Reward: the full story
There’s more to reward than headline-grabbing stories about City bonuses – this year public-sector pay should steal the front pages as the government starts to tackle its deficit. Hashi Syedain gives an overview of the market
Date:
25 February 2010
Source:
Guide to reward
Page:
5
The past year has been a tale of two sectors for reward. While most private-sector organisations froze pay in 2009 to keep down costs, much of the public sector continued to award pay rises, typically of 2 to 4 per cent, often dictated by long-term pay deals.
This year, with the economy poised on the brink of an upturn but faced with huge constraints on public spending, the situation is heading for a reversal. The CIPD’s 2009 Reward Management survey report shows that the private sector’s priority this year will shift from cost cutting to ensuring competitiveness with market rates, while the public sector has been put on notice by ministers to expect only minimal pay increases for the foreseeable future.
The existence of national long-term pay deals covering many areas has enabled public-sector employees to enjoy pay rises. But, while public-sector recruiters confirm that pay rates for new permanent roles have held up, interim rates have slipped significantly.
“There have been fewer assignments and more candidates,” reports Rebecca Beardwell, a director at recruitment company Morgan Law, which specialises in public-sector roles. “I recruited for a senior business partner in a local authority 12 months ago at £450 to £500 a day, but now I’m recruiting for a very similar role at £350 to £400,” she says.
But the situation is about to get much tighter for permanent staff, with both Labour and the Tories having declared limits on public-sector pay as a way to cut the budget deficit. In December last year the chancellor, Alistair Darling, declared his intention to cap public-sector pay rises at 1 per cent in 2011-13. Contributions to public-sector pensions will also be capped in 2012, saving £1 billion a year.
Public servants on higher salaries will fare even worse – and many are already feeling the pinch. Local authorities and non-departmental bodies have been among the first to announce pay cuts for their top brass. Kent County Council, for instance, is recruiting a managing director at £195,000, compared with £207,000 for the present incumbent. The Audit Commission, meanwhile, hopes to hire its new chief executive for substantially less than the £231,000 salary it paid to Steve Bundred, who steps down later this year.
Ministers say that pay for those earning more than £40,000 will be frozen in 2010‑11 and Treasury approval is now needed for any new appointments to jobs commanding salaries of over £150,000, and for bonuses exceeding £50,000. The public-sector administration select committee has called for a “top pay commission” to set principles and produce benchmarks for senior pay and to name and shame employers that overpay.
Meanwhile, the opposition leader, David Cameron, has pledged to freeze pay for a year from 2011 for any public servant earning more than £18,000, except those in the armed forces.
Then there’s the whole vexed issue of executive pay and City bonuses. With the bonus season in full swing, banks are taking a wide range of approaches to the new regulatory and tax regime. Some have chosen to absorb the chancellor’s one-off 50 per cent tax on bonuses of over £25,000; others are passing it on to London-based staff or spreading it out among employees worldwide. Many have announced reductions in the bonuses they will pay this year, despite bumper profits, while others have raised base salaries.
“There is more variety in compensation structures than has traditionally been the case and it will take a couple of years for new norms to be established,” says John Benson, chief executive of jobs website eFinancialCareers.com. “The principle of performance-related pay will remain, but rewards such as mixtures of cash, stock, bonus claw-backs and longer-term incentives will stay. Banks see that paying cash only was a short-sighted way of doing things.”
Outside the Square Mile, other high earners have also seen a blip in the relentless rise of their compensation. “Executive pay has increased less than other pay for the first time in my career,” reports Duncan Brown, director of reward services at the Institute for Employment Studies. But, adds Mark Childs, director at Total Reward Solutions: “It’s a temporary situation, particularly for executives who have been granted share‑based rewards. Although some organisations have become irrationally disillusioned with share-based compensation over the past 18 months, we might look back over the past year and say this was the best time to have been granted share options.”
Meanwhile, Childs says, privately held companies, particularly in financial services, have been setting up shared equity plans that allow executives to be compensated in a format that attracts capital gains tax at 18 per cent, rather than income tax at 50 per cent for the highest earners. “This is opening a gap between the big listed banks, which are subject to much greater regulation and scrutiny, and the small boutiques.”
The other trend that has marked this recession, Childs says, is the huge variation in pay deals even within sectors. “There’s been a wider dispersal of practice than I’ve ever known,” he says.
Whereas you’d normally find that 80 per cent of pay awards were clustered around one standard deviation from the median, things happened so fast with the credit crunch that HR directors didn’t have time to gather information about market norms before the crisis was upon them. Childs conducted his own mini-survey among insurance companies last year and found, for example, that some froze pay while others awarded increases of up to 5 per cent.
On the benefits side, meanwhile, the recent trend towards total reward and flexible and voluntary benefits has continued unabated, bolstered by organisations’ desire to offer more for little or no extra outlay, and to remind employees about the full value of what they are getting in lieu of a pay rise.
“There has been a huge emphasis on reducing wastage and ensuring value that is fundamentally different from three years ago,” reports Kevin Harrington, director of Sodexo Motivation Solutions, who argues that reward packages which motivate all sections of a workforce will become even more important as the economy picks up.
“Some businesses took the [short-sighted] view in the recession that there was no need to focus on talent management because people were not going anywhere,” Harrington says. “But a Marketing Week survey recently showed that 40 per cent of marketers expect to leave their current job in 2010. Our estimate is that recruitment costs are about £20,000 per head, taking account of agency fees, management time and loss of productivity during the notice period and induction.”
Pay and benefits should play their part in supporting an organisation’s talent management efforts, helping it to attract and retain the right people. Matt Waller, chief executive of flexible benefits company Benefex, says his company recently helped a large fashion retailer to reposition its benefits to appeal to an older demographic. The client had traditionally recruited among 16- to 25-year-olds, but found that employees in the 48-to-75 age bracket performed better and had lower absence rates.
After conducting an employee survey and a series of focus groups, Benefex moved the retailer’s voluntary benefits away from the mobile phone and iTunes discounts, which were aimed at younger employees, and towards savings on travel and everyday spending. The retailer also introduced more flexible working practices, allowing duvet days and longer holidays, which appealed to all age groups.
Harrington believes that “time benefits”, such as more flexible working options and buying and selling holidays, will become increasingly important. “Historically, benefits have been about services or discounts, but time benefits will be the big issue for employers in future,” he predicts.
As the range of benefits on offer expands, good communications will also remain vital. George Farrow, client services director at voluntary benefits company Asperity, which offers discounts and savings on about 1,800 purchases, says communications can span anything from a poster in the staff room to a Twitter feed about new discounts.
“When I started in this business in 2002 employers didn’t really understand this market and saw it as a fluffy distraction,” Farrow says. “Now they see it as a way of getting employees to engage.”
The international view on flexible benefits
The huge growth in flexible and voluntary benefits witnessed in the UK in recent years is largely a phenomenon of Anglo-Saxon markets. The structure of reward packages is strongly influenced by economic and social models, according to Mark Childs, director at Total Reward Solutions.
In European countries with strong social services and state pension provisions there is little reason for employers to offer flexible benefits and also no tax incentive to do so. Across Asia, meanwhile, the role of the family is still much more important in social provision.
Only where social provision is poor can flexible benefits gain traction. In Russia, Childs observes, where life expectancy is low and health provision is limited, people are focused on medical plans, but not on retirement saving.
As for voluntary benefits – characterised by discounts on purchases – Childs reckons we love them in the UK because we have a “Green Shield stamp mentality”.
Whatever the reward regime in a particular country, he says, there is a move towards simplifying pay, with countries that offer lots of allowances subsuming them into basic pay.
Progressive reward at Kent County Council
Kent County Council is about to become one of the first local authorities to do away with pay increments and tie rises more closely to performance. The council has been outside national pay negotiations since 2004, when it introduced the first phase of performance-related pay, by awarding incremental pay rises according to employees’ annual appraisal ratings.
People at the top of their pay scale could still get the equivalent of the incremental rise for the rating they achieved as a one-off payment that was not consolidated into base pay. But from April the intention is to abolish fixed increments and award a percentage increase to each appraisal rating, says the local authority’s reward manager, Colin Miller. This should allow greater flexibility and offer opportunities to distribute more of the pay-rise pot to the best performers.
The new system will go hand in hand with a revamped appraisal system that takes into account four factors, including “wider job contribution” – ie, performing tasks that aren’t in your job description.
Miller, who is also chair-elect of the CIPD’s Reward Forum, hopes that the new system will encourage greater differentiation. (Currently about 90 per cent of employees get the same “good” rating, which attracts one increment.) “We see this as pretty radical in local government circles,” he says. “We’re not aware of anyone else doing this top to bottom across a council.”
Indeed, Kent sees itself as having a progressive approach to reward in general. It has a single-status structure for all employees, equal pay measures, extensive flexible and voluntary benefits packages – and a total reward approach to trumpet the benefits to staff.
A public-sector reward manager’s view
James Bright (not his real name) is an interim manager who is currently on assignment as head of reward in a high-profile public-sector body. He says there are three big issues he continues to face in such roles.
The first is the complexity in reward that is often left behind when a government department restructures itself or merges with another one. Whereas harmonising compensation would be part of the restructuring process in the private sector, in the public sector it tends not to be dealt with until after people have moved into their new roles, he says. Then, under pressure from the trade unions, the “best of” rule applies, leading to an inflationary effect.
“The emphasis needs to shift so that more attention is paid to this problem at the point of change and robust conversations are initiated,” Bright says.
The second issue is that the public sector should devote more attention to total reward because, although base pay is lower than in the private sector, benefits such as pensions, holidays and flexible working opportunities are typically better.
Third, Bright believes there is more appetite for performance-related pay in the public sector than what the unions might have you believe. “More needs to be done to tie in individual and organisational performance to reward. There’s still very much a trend for pay increments within scales that might be related to performance, but with less differentiation than in the private sector,” he says.