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Alternative approaches to bonuses

by Ann-Maree Chadwick

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We are living through an unprecedented world event which has particularly impacted retail organisations all over the world. Given the magnitude of the financial downturn as a result of the lockdown due to the COVID-19 pandemic, businesses and organisations have responded in many different ways as they attempt to navigate through this crisis.

A positive company culture has consistently been shown to motivate employees to perform better but sustaining this positivity is not always easy, especially during this time of Coronavirus. Organisational responses to the current, uniquely challenging crisis have been many and varied. A lack of information and the lack of precedence from which to draw experience and ideas means there are many unanswered questions at the moment. There is no handbook on how to manage the situation and no one has dealt with a crisis on this scale before. However, the way an organisation adjusts in uncertain times to ensure new ways of working and support for its employees is crucial (ELMO Cloud HR & Payroll 2020).

At present there appears to be 2 schools of thought to employee bonuses for FY 2020. One is that this is an unprecedented world event and with the downturn in business, no bonuses are being paid at this time. Comparatively, other businesses recognise that the current situation is not the employees’ fault and they deserve recognition for dedication throughout a stressful period and so bonuses should be paid, despite revenue targets not being met.

Boston Consulting Group report that many organisations pay out bonuses to further incentivise high performance and tie them to individual and/or company performance and during these times of a pandemic, bonuses can be a lever to pull, either to support your employees by giving everyone a bonus, or to save money and get through tough times by cancelling bonuses.  

Research conducted by the Boston Consulting Group in 2009 on organisations that previously had to respond to a crisis, specifically, the 2008 recession, found that cutting back on bonuses tied to both company and individual employee performance had negative effects on both effectiveness and employee commitment during the crisis. They concluded that in order to maintain employee effectiveness, it is critical to honour a commitment to bonuses if they are a normal and expected part of an employees’ compensation. 

However, during a pandemic, some organisations might simply not have the option of paying bonuses as it might threaten their ability to remain in business. If this is the case, Management must be transparent in communicating why that decision was made and what employees can expect in the future.

A current positive example of an Annual Bonus Perspective recently reported by Forbes was by The Connor Group a real estate investment firm in the US who did not stand down or terminate employees at this time, but rather gave out bonus checks that were greater than any government support, to ensure funds got directly into the hands of workers. They gave out bonus checks ranging from $2,000 up to $9,000 per eligible employee for the majority of its 400 employees. In addition to this, the company’s CEO Larry Connor gave away all of his stock earnings (believed to be over $1.6 mill after taxes over a 2-week period) to his employees in the form of bonus payments. Connor was reported as saying that he didn’t consider the bonus payments to be gifts. His perspective was that the employees earned them by their dedication despite the instability and risks brought on by the coronavirus.

In stark contrast, Forbes also recently reported on JC Penney who, due to an unsustainable debt load compounded by COVID-19, was pushed over the edge and filed for bankruptcy on May 15. This followed a report that the company had an accumulated $3.7 debt load on February 1 and officially closed all stores on April 1, standing down more than 80,000 of its employees and missing payments on two debt payment deadlines.

However, despite having little money left, it awarded bonuses totalling nearly $10 million to a group of senior managers, including $4.5 million to CEO Jill Soltau. The awards, originally scheduled to be paid at the end of the 2021 fiscal year, were approved by its board to be paid earlier to “enable the company to retain and continue to motivate” its executives, including the CFO, Chief Merchant and CHRO, each of whom will get $1 million.

Clara Ferreira Marques recently argued in The Sydney Morning Herald (May 12, 2020) that despite scandals and crises such as with JC Penney, executive compensation has remained too generous, too opaque and too loosely linked to long-term goals. However, the current upheaval brought on by the COVID-19 pandemic has provided the opportunity for a remake where simpler, smaller packages with a more significant non-financial component would be welcome. Positively, the current environment has prompted some better behaviour than we saw during the 2008 financial crisis, with at least some leaders moving swiftly to share the pain of employees.

For example, Qantas CEO Alan Joyce announced that he will take no salary for six months, Annual Management Bonuses are set to zero for this financial year, Qantas Chairman will take no fees, the Qantas Board will take a 30 per cent reduction in fees and the Group Executive Management will take a 30 per cent pay cut. Ryanair CEO Michael O'Leary has also taken a steep pay cut, along with staff, Air New Zealand boss Greg Foran has cut his $1.65m salary by 15 per cent  and General Electric's Larry Culp will forgo his full wage for the rest of 2020.

Whilst it’s understood that most often these executives can often afford a reduction in remuneration more than most employees and there is self-interest here to protect their corporate reputation, these gestures are widely welcomed.  In order to review what changes organisations should aim for in the future, it is important to recognise that pay is inherently complex and investors can make many and often competing demands of a board. Despite a large amount of research demonstrating that pay is not a significant motivating factor for Chief Executives, the current status quo may be difficult to change, but there is plenty of scope to consider improvement.

If you would like advice or any assistance with a safe Return To Work plan, please contact either of our Trak HR Consulting Directors – Belinda McPhee  0417 239 458 or Garry Connell 0409 590 996.