A continuation of ‘The Impact of the Recession on Developing a Rewards Strategy – Part 1’, this article expands on the SAM principles that are effective in developing the underlying goals of a bonus scheme. SAM stands for;
- Successful execution of the commercial strategy.
- Attractive and competitive total reward package
- Management reward aligned with the interests of shareholders
Successful execution of the commercial strategy.
Business strategy often includes financial and non-financial goals. Bonus plan design can take this into account, for example, by using a balanced scorecard approach. Challenges over the last 12 months have likely been less about long-term strategy and more about short-term survival tactics, so strictly speaking, bonus levels should be on the downside.
The pressure on the payment of bonuses will be to recognize the achievement of short-term goals in the context of downward adjustments in corporate earnings goals. However, this can be a particularly difficult case to argue when bond payments require shareholder approval.
Attractive and competitive total reward package
The underlying focus is to provide a market-relevant reward. This approach traditionally relies on market benchmarking as one of the main decision-making tools. Bonus payouts may be determined more by what other companies pay than by actual business results achieved.
This approach has been attractive to scheme participants when overall bonus levels have been on the rise (as has been the case over the last decade). The implication is that if there is an overall reduction in bonus payouts, what constitutes “complete and attractive” should also be revised downwards. The challenge will be collecting enough quality market data to support this decision.
Management reward aligned with the interests of shareholders
There is a strong link between bonuses and financial performance. For shareholders, financial performance is primarily about share prices and dividend levels. While there is a strong market component to absolute share price, earnings are arguably the main driver of both relative share price and dividends.
With profits falling in 2009, bonus payouts are expected to decline as well. For top management, the reward focus may shift to long-term incentive plan design and rewards. The challenge will be to design these schemes so that they reward genuine achievement rather than recognizing windfall gains driven by changes in the business environment.
In conclusion
An interesting juxtaposition is emerging between the challenges executives and managers have faced in 2009. Namely, the progress made to ensure companies survive and how this translates into bonus payouts.
Depending on which of the SAM principles prevails in the design of the bonus plan, 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 the companies.
How will this trend affect 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 payouts and a more internal focus on actual achievement will become increasingly important.