With the debate over bankers’ bonuses continuing to rage, Kevin Abbott, a Director at the Performance and Reward Centre (PARC), talks to The Gateway about the evolution of corporate reward. 

Just 30 years ago – within a working lifetime – bonuses were very rare in the UK.  Less than 10% of companies used them on a routine basis.  Long-term incentives such as performance share plans and options had yet to make their appearance.  The main element of reward was salary.  And if you did a good job, there might be a pat on the back but there was no bonus…. though there was likely to be an improved chance of promotion which even today still seems the best form of recognition and reward.  There was hardly any talk about the scale of executive reward and the differential versus an average employee.  

As we moved into the 1990s, just ten years later, annual bonus plans were in place at virtually all listed and private companies - not just for the executives but also at most operating levels.  Executive options and employee share plans started making their mark through that same decade with, again, most companies having adopted them by the start of the nineties.  In the following ten years, new types of long-term plans were introduced; often called LTIPs or performance share plans.  Like bonuses and options they were typically added to the existing package.  Significantly, there was much more public awareness of the scale of reward for the most senior executives.  The public pay debate started to take-off during this time.

Into the 2000s, the packages continued to rise well above inflation as did the size of the difference between executives and other employees. A degree of constraint has been evident in the last 5 years with the recession of the last 18 months even occasioning some pay freezes or even reductions.  And it has only been over the last decade that the closure of final salary pensions has happened, to be replaced by much less valuable and much riskier money purchase or defined contribution arrangements.

So what were some of the causes of change over this period?

Government and Regulatory action

Interestingly, it was the Labour government of the late 1970s that first introduced approved profit sharing scheme legislation for UK companies.  There was a chance to escape income tax at a time when tax was high and there was general income restraint in place.  Employers were almost obliged to put a plan in place.   The incoming Conservatives of 1979, not to be outdone, then provided tax breaks for all employee share and option plans which it was difficult for companies not to adopt because of their tax efficiency.  

Investor demands

The booming years of the eighties saw equity markets soaring and investment management attained a much higher profile.  Companies were under increasing pressure from the investment market to deliver ever higher returns that must beat their peers.  This created enormous shifts in the performance culture of organisations.  The drive to do more and to do better became relentless.  All means were used to raise the bar.  Using reward programmes as an incentive to perform better was a major outcome.

Data availability

Regulators and shareholders alike have pressed for ever increasing levels of disclosure about executive reward in order to show and support strong governance.  Reward benchmarking surveys run by the consultants and today’s information technology have created an explosion of reward data.  This naturally leads to more comparisons and a need to show to staff that they are being paid competitively.  

This gives rise to an inevitable pay ratchet effect.  

Globalisation

Companies have increasingly been operating outside their national boundaries and on an international stage.  This has generated more comparisons – internally within companies for their different nationality of employees, and externally when looking at recruitment (and retention) of leaders for an international workforce.  Firms based in what have historically been much lower income countries have suffered and had to face tremendous pay pressures due to this aspect.  

So where have we got to, and what of the future?

Undoubtedly, reward levels have risen appreciably.  But earnings and personal wealth have generally risen in real terms across most periods of history.  There is understandable questioning, however, as to whether the pie is being apportioned appropriately between leaders and their teams.  The wealth gap has been widening through all shades of government and for many, the current reward structures are considerably less than satisfactory.  Meanwhile, payment plans have become very complex and even the most experienced workers often struggle to gauge the true value of their package.  

Perhaps the recent crisis will provide the opportunity and impetus for a fresh and more straightforward approach.  Is there the courage and appetite to break the mould?  Let’s see.