Unilever is taking performance-linked pay to a different level altogether. Its CEO Paul Polman received a pay packet of more than £3 million in his first full year as chief executive after the company hit a number of its financial targets.
According to the Anglo-Dutch fast-moving consumer goods major’s annual report, Polman’s basic salary was just a third (£1.03 million) of his overall salary of £3.12 million. The balance amount came from what the company calls bonus payment and other allowances.
Unilever is doing several other things as well to attract and retain top talent. For example, “Golden hellos” — the signing-on packages offered to leading executives when they move companies.
Its Chief Financial Officer Jean-Marc Huet, who joined the company in February this year, is receiving a bonus of £3.28 million in cash and shares to compensate for the loss of incentives at his previous employer, Bristol-Myers Squibb. The cash award was paid when Huet joined the company, while the share award will vest over the next three years.
In its annual report, Unilever also said it will change the bonus incentives for executive directors and replace the underlying sales growth with underlying volumes growth as a driver for the business performance for the annual bonus from 2010 onwards.
Apart from the package, Huet will receive a salary of £680,000, a bonus of up to 150 per cent of his salary and shares.
Predictably, Polman says he is a strong believer in the variable pay model. After inaugurating the spanking new headquarters of Hindustan Unilever in Mumbai a couple of days ago, Polman said the plan was not to give any hike in the basic pay of top employees. “Extraordinary pay should be reserved only for extraordinary performance and compensation should be structured to reward outstanding, not average performance,” he said.
HUL is obviously practising hard what its global CEO is preaching. The company has already moved away from a market-linked Esops programme to a performance-based share grant scheme and is significantly increasing the proportion of variable pay in the overall compensation structure. The annual bonus to employees is now linked to sales growth, profit and individual contribution. One of the key performance parameters also is how externally-oriented an employee is — the accent being on the speed at which a trend is spotted.
HUL isn’t alone. A Mercer Consulting study showed that all Asian companies are laying greater emphasis on variable pay and linking increments to individual performance as economies recover from the global slowdown.
Sixty-five per cent of respondents in Mercer’s “Asia Executive Remuneration Snapshot Survey” said they planned to provide salary increases for executives in 2010, compared with just 30 per cent in 2009. But 30-40 per cent of an executive’s total pay package is linked to variable pay — which depends on his/her performance — regardless of the type of organisation s/he belongs to. Individual performance is the most commonly used measure to assess performance among surveyed companies today, followed by profit-based and revenue/sales growth-based measures.
Other studies have shown that Indian companies still have a long way to go as the variable component in salaries in US companies has gone up to an average of 75 per cent. But quite a few in India Inc are making up for lost time — in many cases, this has moved up to 50 per cent. This was just around 5 per cent five years ago.
But while variable pay is surely back on top of the agenda of companies all over the world, the jury is still out on its effectiveness. Many say implementation of a variable pay model can often be extremely complex. For example, a problem with pure pay incentives is that they raise the risk of employees driving corporate growth for the sake of the personal reward they bring, rather than for what is best for the company. Another question that arises from this strategy is what the company should be measuring — effort or performance; the individual or the team?
There are many examples of how variable pay plans can backfire if they don’t consider worker motivation in a realistic fashion. For example, a Harvard Business Review study titled “Pay for performance doesn’t always pay off,” author Martha Lagace gives Hewlett Packard’s example of how the best-intentioned variable pay plans can go wrong if not thought through properly.
Managers at one of the HP units launched a programme of team goals coupled with team-based pay with three possible levels of reward. The scheme worked well initially, but the complaints started to pour in soon. The teams were frustrated as factors such as the delivery of parts affected their work and went out of their control.
The high-performance teams often refused to admit people whom they thought were below their level of expertise, leading to disparities among the teams. Mobility between teams was reduced, preventing the transfer of learning across teams. The lifestyle of employees now revolved around higher pay scales, and this led to anger when they could not achieve it consistently.
