at different levels in your organisation, and then extend your investigation. A financial services company found female pay shortfalls originating in recruitment salaries and performance pay awards. They addressed this through training and introducing central monitoring of local rates.

Then train managers in fair treatment and reward, and be as open and honest as possible in your rewards communications.

Finally, nobody is saying that you should pay your chief executive the same as your cleaner. The Financial Services Authority (FSA) inquiry into City pay is directed at the rewards of traders and investment bankers, rather than executives. Pay scheme governance undoubtedly needs to be improved, and HR departments need to be suitably resourced to develop and control incentive arrangements.

Equal incentives

More generally, executive pay must be set in the context of the rest of the organisation, as well as the market. Investors are now much sharper in opposing pay ratcheting, which has seen the average FTSE board annual bonus opportunity triple to 150% of pay since 2002.

But companies should also be applying their internal job evaluation systems to executives. And while bonus opportunities may differ, they might copy the example of one transport company, where if the general staff bonus plan doesn’t pay out, then executive incentives are cancelled.

As well as the FSA’s review criteria, remuneration committees might also address two further questions . First, do our executive arrangements need to be quite so complex and opaque? And, as we see employees in companies such as JCB accepting pay cuts to preserve the jobs of colleagues, they might also want to ask themselves, just how much is enough?

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