The Australian Small Business Blog

Tuesday, November 08, 2011

Incentives for Small Business Employees – The Qantas Model

by Dr Greg Chapman

While there were many cries of “Shame – Shame” at Qantas’s CEO Alan Joyce receiving a 71% pay increase while shutting down the airline, Joyce’s biggest mistake was not greed, but rather poor PR. In fact, his remuneration model may be something that small businesses might want to consider for their staff. Of course I am not talking about million dollar bonuses, but understanding the principles of the deal without the hype.

First some facts about the pay deal. Joyce’s pay is made up of 3 components:

• base pay,
• short term incentives and
• long term incentives.

The incentives are based on achieved targets set by the board, one of which is the Qantas share price, of particular interest to Qantas shareholders, its owners. The Qantas share price in recent times has been languishing for multiple reasons, not least of which are the GFC, the exchange rate, and high operating costs reducing profit, which in turn was reflected in the share price, which is just the market view of the long term value of a share’s dividends expressed as a price today.

As a result, over the last two years, Joyce’s actual total pay fell by 30% and 20%. Which is fair enough you might say. Next year, his base pay actually falls by 9%. The headline figure of $5 million only occurs if he achieves all the targets that the board has set, including a share price increase that will add billions of dollars to the company value. If he achieved that, do you think it would be fair if he received a fraction of 1% of that value increase as a reward? If you said yes, you would agree with the 96% of shareholders who voted for the new package.

The media reporting was, of course all politics, but whenever have the facts ever stood in the way of a good story, particularly when there is a barrow to be pushed?

So how does this apply to small business?
The principle that can be included into many small business incentive schemes is that employees can have different components to their pay. Their base is what they receive as long as they reach minimum standards, failing which they would not have a job. There might then be an incentive based on relevant ‘hygiene’ issues that may reflect common staff problems such as coming in late and leaving early. The third component is where they make a direct contribution to the business’ performance, through, for example, increases in sales, or saving costs.

All good incentive schemes are self funding, and easy to understand (unless you are a newspaper journalist). If your staff help you to increase profit, rather than just turn up each day, why wouldn’t you give them a share in the rewards?

May Your Business Be - As You Plan It.

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.

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1 comment :

Anonymous said...

Two problems: firstly performance pay should be for performance above and beyond the "base". But executives are being paid bonuses despite running businesses badly.

Secondly how to measure the performance. Many criteria are able to manipulated in the short term (eg increase profit by reducing investment in long term assets, or cut costs by moving them offshore) But these short term measures often are deleterious to the business in the long term.

I would rather see exectutives work once and get paid once.


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