December 3, 2023

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Business Life

The Impact of the Recession on Developing a Reward Strategy – Part 2

Continued from ‘The Impact of the Recession on Developing a Reward Strategy – Part 1’ this article expands upon the SAM principles which are effective in developing the underlying objectives for a bonus scheme. SAM stands for;

  • Successful execution of business strategy
  • Attractive and competitive total reward package
  • Management reward aligned to shareholder interests

Successful execution of business strategy

Business strategy often comprises financial and non-financial goals. Bonus scheme design may take this into account, for example by using a balanced score card approach. The challenges of the last 12 months are likely to have seen less focus on the long-term strategy and more focus on short-term survival tactics so strictly speaking bonus levels should be on the downside.

The pressure on bonus payments will be to recognise the achievement of short-term goals in the context of the downwards adjustments to business earnings targets. However, this may be a particularly hard case to argue where bonus payments require shareholder approval.

Attractive and competitive total reward package

The underlying focus is on providing market-relevant reward. This approach traditionally relies on market benchmarking as one of the main tools for decision making. Bonus payments may be determined based more on what other companies are paying as opposed to the business results actually achieved.

This approach has been attractive for scheme participants when general bonus levels have been increasing (as has been the case for the past decade). The implication is that if there is a general reduction in bonus payments then what constitutes “attractive and completive” should also be revised downwards. The challenge will be to collect sufficient quality market data to support this decision.

Management reward aligned to shareholder interests

There is a strong link between bonus and financial performance. For shareholders, financial performance is primarily about share prices and dividend levels. While there is a strong market component in the absolute share price, earnings is arguably the primary driver of both the relative share price and dividends.

With earnings down in 2009 the expectation is that bonus payments will also be down. For top management the reward focus may shift to long-term incentive plan design and awards. The challenge will be to design these schemes so that they reward genuine achievements as opposed to recognising windfall gains driven by changes in the business environment.

In conclusion

There is an interesting juxtaposition emerging between the challenges Executives and Managers have faced in 2009. Namely, the progress made to ensure that businesses survive, and how this translates into bonus payments.

Depending on which of the SAM principles is dominant in bonus scheme design the decision making process will differ but the result should be similar – there will be a downward trend in the level of bonus payments actually made in most businesses.

How this trend will affect the employee reward strategy in a given company will depend on the individual circumstances of the business and the key focus of the bonus approach adopted. Market data will become a less reliable indicator of the appropriate level of bonus payments and more internal focus on actual achievement will become increasingly important.