In these lean times, it’s the fat cats we should be looking to for a few lessons in survival. For years Britain’s best-paid bosses have been vilified for not only awarding themselves with super-generous pay rises year-on-year, but for setting themselves up handsomely with future stock options, pensions and perks to boot.
It was during the dotcom bubble that small adventurous startups decided to get in on the action. Sure they were only ever chasing a ball of string. But suddenly smaller businesses too were offering their people a piece of the corporation they belonged to, as well as rewarding them with offers of more shares tomorrow at today’s price. The option, as these kind of little set pieces are called, became de rigeur. The digital media market was drowning in the things. These were the days remember when share prices only seemed to move in a skyward direction. Then the bubble burst. But attitudes to incentives had already changed for good.
Nowadays, there is a growing school of thought that believes the time is ripe for design consultancies to take advantage of incentives and bonus schemes, rather than adding to the monthly wage bill with salary rises. This is particularly valid in these tougher economic times.
The idea is that consultancies can slowly lower the part played by fixed costs by adopting a reward system increasingly based on performance-related pay. In other words, rather than offering generous pay rises at the end of the year, as much of the increase as possible should take the form of, say, a bonus for good results. The only problem is that staff obviously pay a price for such a tactic, with pay rises sometimes left to the whim of one person. This is fine unless your place of work bears any similarity to BBC2 comedy The Office.
Like it or not, this is already happening. ‘My experience is that many companies are turning to lower salary/higher bonus structures, which serve to keep fixed overhead low,’ says Jerry Hall, financial director of The Design Group in Sheffield. Hall underlines the fact that while these bonuses are sometimes calculated using complex profit formulae, at other times they come down simply to the boss’s decision.
Now is certainly the right time to be reducing the fixed salary base wherever possible, agrees Amanda Merron of accountant Willott Kingston Smith. ‘Many design consultancies cannot afford to give pay rises right now because business is so slow. So they are looking at other ways of doing it,’ she says.
Jim Surguy, managing director of Results Business Consulting, goes further: ‘There is currently tremendous salary pressure on consultancies. Not only are some unable to make the pay increases, but many have actually been forced to cut staff salaries to stay alive.’
According to Surguy, you stand a better chance of seeing a pay rise if you are not simply selling strategy, but have something physical to sell. ‘Many of the network-owned groups are having a torrid time at the moment, particularly the bigger strategic groups because there just isn’t the work in that area. Those having a better time of it right now are the privately owned studio-style groups,’ he says.
In testament to the shifting trend in remuneration, WPP Group chief executive Sir Martin Sorrell has publicly gone on record recently to commit to reductions in fixed remuneration in favour of flexible ones. These lower fixed costs have been received positively by the City since they will only improve the group’s bottom line.
‘Because the highest overhead of any group is the staff, which often accounts for 50 to 60 per cent, Sorrell has committed himself to an amount of flexible remuneration,’ Surguy says.
So for those who have not fully considered the alternatives to pay rises in these chillier times, what are the options?
‘Share Schemes are one way of rewarding people without having to spend cash,’ Merron explains.
The most common of these is the Employee Share Ownership Plan, which gives public and private companies a vehicle for opening up share schemes to everyone in the organisation. Basically the ESOP is set up as a trust, alongside the main company. It buys shares in your consultancy using company-guaranteed bank loans. These shares can then be sold to employees, usually after they have worked a year of service or more. Employees of listed groups can sell their shares on the stock market, while those in privately owned groups are given ‘put options’ to sell the shares back to the consultancy at specified times.
The purpose of widening share ownership should not be forgotten. Not only can these schemes be used to reward results in the workplace, but they can also build a long-term employee interest in the company concerned.
Despite this, there has been growing concern that British share schemes are all too frequently used to reward management, casting aspersions on the ‘all-employee’ tag frequently attached to them. In his book, How to Read the Financial Pages, Michael Brett wonders ‘why is it that the highest paid people in the company need extra payments to persuade them to give their best?’
Plenty of other incentive-style rewards exist other than shares though. The most obvious is probably cash. For a long time the cash bonus was the domain of a few privileged professions, primarily those relating to sales. The real ‘trick’ with bonuses, if that is the word, is in offsetting attractive financial targets with lower basic salaries. Such arrangements, while apparently popular in a sales environment, are often not appropriate to many positions in the creative sector. Carrots and sticks have certainly been known to cause offence.
Putting incentives into practice is often not as straightforward as it might at first seem. ‘The real problem is who do you give the incentive to?’ Surguy adds.
‘Do you just incentivise your new business people? If so, what about the people who aren’t in the front line? How will they react and what will they think? My advice in this situation is to look after your stars. It is the stars who hold it together after all. And it is usually quite obvious exactly who these people are, depending on the consultancy in question.’
But let us not forget the other side of the coin. As Brett points out, ‘Annual bonuses that focus on short-term performance may encourage short-term attitudes, and the basis on which they are granted may be far from clear’.
One of the fairest and most effective incentives is the profit-sharing scheme, where all employees can receive a decent cut of the e e rewards earned by the whole group. These schemes have the added safeguard that payouts are minimised should business (and profit) slow down. More and more consultancies have also begun to offer loyalty bonuses to individuals after a certain number of years work, not only as a reward for dedication, but in recognition that the business has saved on retraining costs as well.
Other fringe benefits such as pensions, medical insurance and income protection schemes can effectively add a good percentage on to a consultancy’s wage bill. Hall, whose consultancy includes a money purchase pension scheme, life assurance and long-term sickness cover for all salaried employees, estimates that these benefits account for 5 per cent of per head remuneration at The Design Group.
As Hall explains, ‘Pensions can offer an attractive form of remuneration in lieu of salary. They are paid to the pension scheme free of tax and without a charge to either employers’, or employees’ (where applicable) National Insurance.’
He adds that these NI contributions have now swollen to 11.8 per cent of salary and will reach 12.8 per cent next year.
Flexible working has become something of a buzz phrase in recent years, particularly in the creative services sector. Design consultancies with a more open approach to how their people fit work into their lives, rather than the other way around, clearly benefit from the ‘loyalty’ and ‘potential attraction’ cards.
Recognising that a nine-to-five style regime does not necessarily allow the people in your organisation to produce their best results is one thing. But putting it into practice is another. According to The Work Foundation (formerly the Industrial Society), a survey of over 500 HR professionals last year found that ‘while 91 per cent of organisations have flexible working practices of one form or another, only 35 per cent of organisations surveyed had flexible working policies’.
The distinction between practice and policy is quite acute it seems and is the cause, says The Work Foundation, for the incredibly inconsistent application of flexible working in this country. Our laid back and informal approach to ‘flexibility’ is just not good enough, says The Work Foundation, because so many people do not know exactly where they stand on the subject and therefore don’t consider it an option.
Of course, flexibility might also mean being prepared to offer staff fewer hours at work rather than a pay rise. A number of public sector companies, such as British Nuclear Fuels, for instance, were known to offer trade unions the choice of a pay increase or a shorter working week.
Quite how flexible you have to become in order to survive is another question and there is always the odd report of a design consultancy that has offered its staff unpaid year-long sabbaticals, when the new business pipeline empties, on condition that they can return to full-time employment later on.
Finally, softer options such as gym membership and interest-free season tickets for commuters become popular in the high season, when attracting and keeping the best talent is more of an issue than being able to find the cash to pay the wages.
And why stop there? Some of our recruitment agencies came up with some even more imaginative suggestions for incentivising the workforce. Company cars or company mobile phones might be expensive, but what about offering courses in mind-expanding subjects not related to design, or duvet days for that lie-in we all need once in a while? What about a therapeutic massage to rest aching shoulders? And if you can’t afford any of that, try just saying ‘thank you’ from time to time.
Government tax breaks
The small print around company and personal taxation tends to change annually, when the Chancellor of the Exchequer unveils his budget for the year ahead. But certainly not everyone takes full advantage of their entitlements. Over recent years, budgets have generated a whole host of tax exemptions and perks, particularly for small and medium-sized businesses, which go unclaimed. A survey earlier this year by the financial adviser group IFA Promotion estimates the total amount of available and unclaimed tax exemptions in Britain at £4bn.
Useful sources of information
The Work Foundation: www.theworkfoundation.com and www.indsoc.co.uk
• Share schemes
• Cash bonuses
• Loyalty bonusesIndirect benefits
• Medical insurance
• Income protection
• Gym membership
• Interest-free season tickets
• Other subsidised travelTime in lieu of salary
• Free time