Performance related pay – some food for thought BA v Banks
Image from slate.com
We’ve all heard the rumpus about bankers getting bonuses while the bank is still loss making. I can’t say I agree at all, as I can’t see a reason why someone should be substantially rewarded when losses are being made. While reading the news recently (April 1, 2011), I noted that British Airways CEO Willie Walsh, did not take a bonus for two years while the company was loss-making (see here). Contrast that to Royal Bank of Scotland. According to the Guardian, bonuses totalling £950m are to be paid out despite £1.1 billion in losses. Or out another way, the loss would be £150m if no bonuses were paid out. I am not getting into the personalities or the companies, but surely what the likes of BA have done is both logical and financially sound.
Opportunity costs of losing employees
If you have studied business or economics, you’ll know what an opportunity cost is. Just in case, an opportunity cost is the cost forgone by choosing one course of action over another. I often ask my students ” what is the opportunity cost of who sitting here listening to me? Can you put a money value on it?” Usually one or two of them realise that they could be out working, so they answer with the minimum wage rate, which is a reasonable answer.
Two things prompted me to write this post. First, someone I know was made redundant as a systems trainer a few years ago, due to the role being outsourced. Now, after much failures by the outsourcing company, that same person is back in the company as a contractor earning a tidy daily fee. Why? Well, the outsourcing/redundancy meant a huge body of knowledge was lost from the company, which to cut it short resulted in poor systems training. I wonder how much this mistake actually cost the company? WI had this thought in the back of my mind when I read a post on Marc Lepere’s Blog on the CIMAGlobal website. Marc talks about the opportunity costs of employees. It’s not something I have ever thought about, but I think he is right on the button. Marc’s company have devised too useful concepts called Cost of Replacing Talent® (CORT) and Cost of Loosing Talent®. Taking both together, you can imagine a substantial cost of losing valuable staff. In my example, the cost of loosing talent included a massive knowledge loss, which is a cost that might be hard to put a monetary value on but is a cost. Within the CORT is an estimate of the opportunity cost of replacing staff, which is something like the time in weeks it take the new staff to become effective. This could be up to 30 weeks for senior managers, according to the post. So be careful when putting too much pressure on your staff; losing the good ones costs more than you might think.
Reducing costs at the design stage
A CIMA report on the manufacturing sector from August 2010 highlights a number of current issues facing the sector. One of the issues mentioned is making products cost efficient by designing in cost effectiveness at the design stage – and this includes costs of designing in poor quality, just think of the issues with Toyota cars last year. So how can management accountants help at the crucial design stage. According to the report, a number of ways actually. First, the report states that a significant proportion of product costs (up to 80%) are determined at the design stage. Therefore manufacturers will benefit from the management accountant modelling costs for the prototypes or revisiting costs when testing is complete. Another way
Sustainability practices being adopted by companies
A recent joint survey (December 2010) from CIMA, the American Institute of CPA’s and Chartered Accountants Canada provides some very useful insights on what companies are actually doing in terms of sustainability. The survey obtained more than 2,000 responds, mainly from CFO’s. It reports on the key drivers of sustainability, with the number one driver being legal and regulatory requirements. This is followed by minimising brand risk for larger companies and cost and efficiency savings is in second place for smaller firms. An interesting finding is that CIMA members place a greater emphasis on sustainability – not surprising given they are more typically involved with the day-to-day practices of the business. The survey also reports on two cases, including UPS – the global logistics firm. The full survey report can be read at the link above.
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