Армстронг

Contingent pay 723

4.Are there effective performance management processes that line managers believe in and carry out conscientiously?

5.Are line managers willing to assess performance or contribution and capable of doing so?

6.Are line managers capable of making and communicating contingent pay decisions?

7.Is the HR function capable of providing advice and guidance to line managers on managing contingent pay?

8.Can procedures be developed to ensure fairness and consistency in assessments and pay decisions?

9.Are employees and trade unions willing to accept the scheme?

10.Do employees trust management to deliver the deal?

724 Rewarding people

DEVELOPING AND IMPLEMENTING INDIVIDUAL

CONTINGENT PAY

The 10 steps required to develop and implement individual contingent pay are:

1.Analyse culture, strategy and existing processes, including the grade and pay structure, performance management and methods of progressing pay or awarding cash bonuses.

2.Decide which form of contingent pay is most appropriate.

3.Set out aims that demonstrate how contribution pay will help to achieve the organization’s strategic goals.

4.Communicate aims to line managers’ staff and involve them in the development of the scheme.

5.Determine how the scheme will operate.

6.Develop or improve performance management processes covering the selection of performance measures, decisions on competence requirements, methods of agreeing objectives and the procedure for conducting joint reviews.

7.Communicate intentions to line managers and staff.

8.Pilot test the scheme and amend as necessary.

9.Provide training to all concerned.

10.Launch the scheme and evaluate its effectiveness after the first review.

TEAM-BASED PAY

Team-based pay provides rewards to teams or groups of employees carrying out similar and related work that is linked to the performance of the team. Performance may be measured in terms of outputs and/or the achievement of service delivery standards. The quality of the output and the opinion of customers about service levels are also often taken into account.

As described by Armstrong and Ryden (1996), team pay is usually paid in the form of a bonus that is shared amongst team members in proportion to their base rate of pay (much less frequently, it is shared equally). Individual team members may be eligible for competence-related or skill-based pay but not for performance-related pay.

Advantages of team pay

Team pay can:

●encourage effective teamworking and co-operative behaviour;

Contingent pay 725

●clarify team goals and priorities;

●enhance flexible working within teams;

●encourage multiskilling;

●provide an incentive for the team collectively to improve performance;

●encourage less effective team members to improve to meet team standards.

Disadvantages of team pay

The disadvantages of team pay are that:

●it only works in cohesive and mature teams;

●individuals may resent the fact that their own efforts are not rewarded specifically;

●peer pressure, which compels individuals to conform to group norms, could be undesirable.

Conditions suitable for team pay

Team pay is more likely to be appropriate when:

●teams can be readily identified and defined;

●teams are well established;

●the work carried out by team members is interrelated – team performance depends on the collective efforts of team members;

●targets and standards of performance can be determined and agreed readily with team members;

●acceptable measurements of team performance compared with targets and standards are available;

●generally, the formula for team pay meets the criteria for performance pay.

ORGANIZATION-WIDE SCHEMES

Organization-wide bonus schemes pay sums of money to employees that are related to company or plant-wide performance. They are designed to share the company’s prosperity with its employees and thus to increase their commitment to its objectives and values. Because they do not relate reward directly to individual effort, they are not effective as direct motivators, although gain-sharing schemes can focus directly on what needs to be done to improve performance and so get employees involved in productivity improvement or cost-reduction plans. The two main types of schemes are gain sharing and profit sharing.

726 Rewarding people

Gain sharing

Gain sharing is a formula-based company or factory-wide bonus plan that provides for employees to share in the financial gains resulting from increases in added value or another measure of productivity. The link between their efforts and the payout can usefully be made explicit by involving them in analysing results and identifying areas for improvement.

Profit sharing

Profit sharing is the payment to eligible employees of sums in the form of cash or shares related to the profits of the business. The amount shared may be determined by a published or unpublished formula or entirely at the discretion of management. Profit sharing differs from gain sharing in that the former is based on more than improved productivity. A number of factors outside the individual employee’s control contribute to profit. Gain sharing aims to relate its payouts much more specifically to productivity and performance improvements within the control of employees. It is not possible to use profit-sharing schemes as direct incentives as for most employees the link between individual effort and the reward is so remote. But they can increase identification with the company and many managements operate profit-sharing schemes because they believe that they should share the company’s success with its employees.

Share ownership schemes

There are two main forms of share ownership plans: Share Incentive Plans (SIPS) and Save-As-You-Earn (SAYE) schemes. These can be Inland Revenue-approved and if so, produce tax advantages as well as linking financial rewards in the longer term to the prosperity of the company.

Share incentive plans

Share incentive plans must be Inland Revenue-approved. They provide employees with a tax-efficient way of purchasing shares in their organization to which the employer can add ‘free’, ‘partnership’ or ‘matching’ shares and which can also be issued as shares. There is a limit to the amount of free shares that can be provided to employees (£3,000 a year in 2004). Employees can use up to £1,500 a year (in 2004) out of pre-tax and pre-National Insurance Contributions pay to buy partnership shares, and employers can give matching shares at a ratio of up to two matching shares for each partnership share.

Contingent pay 727

Save-As-You-Earn schemes

SAYE schemes must be Inland Revenue-approved. They provide employees with the option to buy shares in the company in three, five or seven years’ time at today’s price, or a discount of up to 20 per cent of that price. Purchases are made from a savings account to which the employee pays an agreed sum each month. The monthly savings must be between £5 and £250. Income tax is not chargeable when the option is granted.

732 Rewarding people

outside the employer’s control. The trustees are responsible for the pension fund from which pension benefits are paid.

The pension fund is fed by contributions from employers and usually (but not always) employees. The size of the fund and its capacity to meet future commitments depend both on the size of contributions and on the income the trustees can generate. They do this by investing fund money with the help of advisers in stocks, shares and other securities, or through an insurance company. In the latter case, insurance companies offer either a managed fund – a pool of money managed by the insurance company for a number of clients – or a segregated fund which is managed for a single client.

Contributions

In a contributory scheme employees as well as employers make contributions to the pension fund. Pensionable earnings are total earnings from which may be excluded such payments as overtime or special bonuses. A sum equal to the State flat rate pension may also be excluded.

The level of contributions varies considerably, although in a typical contributory scheme, employees would be likely to contribute about 5 per cent of their earnings and employers would contribute approximately twice that amount.

Approved scheme

Members of an occupational scheme that has been approved by the Inland Revenue (an approved scheme) obtain full tax relief on their contributions. The company also recovers tax on its contributions and the income tax deductible from gains realized on UK investments. This makes a pension fund the most tax-efficient form of saving available in the UK.

Employers can establish unapproved pension schemes which provide benefits in excess of approved schemes but at the expense of the generous tax allowances for the latter type of scheme.

Retiring age and sex discrimination

Traditionally, the retiring age was 65 for men and 60 for women. However, under the Sex Discrimination Act (1986), it is unlawful for employers to require female employees to retire at an earlier age than male employees. In its judgement on the Barber v Guardian Royal Exchange case on 17 May 1990 the European Court ruled that pension was ‘pay’ under Article 119 of the Treaty of Rome (which provided for equal pay) and that it was unlawful to discriminate between men and women with regard

Employee benefits, pensions and allowances 733

to pension rights. It has since been agreed that pensions would not be considered as pay prior to 17 May 1990.

Benefits statements

Every member of an occupational scheme is entitled to an annual statement setting out his or her prospective benefits.

Types of occupational pension schemes

A defined benefit or final salary group pension scheme offers a guaranteed pension, part of which may be surrendered for a tax-free cash sum. In its final pay or salary form, the pension is a fraction of final pensionable earnings for each year of service (typically 1/60th). To achieve the maximum two-thirds pension in a 1/60th scheme would therefore take 40 years’ service. Defined benefit schemes provide employers with a predictable level of pension. But for employers, they can be costly and unpredictable because they have to contribute whatever is necessary to buy the promised benefits.

In a defined contribution or money purchase scheme employers fix the contributions they want to pay for employees by undertaking to pay a defined percentage of earnings irrespective of the benefits available on retirement. The retirement pension is therefore whatever annual payment can be purchased with the money accumulated in the fund for a member.

A defined contribution scheme offers the employee unpredictable benefits because these depend on the total value of the contributions invested, the investment returns achieved and the rate at which the accumulated fund can be converted into pension on retirement. For the employer, however, it offers certainty of costs.

Stakeholder pensions

All employers with five or more people on their payroll are obliged to provide access to a stakeholder pension for employees who have no access to a company pension. Stakeholder pensions will be money-purchase schemes and, initially, employers do not have to make a contribution and employees are not required to take them out (although these conditions may be changed). Employers can designate a stakeholder scheme from a provider but in choosing one are required to consult with the employees concerned.