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The Daily Telegraph (London)

February 17, 2011, Thursday

Bonuses are crucial to performance; Restricting the incentive payout could undermine the UK's competitiveness

BYLINE: Louisa Peacock

BODY:
BUMPER bonuses revealed at Barclays this week show just how effective the payouts are to incentivise staff, leading employment experts say.

Within hours of Barclays announcing on Tuesday it had awarded £2.6bn in bonuses last year - amid full-year profits of £6.07bn - unions dismissed the payouts as "shameful". They claimed huge bonus pots undermined any claim by the Government that there was fair pay in banking.

But if the UK is to fully recover post-recession and remain a competitive place to do business, bonuses must remain a vital part of total remuneration, according to the finance specialists.

Kevin Abbott, a director at the Performance and Reward Centre (PARC), a membership body, said despite all the negativity, bonuses have a crucial role to play in rewarding the best performers.

He said: "Bonuses can undoubtedly encourage discretionary effort and improve performance. For others, the bonus targets serve to emphasise what is most important amongst multiple objectives as management is prepared to pay for it.

"Restricting bonuses would firstly, undermine UK competitiveness and secondly, undermine the role of company management and shareholders to determine how best to allocate resources."

Mr Abbott warned that while public anger was directed towards bankers' pay, top companies in any sector would feel increasing pressure to restrict bonuses to avoid the limelight.

Last week, almost half of Thomas Cook's shareholders rebuked the company over bonus awards by refusing to back the company's remuneration report at its annual meeting. But, Mr Abbott warned, cutting bonuses would make no real difference in the long run because "companies will likely feel that they have to pay the going rate to retain and motivate staff, and if not through bonuses, perhaps by other means".

At Barclays, salary costs increased 13pc to £8.8bn in 2010, despite overall performance payments falling 7pc to £3.4bn.

Kevin Hallock, a labour economics professor at Cornell University, said: "I don't think bashing bonuses is a good idea in general. Bonuses can be good for organizations and employees when used in the right way in the right situations. Taking bonuses away, without replacing them with some other type of compensation, could have unintended negative consequences."

The latest research by PARC reveals three-quarters of companies have changed their incentive plans over the past two years to make sure pay and perks stay relevant, achievable and fair in the current economic climate.

In many cases, additional nonprofits based targets have been introduced around customer service or safety, the analysis of 20 organisations showed. According to PricewaterhouseCoopers (PwC), a number of sectors have adjusted bonus payments in direct response to the recession. They include property, hospitality and leisure, which have had to balance falling profits with the requirement to motivate executives to manage through a difficult period.

Tom Gosling, a PwC partner, said: "It is difficult to see the bonus culture going heavily into reverse.

"In [all] sectors, bonuses will persist as an important way of aligning pay outcomes with performance and of main-taining international competitiveness for a mobile workforce."
Mr Abbott agreed. It was "hard to see reward packages getting smaller" in coming years, he said.

GRAPHIC: Barclays' bumper bonuses have renewed public anger on bankers' pay
AFP/GETTY IMAGES

LOAD-DATE: February 17, 2011