Bonuses in Bad Times

HBR’s fictionalized case studies present dilemmas faced by leaders in real companies and offer solutions from experts. This one is based on the HBS Case Study “Mercadona” (case no. 610-089), by Zeynep Ton and Simon Harrow. It is available at hbr.org. Luisa Fernandez pulled into a parking spot behind one of Superado’s stores on the outskirts of Seville but paused before getting out of the car. This was usually the best part of her week—visiting one of her company’s supermarkets, talking to the store manager, walking through the aisles, watching employees interact with the customers. She’d been doing it since she was a little girl, tagging along with her father as he grew his business from one small market in central Seville into one of Spain’s largest grocery retailers, with more than 1,000 locations across the country. He’d kept up his site visits for 30 years, even after he’d gotten sick. When Luisa took over as CEO, after his death, she vowed to continue the tradition. Today, though, she felt uneasy. Jorge Ramos, the manager of the store she was about to tour, had asked her to briefly address the staff, and she knew it would not be the usual cheerful exchange of ideas. Spain was on the verge of a recession, and everyone was worried about money. Someone was bound to ask her whether Superado would pay bonuses this year. And she didn’t yet have an answer. Is the Party Over? The previous night, Luisa had met with Maria Alva, Superado’s vice president for finance. Preliminary group results for 2008 had revealed a sharp fall in both the number of transactions per store per day and the average value of each. The company had enjoyed steady increases in sales and profits for the past 15 years, but it was now up against the harsh reality of an economic crisis, and it was going to miss its targets. Maria did not mince words. “You understand what this means, Luisa,” she said. “We can’t pay bonuses this year. Our policy is quite clear: Even if the employees have met their individual performance targets and the local stores have met theirs, we give bonuses only if we also meet the company’s growth targets.” She gave Luisa a hard look. “So you’re going to have to make the call: No one gets a bonus this year. Not you, not me, not the store managers, not the cashiers, not anyone.” Luisa had suspected that this was a possibility, but she wasn’t entirely prepared to take such a drastic step. “I understand the position we’re in, but this is going to come as a huge shock to our employees. You know as well as I do that everyone thinks of the bonuses as part of their salary. They count on them, especially around the holidays.” Superado’s bonuses represented one to two months’ pay for most employees, depending on their length of service, and in a typical year about 90% of people qualified. Maria shrugged. “The policy is the policy.” Luisa took a deep breath. “I think we need Rodrigo’s perspective on this.” She dialed the extension of Superado’s vice president of human resources, and he picked up on the first ring. In less than a minute, he had joined them. Rodrigo Mendoza had worked closely with Luisa’s father, and she valued his advice. She briefed him on the bonus issue. He’d clearly seen it coming. “Look, the crisis has affected everyone, not just us,” he said. “But we can hardly hold our employees responsible for the poor results. In fact, it’s thanks to their efforts that our numbers aren’t much worse. Sales per employee are almost 20% higher than at other supermarkets.” “That may be,” Maria replied. “But it doesn’t change the fact that we can’t pay out bonuses of €200 million in a year when we’ve made only €220 million. What if the recession gets worse? Anything we paid out now would have to be made up next year by raising prices, which would send our customers running to Grandplace or other competitors. That would mean even worse results.” Maria pointed to the stack of financial reports she’d dropped on Luisa’s desk. “We’re talking about the stability of the company here. In the long run, the employees will care more about having a secure job than they will about one year’s bonus.” She paused and softened her voice. “Of course, we have to recognize that times have changed, and we should lower our performance targets for next year. We could even revise our policy on bonuses so that they reflect performance relative to our peers. But I think a bonus is out of the question for this year.” Rodrigo didn’t respond to Maria directly; instead he looked at Luisa. “Your father always said, ‘You have to give to get.’ If you don’t treat employees well, they won’t work hard for you. We’re competitive because our people go the extra mile for customers.” He leaned in, visibly agitated. “Will they keep doing that if you take away their bonuses? You can’t risk it, especially when times are this tough. Just think about what your father would do.” “We’re competitive because our people go the extra mile. Will they keep doing that if you take away their bonuses?” Maria looked exasperated. “No, think about what we need to do as a company in this economic climate,” she said. Luisa thanked them, and then considered her options as the two filed out of her office. Even without the bonus, Superado offered much more than other chains did. Employees had permanent contracts, and most workers—85% of them—were full-time. Shifts were stable, benefits were generous, and salaries were well above market levels. And all employees received management training. Would they really give all that up for a part-time, low-wage, no-benefits job at another retailer just because Superado didn’t pay bonuses this year? She didn’t think so. Superado was an outstanding employer, and its low turnover rate—3.8%—reflected that. Still, bonuses had been part of the deal for 30 years. How could she change that? Hard at Work Luisa was still mulling over her problem in the parking lot when someone knocked on her car window. It was Jorge, the store manager. “Glad you remembered to park in the back,” he teased as she got out of the car. That’s where staff and management at all Superado stores always parked their cars. The front was kept clear for “los jefes,” or “the bosses,” which is how employees were taught to refer to customers. Concern for the jefes’ needs was also behind the company’s unusual pricing model. While most Spanish supermarkets varied prices throughout the year with frequent promotions, Superado kept its prices low but steady. Luisa’s father had believed that customers prefer predictability, and so far, the evidence was on his side. Jorge walked Luisa inside and began her routine tour. They started in the warehouse at the back of the store, where workers were unloading pallets of food from delivery trucks, and then reloading the pallets with waste for the recycling center. Next, they walked through the store itself, which was laid out in six simple sections (meats, fish, baked goods, fruits and vegetables, cosmetics, and a deli), each with its own distinctive decor. In the produce section, Jorge called over a plump, middle-aged employee with a warm smile. “Luisa, you remember Rosa,” he said. “Rosa has been with us nearly 10 years, almost since the opening of the store. She’s the one who came up with the loose produce idea.” Luisa remembered it well. Superado used to sell its fruits and vegetables waxed and packed for presentation. Although the produce looked nicer, some shoppers had in recent years started buying their fruits and vegetables from competitors instead. In talking to her customers, Rosa had discovered that most of them found the packaging unnecessary. And they resented being forced to buy a pack of six apples, for example, when they needed only two—especially since it made the purchase more expensive. She’d suggested switching to loose produce at her store, sales had picked back up, and every other site quickly adopted the practice. “Rosa, tell Luisa what we were talking about yesterday,” Jorge prompted. Rosa beamed. “It’s like this, senora,” she began. “We see the jefes getting more and more worried about their budgets. I think we can help them if we cut down on the product range. I know it seems odd, but when they see all the things we have, they get overwhelmed. They have to make hard choices about what they really need versus what they might like to have. If we help them avoid that pressure by offering really good deals on fewer products, I think we’ll end up getting more business, not less.” “Interesting idea, Rosa, thank you,” said Luisa. “Jorge must be thrilled to have you.” “Yes, I certainly am,” he said. “In fact, I’m happy to have everyone in this store. I don’t think I’ve ever seen a team work harder or smarter than I have in the past few months. We’re really pulling together.” Luisa and Jorge kept walking. “There’s something I wanted to mention to you,” he said, suddenly less cheerful. “Grandplace has just moved into our neighborhood with a small-store format. It’s trying to poach our customers—and our employees. Rosa said a manager was talking with people at the bus stop last week.” Jorge regarded Luisa ruefully. “I’ve heard the same thing from several other store managers. They’re even offering signing bonuses.” “Has anyone left yet?” she asked. “No one from this store,” he replied. “Everyone’s happy here. But I just wanted to make sure you knew.” Luisa was about to respond, but something near the exit caught Jorge’s eye and he quickly excused himself. Looking over, Luisa saw four people queued up at one of the cash registers. Always diligent, Jorge had probably gone to open another checkout line. Time to Adjust? After closing for the day, employees began to gather for the staff meeting. Luisa glanced through her notes. Jorge would open with a presentation on the past year’s performance and goals going forward. He would then ask Luisa to take over. She planned to first congratulate Jorge and his team on their store’s being one of the best performers in the region. But then she would have to present the estimates on Superado’s group performance, which would show that not all other stores had been doing as well and that the company would miss its annual sales and profit targets. During the Q&A session, someone would surely raise the bonus question. Luisa knew that anything less than a frank and straightforward answer would be unacceptable. And once she’d given the employees an indication, she’d have to stick to it to remain credible. Many of the store’s staffers knew employees at other Superado sites. The news would spread quickly. Looking around at the gathering crowd chatting excitedly, Luisa felt a sudden rush of gratitude toward the employees. It was their daily efforts, year after year, that had made her father’s company what it was today, and for that alone they deserved a bonus. Yet, as the financial tables in her notes reminded her, the economic reality had changed. It was her responsibility to see to it that Superado survived and thrived. What Would You Do? Some advice from the HBR.org community To give bonuses only to those who have performed exceptionally well would be fraught with danger. True meritocracies take years to build and require agreement on what constitutes achievement and how it is measured. Charl Cloete, COO, Clearance Capital The conflict comes not from the economic downturn, new competition, employee entitlement, or any other circumstance. The conflict is people versus policy. Policies provide legal and ethical guardrails for a corporation, but when they prevent it from practicing its values, they become roadblocks to success. Erich Roehl, Venntis, LLC Luisa should enlist the frontline employees in innovation. If she asked them to help Superado cut costs by, say, $50 million and promised to apply any savings to bonuses, she’d get a committed workforce actively engaged in making Superado more profitable. Using bonuses to focus employees on uncovering consumer insights and generating ideas helps the company in the long run. Katie Konrath, Innovation Process Specialist, Ideas To Go Should Superado give its employees a bonus this year? Nicolas Hollanders is the executive vice president of human resources, IT, and sustainability at the Belgian food retailer Delhaize Group. Luisa has a communication problem. Somewhere along the way, Superado stopped making it clear that bonuses are tightly linked to overall growth targets, and the notion took hold that bonuses are a guaranteed part of salary rather than a reward for superior work. Clearly the company’s bonus system needs to be overhauled. Luisa should start by creating a structured decision-making process for compensation issues of this importance. At Delhaize Group, we typically discuss bonus payouts first in the full executive committee. Recommendations are then reviewed by the remuneration committee of the board before being submitted to the board of directors for approval. Also, I would advise Luisa to get rid of Superado’s “all or nothing” bonus scheme. The retailer could, for example, set a target for minimum company performance below which employees would receive no bonus, an intermediate target at which they’d receive half the bonus amount, and a challenging target at which they’d get the full bonus. I would add an additional range for exceptional performance. Luisa and her management team should continually communicate to employees throughout the year about performance against the targets. Setting employee expectations from the outset would certainly have made it easier for Luisa to find a bonus solution that signaled the downturn in company performance and also provided an incentive for the next year. Setting employee expectations from the outset would certainly have made it easier for Luisa to find a solution. Now, to the question of whether Superado should pay a full bonus, my answer is no. Given that the company’s revenues fell to €220 million, a bonus payout of €200 million is far from prudent from an economic perspective, even assuming that Superado is still a private company. It’s also true that paying no bonus at all is out of the question. Superado’s employees have played a big part in making the company successful, by working hard and smartly. Moreover, they have become so used to receiving bonuses that they might see nonpayment as a breach of trust. In the retail food business, store employees are absolutely critical to the customer experience. It is incredible how fast customer satisfaction can plummet if the in-store experience with the staff is bad. I believe that interactions with salespeople are even more important to the customer experience than the products themselves. Luisa also can’t ignore the fact that a competitor is out there poaching her employees. I understand that this is not an easy situation. My advice to Luisa is twofold. First, Superado’s executive team and its board must decide on a reasonable total amount to pay out in bonuses. They should then allocate that money in a differentiated way across the levels. For example, Luisa and her executive team could take no bonus, middle managers could receive 25% of their target bonus, and store-level employees could receive 50% of theirs. This would send a clear signal that Superado recognizes the hard work and effort of its employees but at the same time would communicate the very real economic pressures on the business. “We are in danger,” should be the message, “and if we don’t work even harder, the competition may put us out of business.” Marcos Barberán is the human resources director of Mercadona. In my opinion, Luisa should pay the bonuses. Any business with an eye to the long term must reward people’s individual and joint efforts. As Superado has found over the past three decades, teamwork and commitment are crucial to building an organization that is successful in good times and in hard times. Overcoming obstacles together creates a sense of pride and of belonging to a team. The bonuses reinforce that. I speak from experience. Superado’s story is loosely based on the situation Mercadona faced a few years ago. In September and October 2008, Mercadona saw sharp drops in sales—3% and 6% respectively. As a result, we were going to miss our annual growth targets and had to decide whether or not to pay out the usual bonuses. In our case, the management committee decided that all Mercadona employees who had achieved their individual targets and had passed their evaluation interviews would receive a bonus. Senior managers believed that it was important to reward and foster individual and team efforts, especially against the backdrop of a severe economic downturn and uncertainty about the future. In the end, 95% of Mercadona’s employees received bonuses—€190 million in total. A culture that rewards the commitment and hard work of employees will deliver sustained growth and higher productivity—and a richer pool of talent to draw on. Our reasoning was simple: We needed the commitment of our people if we were to negotiate the tough times ahead. We did not feel confident that we’d be positioned to understand and adapt quickly to changes in customers’ needs and buying habits without that commitment. After all, people learn new skills and fulfill goals not because somebody tells them to but because they want to. The decision paid off. Since 2008 Mercadona’s productivity has risen by an average of 4% a year. Our company policy on bonuses and targets has remained unchanged; indeed, despite the tough economic conditions, Mercadona continues to grow, and in 2011 employees received target-related bonuses amounting to €223 million. The Superado team has to face a hard decision, but it is often the case that leaders must find the courage to take decisions that are tough but necessary. Most important, Luisa needs to be very clear in how she communicates the firm’s decision to pay bonuses in such hard times. She should state openly the philosophy behind it so that employees understand that there is a strong expectation of their renewed commitment. It’s worth noting that Mercadona’s decision back in 2008 might well have been different if we had been a public company. The capital markets often punish firms that make large bonus payments in deteriorating economic climates. But that’s the advantage we have as a family-run business. We can be much more flexible than a public company when weighing short-term and long-term issues. And I am absolutely convinced that paying bonuses is the right long-term decision. A culture that rewards the commitment and hard work of employees will deliver sustained growth and higher productivity. It will also nurture a richer pool of committed talent to draw on—perhaps the single biggest competitive advantage any company can have.

Bonuses in Bad Times

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