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Employee Relations & Reward

Special groups

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Learning objectives:

To understand the special arrangements for:

senior executives/directors

certain public servants

expatriates

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Senior executivesBackground

Until the late 1970s differentials between those at the top, compared to those at the bottom of organisations compressed by national incomes policies & fiscal policies

1979 onwards top pay has grown removal of pay controls reduction in top tax ratesentrepreneurialism & individualism encouragedprivatisation of public utilities

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The size of executive rewards

More than 8 out of 10 leading executives in FTSE 100 companies earned over £1 mn p.a. 2005-06 (IDS Executive Compensation Review, 2005).

540 full-time executives of the FTSE 100 obtained £678 million; average £1.26 million each (Guardian, 2006).

Annual Survey of Hours & Earnings Full-time males at median = less than £26,000 pa CEOs of companies with over £1 billion market

capitalisation earn around £2 million a year

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Characteristics of Top Pay

Pay of senior managers tend to be separate from the rest of the workforce.

In general, more individualistic approachEmphasis on long term incentives (linked

to company performance.‘Top pay’ is a highly controversial issue.

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High pay in the boardroom?Arguments in favour

Remarkable individuals who will be headhunted if paid less.

If directors know they will receive a lot of money if company performs well, they will strive.

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High pay in the boardroom?Arguments against

No discernible link between directors’ pay movements and wealth creation (IDS Executive Compensation Review, 2006).

unethical to have such large differentials reward for directors not transparent directors’ not setting a good example

There has been a divorce between directors’ salaries and what happens elsewhere in the company. Quite

apart from not being good personnel practice, it leads to dissatisfaction’ (Cadbury, 1996)

no justification for big pay offs to directors who are ‘let go’ because company is not doing well.

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Top pay packages

Basic salaryAnnual bonus

Performance criteriaeither pre tax profit or earnings per share

Long term incentive plans :normally share options subject to performance

Benefitshigh value car, perhaps with driver top hat pension scheme

fast accrual rate and final salary

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Many reports -outcome:

Remuneration committee for public companiessub-committee of boardcomprising exclusively non-exec directorsshareholders should be told who is on

remuneration committeeensure that pay is defensible & competitivebase remuneration on professional advice

Rolling contracts recommended to be 1 (or perhaps 2) years only.

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Publicly quoted companies must declare and seek a vote at the AGM on:

Each director’s total remuneration packages

Company must state its policy on: the duration of directors’ contracts, notice periods and termination payments

ALSOLine graph showing company performance

BUT TOP PAY CONTINUES TO RISE

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Public sector pay: the problems

Often difficult to determine a market ratePolitical imperatives often more

important than financial imperativesGovt both employer and macro-

economic managerSome public sector groups covered by

collective bargaining and others by pay review bodies.

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Pay review bodies (PRB)

Covers certain public servants who are employed directly or indirectly by govt

A pay review body is a committee of experts which recommends to government what these groups should be paid.

Govt has some control appoints members of PRBs gives evidence to PRBs final say (can accept/reject stage)

but PRB reports published

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Who is covered by a PRB?

About 2 million – almost half of public servantsSix pay review bodies

armed forces (210,000)senior salaries eg judges, senior civil servants,

senior officers of the armed forces, MPs (5,000)doctors and dentists (142,000)NHS pay review body (1,300,00)school teachers (500,000)prison officers & allied (34,000)

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Six PRBs slightly different

Recent expansion of NHS PRB Formerly nurses & paramedics Now all those covered by AfC incl. electricians,

admin & clerical staff etc

Some tie in with collective bargaining but others replace it.

In some areas strong unions, but in others not. Some look at non-pay matters eg workload

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PRB mechanisms Supported by govt funded Office of

Manpower Economics which:provides accommodationprovides a secretariatconducts researchcommissions research

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How do PRBs work? Annually they:

Visit “constituencies”eg schools, hospitals, military establishments

Take evidence in writing and orally from interested parties eg unions (if any), employers, govt dept

concernedConsider evidence + research findings &

draw up report with recommendations

Govt free to accept/stage/reject report

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Why have PRBs?

Independent element - seen to be fairgovt rarely rejects report.

Helps to avoid strikes implicit understanding that PRB process

and industrial action are not compatible.Govt ambivalent about loss of control.

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Types of expatriate

employees transferred abroad for a few years.

long-term mobile employees who move from project to project in different countries

contract employees engaged for a specific period

third country nationals (TCNs)

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Problems facing expatriates

May have to work and live in countries which are dangerous or poorly equipped in terms of creature comforts.

Disruption to family life - children’s education, partner’s career.

Host country may have higher cost of living than home country so could lose out.

Cultural and language problems.

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Main areas to consider

Taxation systems - will employee be taxed at home or in host country?

Benefits - What does the state provide?Allowances?

to compensate for disruption eg education costs, home leave, relocation costs

to compensate for hardship, ie conditions in host country

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Company Practices

Home based policy. Link base salary for ex-pats and TCNs to relevant home country but with assessment of any extra costs. (Most popular approach in UK)

Host-based policy. Link base salary to host country base salary but with supplements for ex-pats.

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Territorial scope of employment law (Lawson v Serco Ltd)

Those who work in Great Britain. Those posted abroad by a British employer for

the purposes of a business carried on in GB eg foreign correspondent

Those posted abroad to a British enclave eg in a military base abroad

Others able to show “equally strong connections with GB and British employment law”.

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In conclusion

Three very different groups who merit special consideration senior execs, PRB groups Expats.

The most controversial are senior execs: individually tailored, generally very large

reward packages,challenged on ethical & pragmatic grounds.