Blog: Don’t get sunk by a bonus blunder!

Shortly before Christmas the thorny issue of excessive bonuses once again hit the headlines, this time as the head of a large housebuilder quit after questions about the size of his £75m bonus.  Enough to pay cash for a super-yacht!  Under bonus arrangements that were undoubtedly agreed at Remuneration Committee level, he got what he was promised – and he’s now left his job, and the organisation are still trying to clean up a publicity nightmare.  They would, of course, have had a different nightmare to deal with if they had refused to pay his bonus and he’d sued them: they really didn’t have a leg to stand on.  You may be aware that the PR nightmare has now resurfaced after it emerged that his promise to use a considerable chunk of his bonus to set up a charitable foundation has not happened.

The technical side of me, says “Well, he earned it”.  I know that may feel hard to digest, given the size of the bonus, but the company put in place certain targets and made the promise of a certain reward if he achieved them.  These targets were achieved and so why shouldn’t he get the promised reward?  We are a hungry species that likes to earn good bonuses, and the company obviously tapped into that.  I suspect the real issue is rather the proportionality of it, which no-one expected.

Have the decision-makers learned nothing?  In general, we are also a principled species – we don’t like it when we perceive people are getting excessive reward for what they do.  When we hear about it, we make our feelings plain and in some cases vote with our feet.   There has been sufficient expression of discontent, ever since the “fat cat” issues with British Gas in the 1990’s, that companies really need to be acting more cautiously.

The argument that to remain competitive we have to pay high bonuses does not necessarily ring true.  It’s a question of balance, and psychological studies often don’t provide any evidence base for the view.  Remuneration Committees, Boards and key decision-makers should all be thinking carefully about the balance between rewards for executives and those for their other employees.  It is a shame that the FRC has had to issue guidance on this.  Published CEO pay ratios will also help companies identify what is relevant/appropriate for their sector.

I’m fortunate to spend quite a lot of time working with one particular sector where often executives will take their own pay out of the picture to ensure that pay goes to the people on the ground, although no-one’s perfect and companies still sometimes get it wrong.  The difference is that generally they make sure their salaries and bonuses are proportionate.   It’s inherent in an environment where they are continually under scrutiny by the sector media and other stakeholders.  So they send clear messages about what the remuneration of their executives is about.   Behind the scenes though, it’s really all about sourcing robust market data, understand market trends, identifying the pros and cons of your proposals and ensuring that you are considering the stakeholders.

If you’re concerned that you’re offering bonuses that would buy a super yacht in an environment that warrants a rowing boat (metaphorically or otherwise) and would appreciate further information on ensuring you strike the balance right, do please contact me.

Jane Baalam
Pay & Reward Specialist

Email Jane or call 0117 325 0526

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