A NOTE ON JOINT VENTURES

There is a further category of 'start-up', different in nature to the entrepreneurial model described above, but which also needs to be considered and will frequently be encountered by the reward practitioner. This category relates to joint ventures or like arrangements set up by two established organizations and often designed to leverage a new technology, break into a new market and so on. Such situations can give rise to a complex reward challenge, for the following reasons:

• The joint venture may be staffed, at least in part, by executives from both partners. In all likelihood, as in a merger or acquisition, the existing reward arrangements on which these executives are employed may be very different and the question then arises as to whether these individuals are secondees, whose entitlements are to be retained, or whether a new reward policy needs to be developed as a basis for new contracts.
• The joint venture may need to attract expertise from outside for whom the remuneration package needs to look very different to anything that currently exists in either partner organization.
• As for the 'genuine' start-up described above, joint ventures are often inherently more risky than employment within the established partner organizations. The business potential for growth may also be significantly greater. In these circumstances, aggressive reward arrangements, designed to offer high earnings opportunities in both the short and medium term, often need to be created. A key consideration here is whether or not long-term rewards should relate exclusively to the performance of the joint venture or, in part, to the performance of the parent organizations. The reward practitioner is often key to resolving these issues at an early stage and allowing the joint venture to proceed on an agreed basis.

REINFORCING THE CULTURE OF SUCCESS

REINFORCING THE CULTURE OF SUCCESS

Much of the success of a growing organization depends on close and effective teamwork. Reward systems need to support this. This means that as organizations grow they have much to gain from implementing:

• performance rewards which reflect team as well as individual achievement;
• consistent and as far as possible harmonized benefits;
• the beginnings of a formal approach to setting internal relativities so that a defensible 'pecking order' emerges;
• effective performance management as part of the way the business is run;
• management of the reward system by an individual who is a wise custodian of both policy and implementation until the organization is large enough to have a personnel/HR/remuneration professional to do the job and has grown/improved the management capability in reward issues.

This last point is, in fact, critical. Experience shows that most of the mistakes made by new business in the reward area are because the wrong person had accountability for it. If he or she perceives reward management as merely an administrative system, fails to take a broad view of its purpose or (at worst) incompetently develops policies that divide and cause dissent, then the business is at risk. Good and promising businesses have foundered on disagreements over pay. Sensible pay policies are the oil in the works of any organization. In a small, growing organization oil can turn to grit very fast indeed.

PREPARING FOR GROWTH | Reward Policies for New, Start-up and High-growth Organizations

PREPARING FOR GROWTH

Whatever the basic components of the reward system in a 'start-up' they should be developed with an eye to appropriateness in a larger organization. Particular attention will be needed in these areas:

• Pensions: schemes for small partnerships/groups of professionals or the self-employed will not easily adapt to cover 140 to 200 employees after three years. Professional advice will be needed to achieve this.
• Pay relativities: starting on a 'spot salary' basis is logical, but internal relativities should always be defensible as the organization grows.
• Executive share options/employee share schemes: should be capable of extension - again an area for good professional advice.
• Performance rewards: need to relate to the milestones in the business plan and be based on achievement of agreed objectives/performance standards. Chief executive-driven discretionary bonuses are typically suspect unless the boss really is in the 'tough but fair' (or preferably just the fair) category.

Reward Policies for New, Start-up and High-growth Organizations

WHERE TO START

The objectives of a reward system designed to meet the needs of a business start-up are to:

• Attract and keep people anxious to make the organization grow and flourish.
• Reward the risk of coming into a new venture with high rewards and generally a share in the business if the risk pays off - for those who have real control over development. It is more difficult and probably unrealistic to reward support and more junior staff on a 'high-risk' basis.
• Provide a sensible basic salary that is reasonably competitive with the market for most staff and highly competitive if rare skills have to be brought in. This is one time to pay at the top of the market.
• Lock people in to give business stability - typically with generous share schemes for senior executives and an all-employee SAYE share scheme SIP or profit sharing for everyone else.
• Minimize overheads by keeping benefits to a decent basic core until there is some 'fat' in the system or where competitive pressure indicates additions to the various benefits.
• Pay out bonuses or provide non-cash rewards (have a party!) when key milestones in the business plan are successfully achieved
• Recognize that in the early days office accommodation may be at best basic and demonstrate willingness to improve conditions as soon as practicable (fresh flowers in an aged but clean reception area - or even in the staff lavatories - can have a significant effect on the way the company is perceived).

THE INVOLVEMENT OF INVESTORS/AUDITORS/OTHER ADVISERS

If the business is promising and set to grow then sooner rather than later investment will be sought from providers of venture capital. Such organizations typically take a very robust view of reward systems, requiring introduction of long-term share schemes and highly geared incentives to ensure that the top management group they have entrusted with their money really are fully committed to the business. Clear and wellconstructed contracts will be required and the high-risk/high-reward approach mentioned earlier will be what counts.

If the company decides to float it will have to ensure that its financial house is in order. Auditors, lawyers and others providing advice at this stage will again, as part of 'due diligence', go over the elements of executive reward policy and the structure of payroll costs with a fine tooth-comb. This is the time when 'beyond the fringe' benefits (company yacht, etc) come under scrutiny to potential institutional shareholders.

Such advisers may, or may not always, be mindful of the rationale for pay systems and the messages the individual elements can give. Sad to say, while some are very helpful and constructive, others may have a perspective that is sometimes narrow and confined to their specialism and its accomplishing prejudices - be it over-zealous cost control or a desire to pin down every last detail in fine print. This can come as a shock to a free-wheeling entrepreneurial organization. Faced with criticism about 'unorthodox' approaches to pay from such sources the important questions to ask are:

• Is what we are doing illegal in any way (in terms of employment law)?
• Are there tax implications we don't know about?
• Is it uncompetitive for any reason?
• What messages will the symbolic act of taking it away give?
• Are you mistaking 'unorthodox' on our part for real creativity in finding rewards that match our developing culture?
• What culture should we be aiming for as a larger/listed organization?
• Where can we get advice about putting our house in order if necessary?

MERGER AND ACQUISITION CHECK-LIST

Executive Rewards

1.  What should be the approach to executive remuneration?

Typically in merger or acquisition situations, the proposed remuneration of the chief executive and other key members of the top team is agreed in advance or very early on. It will often be subject to external advice and will take account of market practice, previous remuneration arrangements and issues of governance, most importantly the scrutiny of such arrangements exercised by the main institutional investors. All elements of the remuneration package will be considered, including base salaries, annual bonus arrangements, share option and other long-term incentive arrangements and service contracts.

Once the shape of remuneration at the very top of the organization has been determined, this is likely to cascade through the organization, first to other members of the senior executive population, then to management and ultimately to employees in general. So far as senior executives are concerned, it is often the case that remuneration for this group will be dealt with on a common basis, extending in the largest merged organizations to the top 50 or 100 job holders.

Where the merged organization focuses essentially on a single business or a related set of businesses, executive remuneration beneath the top levels of the organization will typically be defined within a common framework. However, where the new organization contains a highly diverse range of businesses, in which remuneration arrangements have been and continue to need to be different, different remuneration packages may well continue, particularly so far as salaries and bonus arrangements are concerned. However, even in these circumstances, service contracts, benefits arrangements, pension entitlement and access to long-term reward, for example through share options or restricted shares, may well be applied on a common basis.

Generally, the pressure to confirm executive remuneration arrangements rapidly in the new circumstances will be high, as the alignment and motivation of the top management team and the executives who support them are typically regarded as critical, both internally and externally, in beginning to reap the benefits of the merger or acquisition.

Salary Structure

Once the approach to executive remuneration has been set, attention then typically turns to reward arrangements for management and other employees. At this stage, key questions include:

2.  To what extent, if at all, should a common salary structure be introduced?

To answer this question information will be needed, first, on the economics and strategy of each business unit to see how far they conform. Then, if the business case emerges, details will be needed on:

a.    existing salary structures;

b.    organization structures, with salaries and grades for each job;

c.    the distribution of salaries within each grade;

d.    the method of job evaluation used;

e.    policies and procedures for grading or regrading jobs and for fixing salaries on appointment or promotion;

f.     any terms and conditions negotiated with trade unions or staff associations;

g.    the similarities and differences between the work carried out in each company and, therefore, the type of people employed.

3.  What are the advantages and disadvantages of merging salary structures?

The advantages seem obvious. A common basis is established throughout the group which facilitates movement and a consistent approach to salary administration. The disadvantage is the disturbance and potential cost of merging, bearing in mind the regradings and salary increases that might be necessary as well as the expense of job evaluation. Why go to all this trouble if the operations in the respective companies are dissimilar and they are located in entirely different parts of the country? It could even be damaging.

4.  If salary structures have to be merged, how should this be done?

The choice is between:

a.    a full job evaluation exercise involving rebenchmarking, which may be disturbing, time consuming and expensive but may now have to be looked at in the light of recent equal values cases; or

b.    the arbitrary slotting of jobs into the new structure using existing job descriptions (if any). This could result in gross inequities unless full job descriptions are available or there is already a good fit between the two salary structures; or

c.    a compromise between (a) and (b), slotting in jobs without a full evaluation if the fit is obvious, but evaluating doubtful or marginal cases. Note that if pay is negotiated with a trade union or staff association they would have to be involved and they will obviously fight against any detrimental changes.

d.    using this as an opportunity to adopt a new structure based on job family models/generics and broader pay bands.

5.  When the merger takes place, should action be limited to the creation of a common grade structure, defining benefit levels but allowing different salary scales to reflect regional or separately negotiated variations in rates?

It is possible to have common grade structures with different salary levels as long as the differences can be justified by reference to market rates.

6.  What should be done about staff whose grade or salary range is changed as a result of merging pay structures?

To regrade people and adjust their salaries to higher levels could be prohibitively expensive. To reduce salaries could be impossible, especially if there are trade unions in existence who carry any weight at all. It might then be necessary to 'red circle' staff affected by grade changes, that is, give them 'personal to job holder' gradings and salary brackets which they retain as long as they are in the same job.

General Salary Reviews

7.  Should general salary reviews be centralized and take place simultaneously in all locations?

The answer is clearly yes if a common salary structure exists or pay is negotiated centrally. If structures or pay levels vary or if site negotiations continue, then it may be best to maintain local arrangements.

Performance Management

8.  How should performance management be tackled in the new situation?

There are two central questions to consider here, namely:

a.    To what extent are there well-established and effective performance management policies and processes and what is the desirability of standardizing them, as opposed to allowing different systems to continue?

b.    What is the capability of executives and managers to manage performance effectively? (After all, the presumed benefits of the merger or acquisition will rely, to a very large degree, on how effective the organization is at implementing its declared strategy - and good performance management is key to achieving this.)

For the practitioner, an important first step here will be to examine the policies, processes and capability that already exist, from whichever part of the merged or acquired organization they come. If the operating model for the new organization is a fairly centralized one, it will then be important to shape an approach to performance management that can apply across the whole organization, ideally building on the best that already exists, bringing in best practice from outside and creatively shaping an approach to performance management that can best underpin the declared business strategy (eg balanced scorecard approaches, which concentrate not merely on the financial performance and other quantitative outputs required, but also the capabilities, behaviours, innovation and other practices required to deliver performance). Where, by contrast, divisions and business units are to be allowed to function on a largely decentralized basis, the challenge may be to promulgate and apply principles of performance management and some kind of governance process that ensures that performance management is effectively undertaken but in a way that best reflects the needs of the different parts of the organization.

Salary Administration Procedures

9.  Should standardized procedures operate throughout the new group?

The answer to this question depends in part on the degree of centralization or decentralization to be adopted. It may be that divisions and business units can undertake the processes of salary administration perfectly well without the need for some group-based approach. However, a significant shift that is taking place in many, particularly large, organizations at present is the introduction of a 'shared services' approach to HR (and, for that matter, to other support functions, such as finance). At a transactional level, therefore, a centralized approach to salary administration may well be desirable on the basis that it is the most efficient and cost-effective means of managing the process. It has the added benefit that management information regarding salaries and payroll costs is accessible centrally, thereby providing an additional management control tool.

On the other hand, another shift that is taking place in some organizations is the increasing devolution of salary administration/ management to line managers, with HR playing a more reduced role, ensuring that the relevant data are available in user-friendly form at one level and providing decision support to line managers at another. These key questions of cost efficiency on the one hand and line management empowerment on the other are therefore central to the approach taken in this area.

Bonus Schemes

10.  Should different arrangements for bonuses be allowed to continue?

To a large extent, the answer to this question derives directly from the view taken concerning executive remuneration (see above).

Particularly in a situation where there are divisions and business units focused on different market places and customer segments, and where this is reflected in the executive remuneration arrangements established, there is much to be said for retaining effective local bonus schemes that have an immediate link to performance and support achievement of the merger/acquisition strategy. From a group perspective, the issue then becomes one of defining the design principles on which bonus arrangements are determined and following up with appropriate processes of governance, which enable the group to confirm that bonus arrangements are being designed and applied in an appropriate manner.

Profit-sharing Schemes

11.  What should be done about profit sharing, assuming a scheme exists in one or other or both of the companies?

Clearly, if there has been a complete take-over and the merged company loses its status as a separate profit centre or can no longer issue shares under arrangements such as profit sharing share schemes, then the scheme in the company which has been taken over must be discontinued and employees moved into the take-over company's scheme, if one exists. If there is no scheme in that company, consideration would have to be given to some form of compensation, which could be as high as three times the average of the last three years' payments. It is worth noting that the more progressive organizations in the UK have introduced highly successful sharesave schemes in recent years, to the point where the existence of such schemes is often viewed as a hallmark of the best employers in the private sector. It may be that a merger or acquisition creates the opportunity for the introduction of such an arrangement to be considered.

Pension Schemes

12.  What should be the approach to pension arrangements?

In the last few years, the question of pensions strategy and the arrangements deriving from this have become a critical issue, particularly in the private sector. It is no exaggeration to say that this is one of the most important issues that arises when a merger or acquisition takes place and that resolution of the pensions issue can be a 'make-or-break' consideration. For this reason, pensions cannot be considered as simply one element in the overall remuneration approach but must be treated as a major concern in its own right. Almost always, the merged organization or the acquirer will be faced with additional pension arrangements that do not easily align with the established policy and approach. In any event, it may well be that a fundamental review of pensions would have been required anyway, whether the merger or acquisition had taken place or not. For these reasons, it is often the case, in a merger or acquisition, that harmonization or alignment of all the other elements of remuneration is resolved, say within 12 to 24 months of the merger or acquisition taking place, while leaving pensions as a distinct issue to be addressed and (hopefully) resolved in a longer timeframe. Expert technical advice (actuarial and legal) will almost certainly be required, taking into account existing and impending pensions legislation. Recent experience has also demonstrated that getting it right on the pensions front is a critical public relations issue: many large organizations have been damaged by taking ill-thought-through decisions in this area (for that matter, others have benefited from developing creative solutions), and time and resource must be made available to arrive at the right solution in this area.

Other Benefits

13.  To what extent should employee benefits be harmonized, for example:

a.    company cars;

b.    free petrol for company cars;

c.    life insurance;

d.    sick pay;

e.    private medical insurance;

f.     mortgage subsidy;

g.    season ticket and other staff loans;

h.    lunch arrangements, including luncheon vouchers;

i.     leave entitlements;

j.     discount facilities?

The degree to which benefits should be harmonized is, like other areas of reward management, a policy question, the answer to which depends first on the philosophy of the controlling company (the extent to which it believes in centralization and absolute consistency in the treatment of employees) and second, on the circumstances in each company (the degree to which their operations and their geographical locations are linked or adjacent). Considerable variations in benefits between employees in different parts of a group are undesirable, especially if there is any interaction or interchange between establishments. Any approach to harmonization must clearly draw an appropriate balance between cost on the one hand and motivation (or avoidance of demotivation) on the other. Although it has taken some while to develop in the UK, a key consideration is the opportunity to introduce a flexible benefits approach, which allows employees choice in which benefits they take within an overall level of cost and can often provide the basis for achieving effective harmonization in a merger or acquisition.

Trade Unions or Staff Associations

14.  If a trade union or staff association has negotiating rights, how should they be involved?

Trade unions and staff associations will inevitably be suspicious of any merger or acquisition, on the grounds that this is likely to cause a reduction in jobs and, quite possibly, deterioration in the terms of employment. It is therefore vital, at the earliest possible stage following merger or acquisition, that a strategy be developed for dealing with any trade union or staff association involved, particularly where negotiating rights exist. It is always, of course, possible to appeal over the heads of the trade union or staff association to employees. This may seem particularly attractive in a situation where the acquirer or predominant party to the merger has no trade union or staff association and the other does. However, experience demonstrates that trade unions and staff associations can cause damage in such situations unless effectively handled and can do so both inside the organization and externally. Shaping the strategy and initiating an early approach so that communication is established is therefore usually vital. Often, the trade union or staff association will press for early reassurances that no employees will lose their job. Clearly, it may not be feasible to give any such reassurance, and defining the messages (what can and cannot be said) up-front is therefore a critical part of shaping the necessary approach.

Communication Strategy

15.  What should be the approach to employee communications?

Experience in mergers and acquisitions demonstrates that this is one of the most important things to get right. If the organization itself does not communicate effectively, a communication vacuum will be created that will inevitably be filled with all sorts of rumour, almost all of it negative and potentially damaging. The critical issue, therefore, as soon as possible following announcement of the merger or acquisition, is to determine and then manage communications in the most effective manner. Of course, this is not restricted to the question of remuneration (although this will be a critical concern on many people's minds), but is to do with the totality of the way in which employees are to be managed in the new situation. Accountability for leading on communication may rest with the HR function or may be a shared accountability with line management. Either way, it is impossible to overstate the significance of successful communications - however good policies for managing employees are in a technical sense, this will mean very little if communication is badly handled.