Written by Alex Botha on April 23, 2020.
What do you urgently need to know about incentive schemes right now?
As we begin to adjust to our new “normal” and get some of the immediate HR/H & S practicalities sorted, some of the questions now facing employers relate to incentives schemes. For some, it is simply a question of whether to pay out incentive payments for the 2019/2020 financial year, while for others it’s a bigger question about whether their incentive scheme is still fit for purpose in the Covid-19 era.
In a recent pulse survey of 247 employers in the Strategic Pay network, 38% of survey respondents had either cancelled their 2019 bonus payments, put them on hold, or were undecided. This percentage was as high as 50% amongst private sector respondents. There are likely two schools of thought on this issue; on the one hand, bonuses are for past performance and therefore already earned for the 2019/2020 year. Assuming the scheme’s design is sound, the bonus pool is likely part of a budgeted surplus figure and therefore self-funding. On the other hand, as companies are faced with unprecedented cost control measures to try and protect their staff from future job losses, it would seem prudent to retain those funds in the first instance to temporarily bolster the company’s balance sheet.
Can we withhold 2019/2020 incentive payments?
Before a company can even consider withholding incentive payments for 2019/2020 it will need to answer two key questions:
Is your incentive scheme contractual?
In other words, do the targets and pay-outs of your incentive scheme form part of your employees’ individual employment agreement with you. If so, you will need to seek independent legal advice before making any decisions. Your ability to make any changes to this scheme will depend, in part, on the following conditions:
The presence of a “Force Majeure” clause in your scheme rules. A force majeure clause excuses a party from their contractual obligations and liabilities if they are prevented from acting because of a specified event. The coronavirus may be covered if the specified events include “disease" or similar, or more ambiguously as an “act of god”.
If the contract does not contain a force majeure clause, the common law doctrine of frustration may apply. It releases the parties from their contract where, by no fault of either party, an intervening event makes performance impossible or radically different than what the parties agreed. Accordingly, the effects of the coronavirus must be so significant as to make performance of the contract impossible or radically different for the doctrine of frustration to apply. Parties should be careful in asserting frustration; it should be noted that New Zealand courts apply a very high threshold for the doctrine of frustration to apply.
Do you have a clause enabling the annual revision of your schemes to cater for changed circumstance? This is certainly common market practice amongst well designed incentive schemes and provides protection for both employer and employee alike, especially if revenue forecasts will directly impact any pay-out of incentive schemes in 20/21.
Does your incentive scheme have a built-in company performance hurdle/gateway?
A hurdle can be defined as the minimum acceptable organisation performance level that must be achieved before any incentive payments are made. This is typically a margin or profit based measure and is used as a protection for the company. If the company does not reach the hurdle, no incentives are paid. So that the scheme is largely self-funding, the gateway is typically set at a level above budgeted surplus. If this target is not achieved, no payments would be made in the year.
Because of the lag effect of Covid-19 on company revenue statements for 2019/20 and the timing of the new financial year, it is unlikely that this mechanism will provide much protection for the year that has just been, however inclusion of such a gateway becomes all the more imperative to 20/21 scheme mechanics.
Is our incentive scheme still fit for purpose moving into 2020/21?
This unprecedented time also presents an opportunity to step back from daily operations and reflect.
If you do nothing else, clearly revenue targets will need to be set at appropriate levels for 2020/21, both at a company and individual level to reflect a realistic stretch against revised revenue projections. A reminder that targets should be set at “difficult, but achievable” levels. Similarly, if you have a company performance hurdle, or gateway that must be achieved for the scheme to come into play, this figure will also need to be reviewed and revised (you should be reviewing this figure as a matter of course each year, regardless).
Similarly, you may want to look again at the non-financial objectives of your scheme and confirm that these fit with your newly revised business imperatives and strategy.
If, however, you have been unhappy with the current incentive scheme for some time, or have identified some small niggles that you are currently stuck with, now would be a good time to review all scheme mechanics, as the existing schemes may well not be triggered in 2020/21. In other words, employees are currently faced with keeping the existing scheme and getting little to no pay-out, versus accepting a new scheme with tighter mechanisms and rules, but more realistic targets that will likely pay-out more than the original scheme in the current year.
The Importance of Consultation
Regardless of whether your incentive scheme is contractual or not, failure to properly consult is likely to put you foul of the law and your staff will likely feel aggrieved that you left them out of the loop. It is also a good test of your company culture (regardless of the law or financial situation) if you are looking at some drastic measures and maybe there might be some longer term reflection on that for the future.
How can we help?
There are a number of ways that Strategic Pay can assist with incentives best practice, be it reviewing and tweaking the scheme mechanics you currently have in place or designing a new and improved scheme that better fits the needs of the business going forward. We have a number of thought papers readily available that may provide a cost-effective alternative if purchasing a full scheme design is outside your budgets at present.
We have developed an excel based -tool that will provide you with a quick and easy litmus test of your current incentive scheme(s) and highlight those areas that are working really well for your business and areas which may need to be tweaked or overhauled. If you would like to request a copy of this complimentary tool, please email us at firstname.lastname@example.org and we will get in touch.