Finance: It pays to offer the right incentives

When the practice of profit-related pay (PRP) is brought to a close at the end of this month, it will not be missed just by the 2.5 million workers who have been receiving its annual tax-free cash bonuses. Their employers, too, will mourn the passing of an initiative that has basically enabled them to award their workers pay rises at the Government's expense.

This is because Nigel Lawson, when he was Chancellor of the Exchequer, was apparently so convinced of the merits of employees sharing in the success of the organisations they worked for, that he created a system whereby businesses could receive a proportion of their profits free of tax, provided they satisfied certain Inland Revenue criteria.

Long before the Blair government decided to end this tax relief from the end of this year, the system was discredited and open to abuse. But the conviction that workers are more productive if they share in the success of their organisations is so widespread that Gordon Brown is in the process of carrying on the principle by encouraging share ownership for all employees.

Some experts doubt whether the latest scheme will work much better. Harry Hicks, tax partner with the accountancy firm Baker Tilly, believes the rules being proposed for these share schemes will be so complex that the system will be less attractive than the one it is designed to replace, leaving the Government paying "lip service to the concept of profit-sharing".

Others have a more general concern. For them, the problem is that improving performance relies on a lot more than giving employees a share of the spoils.

In the just-published book Paying for Contribution, Michael Armstrong and Duncan Brown, two highly-regarded experts on employee remuneration, chart how organisations are drifting away from relying on performance- related pay alone to support the achievement of business goals towards what they regard as a more holistic approach.

This involves taking account of such matters as individuals' competence as well as performance; paying for skills and behaviours supporting the success of the individual and the organisation, and rewarding a combination of organisation, team and individual performance, rather than concentrating on an individual's efforts.

Paying for contribution, as they term this approach, should "form part of an integrated and strategic approach to reward", say Mr Armstrong and Mr Brown, who are consultants. It is one thing to say this and another to make it happen - as one car company in their book shows. Faced with very low margins on new cars and a large proportion of their pay dependent on commission, "sales staff were directly and strongly encouraged to act in a way which conflicted with the company's business strategy", they write. The company's strategy was to deal with fierce competition by seeking to sell fewer more expensive models, a plan that was supposed to be achieved through a combination of strong products, teamwork and excellent customer service in the dealerships as the basis for building long-term relationships with customers.

In practice, sales staff could make a decent living only if they competed with each other to get customers and then went for the "quick sale" on higher-margin aspects, such as financing. This company saw the problem and in 1996 took steps to align the staff's incentives with the company's business objectives. The level of individual performance pay in the monthly contributions was reduced, base pay was increased and related to the skills and competencies required by sales staff dealing with affluent customers and a new annual bonus scheme related to individual and team performance was introduced.

Other businesses are following suit. In addition to taking greater account of the general business agenda and strategic issues, organisations are adopting many practices to satisfy the increasingly diverse needs of their employees and themselves.

A report earlier this year by the consultancy Business Intelligence showed how organisations as varied as the Midland Bank arm of HSBC and the industrial company DuPont were offering employees benefits to help them cope with the "work/life balance", while the likes of Bass Brewers and the cereals company Kellogg's were concentrating on linking pay to individual capability and performance.

Unfortunately, the development of what is known in some quarters as "strategic compensation" is undermined by the ways in which such plans are implemented. In particular, says Mr Brown, the effectiveness of many reward strategies is limited by "an over-reliance on top-down communication and a lack of consultation before introducing new ideas".

In the same way as employees showed enthusiasm for profit-related pay only when it was demonstrated that there was little risk of their income declining, so those being subjected to the new approaches to pay are concerned about what is in it for them.

Chris Ashton, author of the Business Intelligence report, says advisers and successful practitioners "emphasise that the involvement of employees in rethinking compensation, designing programmes, delivering change and evaluating the outcomes is of critical importance".

Actor Burt Reynolds last year
peopleBurt Reynolds, once among the most bankable actors in Hollywood, is set to auction his memorabilia
Gordon and Tana Ramsay arrive at the High Court, London
newsTV chef gives evidence against his father-in-law in court case

Watch the spoof Thanksgiving segment filmed for Live!
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
i100 Charity collates series of videos that show acts of kindness to animals
Arts and Entertainment
One of the installations in the Reiner Ruthenbeck exhibition at the Serpentine Gallery
artCritics defend Reiner Ruthenbeck's 'Overturned Furniture'
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Austen Lloyd: Company Secretary

Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

Citifocus Ltd: German Speaking Client Specialist

£Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

Citifocus Ltd: Performance & Risk Oversight

£Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

£90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game