Albeit the maximum amount of the bonus might or might not be subject to a cap, it is
always better, as a general rule, to also set a maximum payable bonus from the outset.
At the end of each pre-set period, executive performance will be assessed and the bonus
payment made according to the outcome of the assessment procedure.
453
Executives and teams
Deferred bonuses
As a consequence of the international financial crisis burst in 2008, employers’ recourse
to bonus practices based on deferring part of the executive bonus payment has
remarkably increased. Albeit this practice was initially intended for the financial sector
industry, many employers of the private sector too are nowadays using this approach as
a matter of course.
The recourse to this type of approach is first and foremost intended to avert executives
resorting to risky initiatives in order to attain both organizational and their personal
objectives. The first recommendation provided by the Chartered Institute of Management
Accountant (CIMA) on executive pay in fact states that executive pay practices should
clearly be aligned with a sustainable business strategy and introduce bonus
arrangements commensurate and linked to executive performance and risk-taking
(Topazio et al, 2010).
The circumstance that part of the bonus will not be paid at the beginning of the following
year as usual is aimed at stressing the circumstance that the benefits of executive
actions have to be long-lasting as opposed to short-sighted.
In order to the intended aim being actually attained in practice, the identified component
of the total bonus has to be deferred for at least three years (Barty and Jones, 2012).
Indeed, deferring part of the bonus, usually in the measure of 50 per cent, may also
reveal to be a rather effective retention measure. This effect should, at least in theory,
be supported by the circumstance that being the deferred part of the bonus paid in
business shares, whether the activities performed by executives should reveal to
produce short-lived effects, the moment arrived the bonus amount will result lower than
that actually expected. Bonus pay practices based on this method should, hence,
contribute to the achievement of executives and shareholders interest alignment (Barty
and Jones, 2012).
Some firms have developed and introduced “matching” or “co-investment” deferral plans.
According to this plans executives who, usually voluntarily, invest the deferred portion of
the bonus in company shares receive at the end of the relevant period a, for instance,
“2:1 match.” This would practically entail that for each, for instance, 10,000 shares
deferred the executive will receive additional 20,000 company’s shares at the end of the
deferment period. According to the mechanism of these schemes, however, the
additional or matching shares will be granted to executives only and only if the business
performance has met the pre-defined requirements over the deferral period (Barty and
Jones, 2012).
Long-term incentive plans (LTIPs)
The portion of long-term incentive plans of executives’ total reward packages has
increasingly grown during the last years. Since according to these arrangements
executives receive part of their reward in the company shares or in cash only whether
the business performance has met predefined standards, these programmes are
considered somewhat of a good solution to surmount the principal-agent issue. On the
454
Executives and teams
other hand, however, these types of schemes clearly add complexity to executive reward
management. Identify clear and easy to understand objectives and performance
indicators over a relatively long period of time, usually three years, is actually the main
challenge remuneration committees and boards have to tackle. In a bid to design more
reliable and fair schemes, employers tend to have recourse to different types of metrics
which in the end, considering that these schemes are just part of the overall reward
package, lead to add complexity to complexity (BIS, 2012). The larger sums of money
usually associated with these plans, compared to annual bonus programmes, are
therefore justified by the more strict and stringent performance assessment criteria
(Independent Director, 2005).
More often than not, organizations pay these forms of incentives in company shares
rather than in cash. However, smaller business whose shares have no market as well as
the subsidiaries of public limited companies may find it most appropriate to offer
executives cash (Independent Director, 2005).
Share plans
Share options plans
Organizations can grant executives the right to buy, in a given period of time in the
future, a predetermined number of the company shares at the market price these have
at the moment in which the option is granted. These schemes usually appear attractive
to executives in that whether these should perform well, the business shares will gain
value over time enabling them in turn to benefit of the company shares increased worth.
As suggested by Armstrong (2010), the reasons for these schemes being considered
effective and appropriate for employers are mainly two: on the one hand these schemes
enable to establish a direct line of sight between organizational success and executive
earnings, based on the assumption that executives themselves have contributed to the
business success; on the other hand these plans enable employers to more effectively
pursue the alignment of the business interest with that of the executives and overcome
the principal-agent issue. Armstrong, however, considers this second aspect
questionable in that executives all too often sell the business shares immediately after
having exercised their right of option. Albeit the point raised by the Author is clearly
supportable, the circumstance executives sell their shares as soon as they can, could
have been considered as spoiling employers intended aim whether options would have
been mostly intended to create long-term loyalty, rather than enabling employers to set
the agency theory-related problem. What in actual fact employers desire to attain by
means of these schemes is “simply” ensuring that as long as executives have no title to
exercise their right, these will do their outmost to the benefit of the business. On the
other hand the criticism attracted by these schemes for the remarkable gains these allow
executives to make are much more justified, especially by reason of the fact that, in
most cases, the contribution of executives to the value attained by companies shares is
limited, if any.
In the UK the use of share options has also considerably declined during the last decade
by reason of the introduction of the International Financial Reporting Standard (IFRS)
455
Executives and teams
which, by changing the way share option grants have to be treated from the accounting
viewpoint, caused these to be more complex to be dealt with (Barty and Jones, 2012).
Performance share and restricted share plans
As suggested by the same name, these plans are based on the award of a given number
of shares to executives whose possession is conditional upon the company performance.
Executives will gain ownership of the shares provisionally granted to them at the
beginning of a given period only whether at the end of the agreed period, usually varying
from three to five years, these have met the required level of performance.
Executive performance metrics
It is unlikely that nowadays company shareholders would be willing to accept executive
incentives schemes whose number and values of the granted shares would not be based
on executive performance. Boards and remuneration committees, by extension, have
usually recourse to a combination of different metrics and measurements to assess
executive performance and contribution (Barty and Jones, 2012).
In general, employers utilize two main types of measures:
Market-related measures – concerned with the company share price fluctuation,
Non-market-related measures – usually based on accountancy indicators or in
some cases also on the volume of sales or on the net asset value growth.
Amongst the market-related measures the most widely used is the total shareholder
return (TSR). The mechanism of this indicator is based on comparing amongst a number
of businesses belonging to the same industry, “peer group”, the value of the company
shares over the relevant period of time and the gain or loss experienced by shareholders
during the same spell. The benchmark against other businesses of the same industry is
considered necessary, since taking into consideration the organization performance in
isolation would not be sufficient to provide correct indications about the executive
performance. The final organizational result might, for instance, result to be
disappointing, but could reveal to be much more appreciable than that attained by the
other businesses of the same or similar industry (Barty and Jones, 2012).
Amongst the non-market-related executive performance indicators, the return on equity
(ROE), earning per share (EPS) and return on capital employed (ROCE) are definitely the
most commonly used by employers.
Benefits
Employers usually offer to their executives, especially executive directors, a wide variety
of perquisites in kind which are habitually remarkably different, both in type and value,
from those usually received by the other employees and which in some cases can be
particularly attractive, as is the case of the personal use of corporate aircraft. However,
the benefits companies most frequently offer to executives are: company car, health
insurance and housing allowances.
456
Executives and teams
The values of the overall benefits package offered by organizations to executives usually
reach 20 per cent and over of their total reward package (Armstrong, 2010).
Pension scheme
Amongst the benefits executives receive from their employers, those related to pension
schemes are definitely the most important. Executive directors are typically offered
pension arrangements enabling them to reach the maximum level of contribution in half
the time usually required by a standard plan (Armstrong, 2010).
The majority of executives are likely to be still on a defined benefit pension plan where
pension income is calculated on the basis of the number of employment years and of the
pensionable earnings. Traditionally, employers have considered as pensionable earnings
the “final salary”, that is, the salary received by the executive when leaving the
organization. In order to avoid the high costs associated with this approach,
“pensionable earnings” has been more recently intended as “career average”, that is, the
average pay received by the executive throughout the employment relationship. This
approach has, for instance, been introduced at Tesco a few years ago. The final salary-
based pension scheme previously in place was hence closed to new entrants and
replaced with the career average-based scheme.
The typical alternative to this plan is represented by the defined contribution
programmes. These kinds of plans do not ensure executives an income at the time of
retirement, but provide them the option to buy an annuity with the funds they have
accumulated during the period of their participation to the scheme (Barty and Jones,
2012).
Rewarding teams
Introduction
The main reason why numerous employers have tried to develop and foster team
working practices over time is mainly associated with the idea that work carried out by
teams can enable businesses to achieve more satisfactory levels of performance. Putting
individuals in the position to potentially extend their knowledge and competencies,
teamwork is also supposed to provide individuals effective opportunities for growth.
As suggested by Buddy (2008), however, the concept of team is different from those of
crowd and group. A number of people put together by chance forms a crowd, a number
of individuals of the same organization working in different units, but sharing information
and work practices, can be considered a group, but only a relatively reduced number of
people with complementary knowledge and capabilities working and sharing
accountability for the attainment of a common objective can be actually considered a
working team (Katzenbach and Smith, 1993).
Organizations having opted for the introduction of teamwork have been virtually
immediately confronted with the reward management issue, that is, the identification of
the most suitable reward scheme and practices to develop and implement in order to
457
Executives and teams
sustain the performance of the members of the different teams. The introduction of a
specific reward programme can indeed help employers to underscore the importance
they associate with team working as well as provide evidence of the increased
expectations they have in terms of improved performance (Englander, 1993).
Identifying the most appropriate team-based reward programme
Designing a sound and effective team-based reward system definitely represents a
sorely difficult feat. Employer prime aim is clearly that to induce individuals to genuinely
collaborate and motivate them to do their utmost for the attainment of a common
objective. However, whether not properly and crafty devised, this type of reward
arrangements are likely to produce severe drawbacks in practice.
Employers can essentially opt for a system aiming at rewarding group performance,
individual performance or a combination of both. Distributing reward amongst team
members according to group performance essentially means operating the system on the
basis of the equality tenet. Equality implies that all of the individuals forming the team
will receive a reward of the same worth, irrespective of their individual contribution to
the final output produced by the team. Systems based on equity, by contrast, foster
individual contribution and reward teams’ members for the value of their input and
participation to the team. Individuals who have contributed the most will hence receive
an incentive of higher value vis-à-vis that received by the other components of the team
who have contributed less.
The introduction of both equality-based and equity-based approaches, however, can
potentially
produce
undesirable
consequences
and
impediments
during
the
implementation phase. To avoid falling into the pitfalls typically associated with the
introduction of team-based reward schemes, when designing and developing these types
of systems, a number of circumstances should be definitely taken into consideration by
employers from the outset. Many of these reward plans in fact have failed miserably just
by reason of employers having neglected some implications, typical of these schemes
introduction, revealing later impossible to readdress.
Group-performance-based schemes
A number of individuals sharing responsibility and equally accountable for the final
outcome produced by their work should in theory equally contribute and participate to
the team activities, albeit each one according to his/her field of expertise. In practice,
however, this is not invariably the case. Individuals who have devoted to the team a lot
of efforts will clearly express disappointment and resentment in the case these should
receive the same reward as that received by the other team members who have
contributed less. The wider the gap the higher the level of displease of best performers
who, as a consequence of this, will feel overly deterred to perform well and at their best
in the future.
Individual-performance-based schemes
The implementation of individual-based reward schemes within a team usually prompts
brilliant individuals to strive in order to attain outstanding results. The flip side produced
458
Executives and teams
by this approach is that employees tend in such circumstances to be very jealous of their
ideas and unveil these only in public events or in occasions where they can increase their
visibility in presence of their managers or company’s senior executives. This leads in turn
to the most negative occurrence which may affect teamwork, that is, the paralysis of the
information stream and circulation, which should indeed be at the basis of and
characterize, effective team working (Field, 2006).
Findings of an investigation carried out by the Center for Effective Organizations
revealed that the use of team-based incentives has increased, amongst Fortune 1000
companies, from 59 per cent in 1990 to a remarkable 85 per cent in 2005. The study
also showed that the introduction of team-based reward plans has revealed, in many
occasions, to be ineffective to practically encourage teamwork by reason of the pay
inequity perceptions it generates amongst employees (Merriman, 2009).
Hybrid system - Combination of individual and team performance reward
A car dealership in Silver Spring (US) used to reward its sales staff, composed by twenty
members, exclusively on the basis of individual sales assessment. This had triggered
over time somewhat of a war, more than a contest, amongst the salespeople who spent
much more time trying to damage other colleagues and steal each other customers,
rather than developing sound customer care strategies. What worse, this atmosphere
was also clearly perceived by the dealership clientele causing a negative impact on the
business overall volume of sales. Subsequently, the employer decided to change its
reward system and put in place a scheme rewarding salespeople both for individual and
team performance. This brought a profound change virtually immediately: employees
started collaborating, customer noticed this and turnover rate drastically dropped as a
consequence of the execution of this change (Ross, 2006).
According to Field (2006), therefore, the best way to reward team members is that to
recognize them both on the basis of individual and team performance. In order to this
“dual-focus incentive” scheme be successful, employers need to be clear from the outset
on the importance they associate with individual and team performance and in which
measure each of these components contributes to the calculation of the final incentive;
for instance, 30 per cent and 70 per cent or a different combination of percentages.
The hybrid approach can actually reveal to be most appropriate in many circumstances;
however, it is not completely immune from risks and potential downsides itself. These
schemes in fact, being more sophisticated and complex, certainly require much more
attention and care during the development and implementation phases.
Employers introducing such type of schemes, in order to properly and effectively assess
individual and team performance, should have recourse to the same indicators or to
similar and comparable measurements. Differently, after having identified clear
performance assessment metrics for individual and teams performance, these will need
to be aligned in order to render them comparable and useable in conjunction with each
other.
459
Executives and teams
Developing a team-based incentive scheme
Irrespective of the approach identified, there are a number of aspects and elements that
reward managers and professionals should invariably consider when designing and
developing these programmes.
The first of these aspects is once again associated with fairness. The reason why the
largest part of individuals prefers equity-based to equality-based approaches is in fact
sorely associated with the lack of trust on incentive fairness, or rather, in the other team
members. As often as not individuals are wary of the circumstance that all the team
members will practically contribute equally. The less an individual trust the other or part
of the others team members, the less this will be willing to accept an equality-based
incentive system. Basically, individuals express dissatisfaction with equality-based
reward systems by reason of their lack of trust in individual equal contribution.
Coherence on the way team members are rewarded is definitely paramount. Managers
assessing individual performance should be used to invariably apply the same judgment
method and reward individuals according to their real value and contribution. However,
when people working in a team come from different functions of the company and
rewards are decided internally within each function, some inconsistencies can actually
occur. Team contributors are likely, sooner or later, to become aware of the value of the
incentive received by the other teammates, and where unsustainable differences should
emerge these will be clearly perceived as unfair and unacceptable by the individuals
concerned and deter these to perform at their best in the future (Merriman, 2009). At
worst, the existence of such circumstances might also pose some serious risks and
threats to the employer in legal terms. Individuals in some cases might in fact feel
encouraged to lodge a claim for discrimination or equal pay legislation breach.
As maintained by Merriman (2009), inconsistency is important not only across a team,
but also over time. An employee who has in the past contributed to a team and received
an incentive for his/her contribution would be expected to receive a similar treatment
also in the future occasions. Whether this should not be the case, employers should
inform individuals from the outset in order to avoid later disappointment and preferably
also explain the reason for not being planned any incentive for the people participating in
the team in the present occasion.
When an