29 Mar 2018
By John Grant, Wright, Johnston & Mackenzie LLP
The advantages of a mutually satisfactory employer and employee relationship cannot be overstated. There is a wealth of statistical evidence available to show that happy employees are more productive and also less prone to sickness absence. There is also a benefit to the bottom line in not having to be continually bringing new employees up to speed with the use of systems and technology.
One way of ensuring that employees feel genuinely incentivised to grow their employer’s business is by the use of employee ownership. This is where the employees have ownership of some or all of the business. The best known example is John Lewis who turnover almost a billion pounds and have over 90,000 employees.
While this model may be better suited to slightly larger and more well established businesses, it is clear that this is becoming an increasingly popular model with the latest statistics from the Employee Ownership Association confirming that there had been a ten per cent increase in the average operating profit and over a six per cent increase in productivity of employee owned businesses. These figures easily outstrip the performance of the economy more generally. Staff are also likely to remain employed for longer in the event that they feel that they have a genuine stake in the business and customers reap the benefits of having knowledgeable and motivated staff.
It may sound trite, but another way to ensure that the staff help grow the business is to incentivise their performance. This could be done by paying staff at above market rates but that can be unattractive if done on a uniform basis as it becomes a function of the job rather than rewarding individual excellence. In my view, it is perfectly appropriate to have employees in the same role earning different salaries depending on ability (provided, of course, that the reason for any difference is not a discriminatory one). To pay everyone at the same rate can sometimes lead to a “race to the bottom”.
Another approach is through the use of performance related bonuses. Indeed, a guaranteed bonus during the initial period of employment can be an effective way of luring talent away from competitors.
Sometimes employers prefer the flexibility of a discretionary bonus only and this would normally be the way that I would approach drafting the relevant terms. There are a number of reasons why this can be attractive to an employer, not least that that there is a long line of case law, largely relating to City bankers, which establishes that if a bonus is genuinely discretionary then the employer has complete freedom to pay or not to pay and also maintains control over the timing and amount of payments.
However, employees are likely to wish to ensure that their hard work is definitively going to be rewarded. The best way to do that would be to link payment to performance. If done properly, this creates a virtuous circle where everyone is sharing the same objective. However, if this is the route to go down then it is important to review and revise the targets on a frequent basis. It can be demoralising for employees if they have an expectation of meeting targets which is then shown to have been false.
While there will be times where salary details should be kept confidential, in smaller organisations people are likely to talk and there are often situations whereby an employee can be incentivised to do as well as one of their peers. In my view, healthy competition can be no bad thing provided it doesn’t damage the culture of the employer.
Good entrepreneurs are also more likely to have a flair for identifying talented employees. It may be that they find it easier to recognise entrepreneurial traits in others.
As always, ensuring that everyone has an informed view of their prospects of contributing to the growth of their employer’s business is in everybody’s interest.
John Grant is a Senior Associate at Wright, Johnston & Mackenzie LLP. Wright, Johnston & Mackenzie is a full-service, independent Scottish law firm, with a history stretching back over 160 years, operating from offices in Glasgow, Edinburgh, Inverness and Dunblane. Further information on WJM can be found at www.wjm.co.uk