Staff at Irish Water and its parent company Ervia can earn an extra bonus payment of up 3% of their salary on top of individual performance-related payments, according to details revealed [by reporter John Burke] on RTÉ News yesterday.
The potential top-up payment is calculated using what is described in official company documentation as a “multiplier“.
Under the mechanism, staff members “are paid two further layers of bonus payments, if both the company and their individual business unit exceed all their pre-agreed targets in a given year”.
Not remotely confusing.
Ervia’s CEO Michael McNicholas appeared on This Week with host Colm O’Mongain to elucidate further.
Grab a tay and a soft cushion.
Colm O’Mongain: “Can I just ask you first, this multiplier on performance related pay and bonuses, when would that apply in terms of establishing (a) what the target is, I suppose, and when this would be paid?”
McNicholas: “Well, let me start by explaining exactly what the pay model is in Ervia in the first place. So in 2012, Bord Gais, as it was then, negotiated a new pay model for the company, and it was introduced in 2013, and, at the heart of that pay model, it was designed to reduce the overall payroll costs of the company, and fundamentally to introduce a performance-based reward system. The effect of this new pay model was that it eliminated all traditional allowances in the company, it eliminated automatic increments, it introduced a pay freeze to 2016, it targeted the delivery of 34 million in payroll costs savings over the introduction of this model, but at the heart of it it also replaced the traditional performance-based model, because at Bord Gais in the past we actually did have bonuses for some of our managers, we do not have any bonuses in Ervia group today under this pay model, we have replaced it with a performance-based model where an element of every individual’s pay is at risk. Let me give you an example…”
O’Mongain: “Can I just.. You’re making a distinction there that this is not pay, or that, sorry, that this is part of pay instead of something…”
McNicholas: “And I’d like to give the example of exactly how this works, Colm, it’s germane to every comment that has been made on this programme to date. So let’s take an individual and, most importantly, all pay in the company is now benchmarked to the market, we don’t decide what the pay should be for a particular role, it’s independently benchmarked to the market, so let’s take an example of somebody working in Ervia or joining Ervia, we’ve benchmarked their role in the company to market and let’s say that the market says you should get paid, call it round numbers, 50,000 Euros for that job. In joining Ervia we will bring you in and say you’re on a performance related reward system, let’s call it 8%. So we’re not going to pay you 50,000, even though the market would pay you 50,000, were going to pay you 46,000 for your job. The other 4,000 of your salary is the pay at risk, and if you deliver your performance during the year you have the opportunity to regain that pay at risk. It is not a bonus, it is an element of your core pay that is at risk.”
O’Mongain: “But is it pensionable?”
McNicholas: “No it is not.”
O’Mongain: “Well then how is it not a bonus?”
McNicholas: “Well, you assume maybe everyone in RTE has all of their pay pensionable, but let me be clear here, in the marketplace today not all of people’s salaries are pensionable. if you have an element of your pay that is not pensionable, it does not make it not pay. The market salary, in the country, for someone with 50,000 pensionable, it is a further reduction in our costs that we reduce to to 46,000 and don’t recognise the 4,000 Euros of pay that is at risk as pensionable. That is a further cost reduction. It does not not make it pay, Colm.”
O’Mongain: “And how do you calculate, as you were saying there, that there’s a market benchmark for this, what companies do you pick in the market and what’s the spread of companies that you pick when you are benchmarking people’s pay on entry?”
McNicholas: “That’s a very good question. One of the things you could do is you could take all the lowest paid companies in the country if the benchmark is very low or you could take the highest paid companies in the market and get a very high pay salary. We’ve agreed with our trade unions that under this pay model we will use the median of the market, that means the middle of the market, and we use an independent company, Towers Watson, who are recognised as experts in this field, to pick a basket of companies that are representative of the roles in the company, pick the median of, you know, the market, and that is the objective independent benchmark.”
O’Mongain: “And you’ve done that in consultation with, with the trade unions in Ervia and in Irish Water?”
McNicholas: “Yes, we have.”
O’Mongain: “Those trade unions have presumably engaged in this process not to the detriment of their members…”
McNicholas: “I’m not quite sure I know what you are saying by that question.”
O’Mongain: “Well, what I’m saying is, when you look at the basket of companies against which you’re going to benchmark yourself, you’re obviously not going to pick people at the lower end of the market, so, I mean, in terms of deciding how big the basket in the first place is, then when you decide what the median within that basket is, there’s a process that’s involved in that as well, surely.”
McNicholas: “There’s a process, which is done independently by Towers Watson, where we target that they give a representative sample of companies to get the median of market pay in the country, that means that for every role in Ervia, we look at the median pay in the country, we benchmark against that, and for any individual, we reduce their pay in the company by a percentage, and that is at risk.”
O’Mongain: “And by reducing that pay, what are the criteria for, because, obviously, one of the things for looking at when a person gets some of the at risk pay or doesn’t get the at risk pay, people in the ‘needs improvement’ category do get some of that. Explain please the rationale behind that and how is that calculated?”
McNicholas: “Absolutely. So let’s take any individual. So what happens in the company is, any individual in Ervia is sat down at the start of the year and they’re given a set of performance targets for their role and what we expect them to deliver during the year. That is reviewed at the half year and then at the end of the year in a performance review meeting. Those targets are explicitly set out in metrics or measures by which we can definitively say whether they were delivered or not. There are a number of categories, as you’ve outlined in your report at the start of it. So let’s take somebody who’s in the lower categories, somebody who does not meet a performance. This means that they did not meet what was expected of them in terms of their job or how they did it in terms of their style of management or style of delivery. That means that the pay that is at risk is not paid. Take somebody, and this is the one that has been talked about before, that if we had a bonus system, and somebody needed improvement why should they get a bonus. That’s absolutely correct, but we don’t pay bonuses, if you need improvement, you asked the question so if I may finish, if you need improvement, you have delivered some of what we have expected of you during the year, so you should get some of that pay that’s at risk, but you don’t get all of your pay that’s at risk.”
O’Mongain: “And why the differential, then, within those categories, in the lower categories it’s 1.5% for people who need improvement but at the higher levels it’s 9%?”
McNicholas: “Well, you’re talking about the thing about different, different…”
O’Mongain: “That’s in the ‘needs improvement’ category, that is.”
McNicholas: “Well, I think it’s more to do, it’s more to do with the level you are in the company. The lower you are in the company, the less of your pay is at risk. The higher you are in the company, the more your pay is at risk. So within it, somebody who does not meet gets very little. if you need improvement, of course you’re going to have more of your pay at risk, so therefore you’re going to get paid less of it, so there are two criteria, one if you’re lower level in the company there’s less of your pay at risk because you’ve less control over it, and then if you’re higher in the company you’ve more of your pay at risk, within your performance scores, if you’re not performing in then more of your pay that’s at risk does not get paid. Let me be very clear, these are not bonuses, they are part of your salary in any other company that you don’t get paid.”
O’Mongain: “Would you not accept that that’s a matter of semantics and interpretation?”
McNicholas: “I absolutely do not accept that.”
O’Mongain: “But you have picked a median that you say is part of the market median, you sit people down and you say we have agreed, we will agree core pay with someone and then there is an element of a bonus which can be paid to them over and above the agreed core pay they sign off contractually.”
McNicholas: “No, they sign off contractually on a contract that says you will be paid to the market median but you accept if you join our company that part of your salary is at risk.”
O’Mongain: “Yes but…”
McNicholas: “And that is a condition, that is a condition of signing a contract with Ervia or any part of Ervia Group. And trying to turn this around and say, well you know…”
O’Mongain: “But there’s a core aspect that’s pensionable and then there’s a notional aspect that’s discretionary on the part of the company, that will be baid in certain circumstances, and that part’s not pensionable, is that not a performance-related bonus by another name?”
McNicholas: “Let’s go back again. If you look at a benchmark in the market and you can show that for your job, and I’m not going to ask you how much you get paid, but for your job, if you joined Ervia, were paid 50,000 to use that example again, when you join Ervia you understand you’re not going to get paid the 50,000 you got paid in an outside company, you’re going to get paid 46,000 and the 4,000 that you would have taken as part of your normal pay in another company is not going to be paid because we have transformed Ervia into a performance-based company. Our objective is to have a high-performing organisation and to do that we have insisted, as part of the review of our pay model, that everybody who works in our company is accountable for their performance and they have to be prepared to take an element of their pay at risk and no matter how much we talk about this you are not going to convert an element of someone’s basic pay into a bonus because it is not a bonus.”
O’Mongain: “So when people went over to Irish Water from Bord Gais as was did portion of their salary become discretionary at that point and become at risk, did somebody on 50,000 in Bord Gais transfer to Irish Water and all of a sudden become somebody on 40,000 with 5,000 at risk or somebody on 40,000 with 10,000 at risk.”
McNicholas: “Okay. So let’s even take it for, let’s take the Bord Gais family in its own right, someone who worked in our network business. One of the reasons we introduced this pay model is that we wanted to make sure that our pay was in line with the market because we felt that our pay had drifted outside the market. So that we known from the start that we were going to have people whose pay grades were outside the market. That’s why we introduced a pay freeze. So absolutely, we started off from a traditional utility pay model that didn’t have performance. We accept fully that people would have been a little hard on the market in some cases and our statistics show that there’s a percentage, it’s 20% of…”
O’Mongain: “Yes, but did anyone go from 50,000 down to 40,000 with a discretionary element?”
McNicholas: “I’m coming to that. Yes, so there are absolutely within Bord Gais itself, I’m coming to Irish Water, people who if benchmarked in the market would be higher than the market.”
O’Mongain: “No, that’s not what I’m asking, but what you’re saying is… Did any one move and put at risk a portion of their salary…”
McNicholas: “I’m coming to that, that if I may, Colm. But to just explain it. You have to understand, when you transition from a traditional pay model, we know and accept that in the beginning of it for the first couple of years we are going to have people who are paid above the market. What we’ve done is introduced a pay freeze for that and we know that over a period of time they will not get any pay increases and as the market moves they will come in line with the market median, so yes there would be people who have moved from networks into Irish Water, who would be above the median, to some degree, some of them and yes, for a period of time, the pay related award for them will be somewhat higher than the market median, that’s just a natural transition, and we’ve checked it, even in year one, and as we look at our figures over year 2 we know that the vast majority of those move into the market median, but in the transition it is absolutely a fact that some people will be slightly above it but that does not take away from what the market is doing.”
O’Mongain: “Michael McNicholas, CEO of Ervia thanks very much for joining us in the studio this afternoon.”
(Laura Hutton/Photocall ireland)