Tesco Managers Brooding Over Teeny Bonuses
Senior store managers at Tesco are said to be "outraged" after hearing that their annual bonuses had been slashed by more than 80 percent following a rare down year for the U.K. retail giant.
According to the Financial Times, approximately 5,000 store managers and executives just below the board level were sent a letter last week by CEO Philip Clarke warning them that their annual performance-based rewards would be dramatically reduced following an earnings and sales shortfall.
The letter stated, "Last year was a difficult one despite delivering another record set of results. The group missed its profit targets and had a mixed performance across our six corporate objectives – we missed the threshold for U.K. return on capital employed and our U.K. like-for-like sales target. Following a review of our performance for 2011/12, the executive committee has approved an award of 16.9 per cent of your maximum bonus."
In 2011, managers received 100 percent of their maximum bonus payout with many receiving on average £12,000 ($19,000). The 16.9 percent cut is expected to reduce annual bonuses to between £2,000 and £3,000 ($3,200 to $4,800).
The Daily Mail said that while non-exec personal recognized that bonuses would be lower given reports that Tesco showed its worst performance in 20 years, the size of the bonus cuts surprised many "with morale said to be at rock bottom."
The annoyance level is said to be particularly high since moves by top management to tighten coupon policies, reduced stores’ promotional cadence and other marketing failures were blamed as largely responsible for Tesco losing market share to rival Sainsbury’s. Given the media attention to executive pay, the story is expected to get a reprise next week when bonus allocations to the CEO and other board members are revealed.
A spokesman for Tesco issued to the British press indicated that board-level execs will receive similar treatment. The statement read, "Tesco’s top 5000 leaders, including the executive directors, all have genuinely performance linked incentives and these are closely aligned. We will announce full details in our annual report published later this month and those at the top of the company will take their share of the impact of last year’s results."
- Tesco to slash bonuses after poor results – Financial Times
- Tesco store managers left outraged by 80 per cent cut in bonuses after ‘difficult year’ – Daily Mail
- Tesco chief’s Big Bonus Drop angers store managers – Guardian
- Why the Tesco flag has slipped to half mast – Telegragh
- Christmas & New Year Trading Statement – Tesco
- Preliminary Results 2011/12 – Tesco
Discussion Questions
Discussion Questions: What do you see as the pros and cons of performance-based bonuses? What would you do, if you were at Tesco, to deal with the morale issue among store managers who believe bonuses are being cut through no fault of their own?
Tesco must find ways to single out top performers, and give raises or end up losing them to a competitor. Bad years are going to be the norm for most supermarkets, as higher costs of doing business will eat away at the bottom line (I know). The old days of 6-7% bottom lines are gone, and it is going to get worse, as the BIG BOYS are sharpening their pencils to increase market share. It is hard to keep store managers motivated, knowing that incentive bonuses will be hard to attain in the future, so another form of compensation needs to be implemented in order to keep the best of the best.
One of the tough things about performance-based bonuses is that when a company is doing well, employees and/or execs get used to receiving them. They become ingrained, so that when times are tough and people receive small or no bonuses, they feel cheated. So, instead of the bonus working as an incentive, the lack of a bonus becomes a disincentive. Dealing with the morale issue when that happens is difficult, except to say “Let’s all pull together and do better next year.”
The clue is in the description – performance-based. The measure should represent each level’s actual performance, not their performance as it’s affected by those further up the chain. They’re the ones who should carry the can for the results of their performance, good, bad or otherwise.
Performance-based bonuses, properly designed, align associates with company, store level, and personal performance expectations. They place associates in a position to have skin in the game, and assure that all are focused on similar objectives.
The best incentive plans will have characteristics like these:
1. Objectives are consistent with corporate goals
2. Point associates in the direction they should go
3. Objectives are achievable and realistic
4. Opportunity excites and motivates achievement
5. Clear monitoring system for all to see is in place
6. Bonus is paid in a timely manner
Tesco, like other concerns that institute performance-based compensation, need to commit to regularly (quarterly or monthly), communicating with associates as to how they and the organization are performing. The 5,000 store managers shouldn’t be surprised, or delivered a surprise at the end of the year.
At first I thought I was gong to read that these employees were going lose out on some big bucks. But only a $15k haircut is small change to a high volume store manager. The big con is putting a cap on the max. Some of my clients give their managers 20% of the bottom line with no limits. And it works. The pros are these bonuses work. The con is when top management messes up nullifying the good efforts of the managers.
Epic fail of performanced based bonus. Store managers should be bonused on their store factors (sales, margin, customer sat) which are in their control not corporate goals. You can tie in corporate goals, but that is so far removed from the store team that they will not have any skin in the game.
Obviosly, corporate directive (coupons, circular scheudule, etc) can influence but the local team also has levers to pull.
More than once in its competitive retail story,
The path of booty was the way to Tesco’s glory.
But duty is what is now expected of Tesconians,
So its a stiff-upper-lip for the non-harmonians.
A manager asks: “When are decreased sales my fault?
I worked just as hard as last year without default.”
A voice from the top replied, “We are all of one team
And that’s the bottom line of Tesco’s bonus scheme.”
The brass says, “Let’s now picnic and grieve together
There won’t always be such stormy British weather.”
“That’s a crock, Boss. We deserve our annual bonus,”
A store managers said, “You’re making this our onus.”
Moral on morale:
To expect the expected — whether justified or not —
is a thoroughly modern intellect, righteous and hot.
Performance bonuses can be a good incentive tool, but only when set up and administered correctly. Having everyone’s payout based on how the total company performs is rarely a good idea. The total company approach is to encourage everyone to work together, not just their area. When a company does not perform, the high performers feel slighted and are most likely to leave. Slackers under the total company approach get a free ride and will never leave. Simple area performance bonus systems also have a weakness as they don’t support what is best for the company. A better approach is to award bonuses based on 40% area achievement plus 60% company achievement.
Performance based bonuses have to have criteria for those on the program to meet. If a manager has met his/her criteria they should receive the reward. If not, then they don’t get it. What is bothersome is the perception from reading this that the managers are being made aware of it just before the bonuses are due. Tesco has a big internal as well as external PR problem to deal with.
Basically you can pay people based on either an equity model or a market model (the former being, essentially, where they receive a portion of company income as if it were a dividend, the latter where they’re paid the going wage regardless of how the company does); if we assume most companies will average out to average, sometimes the first will do better than the market, and sometimes it will do worse. The problem, of course, is people not following the game plan: either employees enjoying the good years but jumping ship with the bad, or employers (effectively) shifting to a lower-of-market-or-equity method. Hard to know which is the case here without knowing the whole compensation history, but the…er…whining makes it appear that the traditional “stiff upper lip” has gotten a bit loose.
The description that the store managers were outraged after “hearing” about the reduced bonuses is scary. A strong performance-based bonus system requires transparency and at least quarterly, if not monthly, updates on the status of the performance metrics. The end result should never be a surprise. Managers should be able to follow along throughout the year and be able to at least roughly estimate where they are YTD against the bonus metric targets.
If the company is not willing or able to communicate the status of the metrics throughout the year, they should consider abandoning the scheme. Only a transparent process works to maximize the effectiveness of performance-based bonus schemes.