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• Reward can be used to drive cultural change, whether it relates to the Bribery Act, an organisation’s carbon footprint, encouraging a high-performance culture, or reducing risk-taking in financial services.
• Employers need to ensure that their mission statements and values are backed up by the ways in which employees are rewarded.
• Remuneration committees need a clear understanding of the strategic aims of the business and what targets should be set to meet them.
Case study: BAE Systems reshapes bonus scheme
Defence firm BAE Systems restructured its bonus scheme for executives as part of its efforts to reward those who contribute to its objectives, in order to follow recommendations set by Lord Woolf, the Lord Chief Justice, who started examining its business practices in 2007 when an investigation by the Serious Fraud Office was already well underway.
This year, for the first time, a quarter of any executive’s bonus will depend on them meeting objectives around ethics and safety. Among other targets, executives will need to illustrate they have embedded Woolf’s objectives into their business area and that staff get proper training on the recommendations.
Later this year, the ethics targets will change to reward executives who show they have had external confirmation of completing the implementation of the Woolf review.
Debbie Allen, managing director of corporate social responsibility (CSR) at BAE Systems, says 15% of the non-financial element of the bonus is related to objectives in the areas of safety and ethics.
“Those are reviewed by the board committee on CSR and approved by the remuneration committee, so it is not given lightly,” she says.
Lord Woolf’s report in 2008 made 23 recommendations, and BAE Systems pledged to adopt the new way of working within three years.
Before Woolf conducted his review, BAE Systems established a new code of conduct which states that employees, advisers, consultants, distributors and joint-venture partners must not offer, make or receive bribes or corrupt payments.
“We had a number [of codes of conduct] around the organisation and we had been in heavy acquisition mode,” explains Allen. “We had grown, particularly in the United States, where we went from 6,000 to almost 50,000 employees over four or five years. We had a lot of heritage, cultures, companies, and legacy ways of doing things.”
BAE Systems was never convicted of bribery or corruption, but it did have to pay huge settlements for misreporting accounts. In 2010, it was fined $400 million after pleading guilty to conspiring to make false statements to the US government. The company also agreed with the UK Serious Fraud Office that it would pay a penalty of £30 million after admitting one charge of breach of duty for failing to keep accounting records in relation to payments made to a former marketing adviser in Tanzania.
The Bribery Act is focusing employers’ minds on how they use reward to encourage desired employee behaviours, says Nicola Sullivan
Any breach of the Bribery Act, which becomes law on 1 July, will have serious reputational and legal consequences for UK businesses and their staff. The legislation introduces the corporate offence of failing to prevent bribery, and will require many employers to conduct a risk analysis of their business practices.
An organisation will have a defence if it can show it has put in place adequate procedures to prevent bribery. In March, the government issued guidance on the legislation, stating that adequate procedures are to be proportionate to risk, which will vary according to the size, nature and complexity of a business.
Such policies may cover a documented risk assessment of the organisation’s exposure to bribery and steps to mitigate bribery risks, such as those arising from the conduct of intermediaries and agents or employees connected with hospitality and promotional expenditure, and facilitation payments.
Rachel Jacobs, general counsel at Informa Group, says: “We have done a risk assessment across all our business units. We have done that in conjunction with external counsel and we focused on the areas and risk that are particular to our business. Territory risk is one. There are some jurisdictions which are more prone to bribery than others.
“Another area of risk is dealing with foreign public officials where we might deal with licensing authorities where you need a trade licence to operate in a particular territory.”
Simon Webley, research director at the Institute of Business Ethics, says: “Organisations have to put in training [programmes] for all officials who are likely to come across this issue anywhere in the world. The difficulties arise in a jurisdiction which allows and, indeed, insists on the use of agents to work as a go-between to negotiate a contract.”
Cultural change may be needed
However, policies and procedures on bribery will be pointless if staff are not engaged with them. Reward can be used to drive cultural change, whether it relates to the Bribery Act, an organisation’s carbon footprint, encouraging a high-performance culture, or reducing risk-taking in financial services.
Caroline Stroud, partner in the employment practice at law firm Freshfields Bruckhaus Deringer, says: “Where employers might have problems is not so much in writing a compliant policy, but in establishing a culture within their organisation that supports compliance across the board. It is much more subtle. It is fine to have a policy, but employers cannot guarantee that people will comply with that policy.”
When trying to introduce a culture change, one of the first steps employers should take is to ensure remuneration committees have a clear understanding of the organisation’s strategic direction and consider what targets are appropriate for the most senior executives according to the desired culture. Holly Insley, an associate in the employment team at Freshfields Bruckhaus Deringer, says: “The remuneration committee, although focused on the top-level executive, could play a role in testing the principles that would guide remuneration in the organisation.”
Performance appraisal process
Performance appraisals or the assessment of bonuses or incentives could also be designed around an organisation’s ethics and anti-corruption policies. Also, the appraisal process could incorporate a review of employees’ awareness of their employer’s anti-corruption and bribery policy.
This means the value of the reward would be determined by how effectively employees comply with the policy. For example, BAE Systems changed its bonus scheme for senior executives to better reflect targets relating to recommendations made by Lord Woolf, the Lord Chief Justice , who was commissioned in 2007 to look into its business practices following the start of an investigation by the Serious Fraud Office in 2004.
Practices that reward good behaviour in this way may go against an organisation’s usual instinct to punish or discipline staff who break the rules, says Webley. “Incentivising employees [to do the right thing] has been negative through the use of disciplinary action,” he adds.
Ed Goodwyn, partner in the employment group at Pinsent Masons, says employers should be wary of appraisal processes that are focused too heavily on financial targets and customer relationships. If left unbalanced, such targets could encourage staff to take risks at any cost, he says. “Bonuses and incentives do need to be dusted down. Subject to the way they are drafted, employers may unwittingly seem to encourage bribes.
“If an organisation is operating in Nigeria or another country perceived to be risky and it has an incentive scheme where the salesman takes home a proportion of what he sells and there are no safeguards, he might offer a bribe to get his sales through. If the employee has missed their sales target because, rightly, they did not offer a bribe, the employer might say ‘we will look at the sales target you were given and seek to adjust it so you do not lose out’. That is the positive attitude that employers will need to take.”
Claw-back bonuses could create problems
Claw-back bonus arrangements, whereby awards that have been paid are taken back if the employee’s behaviour does not merit them, could also create problems, says Freshfields’ Stroud. “It is always problematical in practical terms because employers are trying to get money back from someone who might have spent it. So it is much better to ensure there are good remuneration policies that reward behaviours which have already occurred, even if employers have to defer the payout of some remuneration to see how the organisation performs or until they have had the time to actually measure whether there has been any risky behaviour.”
Reward schemes incorporating feedback from staff can help to ensure an organisation’s values are respected. Mark Quinn, a partner at Mercer, says that one of Mercer’s clients, an investment arm of a universal bank, used variable pay as an incentive for good business performance. However, the payment could vary by up to 20% depending on whether the recipient was judged by colleagues to have demonstrated behaviours that went against the organisation’s values.
BAE Systems uses a peer review process for its 10,000-strong executive population, in which senior staff are asked to evaluate their colleagues’ behaviour in terms of the organisation’s values. Executives are rated on a number of criteria, including their ability to develop a strong employee culture and encourage people to speak up. However, financial rewards no longer depend on the ratings executives receive from their peers. The company introduced the process because it was thought that linking outcomes to career progression would produce more genuine feedback on behaviours.
Debbie Allen, managing director of corporate social responsibility at BAE Systems, says: “We decoupled it from reward this year and made it more about career development. If somebody is getting rotten scores, they are hardly going to get the next promotion.”
Reward the right behaviours
Mercer’s Quinn advises employers to conduct analysis to ensure they are rewarding the right behaviours among staff. “An organisation might talk about having a performance-based culture, but if it looks at what actually gets rewarded, it might be tenure, for example,” he says. “Careful analysis may show that people who [get] the best reward are the ones that are there longer and not necessarily the high performers.”
Employers should beware of any contradictory messages their reward package may be sending out, says Stuart Hyland, UK head of reward consulting at the Hay Group. “There are examples we have seen where the employer talks about wanting much greater collaborative team-based effort, so it builds up team-based incentive programmes, then you look at individual base pay progression and it is all down to personal performance. That is a very strong contradiction you have got to get across.”
Mercer’s Quinn says organisations need to determine what is successful about their reward programme before making changes. “Every organisation is unique. Sometimes when employers are using reward to drive organisational change, they need to understand what makes the organisation operate with the degree of success it has at the moment.”
Employers that want to drive cultural change through reward need to consider a number of factors concerning the behaviours it wants to change, what its current structure already achieves, and whether it complements organisational values.
Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development, says: “I do not think reward on its own can drive change, but it can support change. If the organisation wants to lessen its impact on the environment, it may have some mission statement or aspiration, but is it actually backed up in how people are rewarded and recognised?”
The Bribery Act 2010
When the Bribery Act comes into force on 1 July, employers carrying out business in the UK may be breaking the law if they fail to prevent employees from committing bribery on their behalf.
• The Act covers offences committed by parties associated with an organisation, including contractors, sub-contractors, suppliers and joint-venture partners.
• A bribe on behalf of a subsidiary by one of its employees or agents will not constitute a breach for its parent organisation if it cannot be shown the employee intended to obtain or retain a bribe, even if their employer or connected subsidiary benefited from it indirectly.
• Gifts and hospitality to private sector employees and UK public officials will be an offence only if they are intended to influence the recipient improperly.
• Prosecutors scrutinising potential bribes paid to foreign officials must prove there is sufficient intention to influence and secure a business advantage. Lavish hospitality could be regarded as bribery.
• Repeated facilitation or ‘grease’ payments that are an accepted way of doing business, as well as a failure to follow organisational guidance on how to handle requests for such payments, are more likely to result in a prosecution.
• UK organisations providing free medical help or community services in exchange for contracts in poorer countries could run into difficulties.
Gifts and hospitality
Government guidance on the Bribery Act has cleared up some of the confusion over how businesses and their staff should go about offering or accepting corporate hospitality.
It said the Act would not criminalise genuine and reasonable examples of hospitality and promotion. This means that in almost all circumstances, employers can take clients out to dinner or recognise the achievements of staff at a dinner hosted by the chairman, for example.
Ed Goodwyn, partner in the employment group at Pinsent Masons, says: “There has been a lot of scaremongering about this. The Ministry of Justice has sought to help employers and say ‘let’s not chuck the baby out with the bathwater on this issue. What we are trying to do is stop bad practice and we accept that bona-fide hospitality and promotion is part and parcel of business’.”
However, employers will be breaking the law if prosecutors find that hospitality resulting in a financial advantage or other gain influenced someone in an official role and secured a business advantage. Therefore, excessively lavish treatment just before presenting a tender proposal should be avoided.
Simon Webley, research director at the Institute of Business Ethics, gives an example: “Flying somebody out for four days to the Grand Prix in Monaco at a five-star hotel is one where alarm bells should ring. It could be seen as a facilitation payment.”
Openness about salaries, hospitality and reward will reduce opportunities for unethical behaviour. “I would introduce things like gifts and hospitality registers to record what you are doing and who it is for,” says Webley.
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