Harvard Business Review
Case Analysis Report
Bonuses in Bad Times
MNGT 483 – 001
Strategic Human Resource Management
Professor: Yong-YeonJi, Ph.D
Team D
Students:
Nicole Savignano, Tom Butterfield, Tiffany Luviano, MelissaHekl, Chau Tran
November 17, 2013
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Abstract
The case study “Bonus in the bad time” illustrates the situation of an organization which is
considering whether bonus should be given out this time during the economical crisis. The bonus
is calculated to exceed the revenue of the firm. However, there has been an “implied contract”
for annual bonus that has been lasting for 30 years. The predicament is posed to duel with the
employee retention and the organizational culture as well as the capital to maintain its operation.
In this report, we are going to give the summary of the case study “Bonus in the bad time”. Then,
we will identify the problems that emerge in the case. After that, we will propose different
solutions for the problems. The pros and cons of each solution are also considered before taking
the final decision for the case.
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Summary of the HBR Case
The case study, “Bonuses in Bad Times” is an inside look at one of Spain’s largest grocery
retailers, Superado. Superado has over 1,000 locations across Spain, which started as a simple,
small market in central Seville. It is a family owned and managed store. Luisa Fernandez is the
CEO of the company, after taking over the position from her deceased father. Luisa is currently
faced with the issue of paying her employee’s bonuses during a poor economic time. Superado
has had steady increases in sales and profits over the past 15 years. However, with Spain
unfortunately on the verge of a recession, concerns about money began to develop for everyone.
Superado’s Vice President of Finance, Maria Alva, informed Luisa that the company would not
be able to pay bonuses this year, including the executive management. Luisa contacted
Superado’s Vice President of Human Resources, Rodrigo Mendoza for his opinion. Rodrigo
believes that without Superado’s dedicated employees, they would not be staying afloat during
the economic downturn. The sales per employee at Superado are almost 20% higher than
competing supermarkets and Ricardo believes this achievement should be rewarded. Rodrigo is
encouraging Luisa to give the employees the bonuses because the company’s philosophy has
always been that if you do not treat your employees well, they will not work hard for you.
Superado offers more benefits than its competitors with permanent contracts, full time
employment, stable shifts, and generous benefits and above market average salaries. Although
Superado currently offers the best overall package, there has been a threat of a competing
supermarket, Grandplace, which has just moved into the neighborhood and is looking to poach
Superado’s customers, as well as employees by offering signing bonuses. Luisa is faced with the
decision whether or not to give the employees their bonuses to retain employees and improve
employee morale, or sacrifice the employees for the financial status of the company.
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Character Analysis
Luisa Fernandez is the CEO of Superado, a large supermarket chain located throughout the
country of Spain. Luisa has been a part of the Superado family since she was a little girl. Her
father began Superado as a small business in Seville. Luisa visited the stores with her father as he
visited all of his sites for the past 30 years. Luisa became CEO after the death of her father. She
is very devoted to Superado and vowed to continue her father’s traditions after his passing. Luisa
is a rational person who understands that the economy is not in a good position to give the annual
bonuses; however, she has a bond with her employees and does not want to disappoint them. It is
Luisa’s responsibility to see that Superado survives and thrives through the economic troubles.
Jorge Ramos is a store manager for Superado. Jorge is a loyal and diligent employee who puts
the store and employees needs above everything else. Jorge’s primary concern is his employees
and the customers of Superado. Jorge does not want to upset his employees and have them leave
the company for a competitor because of the recession. He wants to prove to Luisa that it is
important to value the employees of Superado. Jorge is an honest employee and informed Luisa
of the new competition, Grandplace, who is looking to take Superado’s employees and
customers. He remains loyal to Luisa by informing her of the attempts as Grandplace has many
an impact on employees at other Superado stores. Jorge has kept his employees happy enough
where they have not left the store, but he is an honorable employee who felt obligated to inform
Luisa of the possible threat.
Maria Alva is Superado’s Vice President of Finance. She is very numerically focused and bases
her feelings on the bonuses on facts. She is straightforward with Luisa when she informs her that
the company cannot afford to pay bonuses this year because of Spain’s recession. Maria is a
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business woman and believes that Luisa needs to make a decision in the best interest of the
company. Maria follows all policies and procedures and is not sensitive to the hit that many of
the employees will take as a result of the inability to pay the bonuses. Maria is a fact driven
individual and uses financial data to make her decisions.
Rodrigo Mendoza is the Vice President of Human Resources for Superado. Rodrigo was a close
associate of Superado’s founder and Luisa’s father. He shares many of the same traditional
values that Luisa’s father and the same values that Luisa is trying to uphold. Rodrigo is a smart
man who predicted this situation. He feels loyalty to the employees and believes the success of
Superado during the recession is due to employee contributions. He is worried about employee
motivation if Luisa does not pay the bonuses. He is looking at the bonuses as a strategic move in
remaining competitive in the industry. Rodrigo is traditional in his values and is focusing on the
company impact if the employees do not receive the bonuses.
Rosa is a dedicated Superado employee. She has been with the store for almost ten years. She is
an innovator for Superado. She marketed a new idea to the management about loose produce.
This abled Superado’s profits to increase as more customers were interested in buying loose
produce instead of packaged produce. She is personable and connected to the customers. She
knows their budgets and how to present these concerns to management. She serves as a middleman for the employees to the executive staff. She is a critical thinker and looking to improve the
business. Rosa is loyal to Superado and informed Jorge of the competitive threat after
Grandplace started to recruit employees. She holds high to her integrity and will not allow the
recession and money incentives to alter her morals.
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Problem Identification
The problems in this case involve employee retention, Superado’s external and internal
alignment, employee satisfaction, as well as total compensation.
With the entry of Grandplace in the market as a direct competitor it is essential that Superado
stays focused on its external alignment in their HR structure. By keeping HRs attention on how
the HR system helps implement Superado’s strategy, being an employee friendly customer
service driven supermarket, they must evaluate both the short term and long term implications of
not issuing bonuses. They must measure the importance of the bonuses to the employees as part
of the total compensation package, and determine if the loss of the bonus will affect retention,
employee satisfaction, and customer service.
With Superado’s current HR practice of leading the market with regard to wages, as well as a
secure future, above average benefits, and stable shifts, they are already making it more difficult
for competitors to enter the market. By eliminating the bonuses they may make it easier for
competitors to enter the market which could erode market share and slow or reverse the growth
in sales and profits they have seen over the past fifteen years.
Solutions
Withhold Bonuses
Failing to pay out bonuses is one potential solution to Luisa’s problem. According to Bonuses in
Bad Times, given the economic circumstance, the company’s revenues fell to €220 million. In a
typical year, about 90% of the employees qualify for bonuses adding up to a pay out in bonuses
of €220 million in a year. The company’s policy states that even if the employees have met their
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individual performance targets and the local stores have met theirs, bonuses are only given out if
company growth targets are met as well. Moreover, paying out bonuses would have to be made
up by passing the burden to the consumer, which could potentially send loyal customers to
competitors.
With that, everyone in the company would not get a bonus, including Luisa and upper
management. Aside from the bonuses, the company offers a lot of other benefits than other
retailers; employees have permanent contract (85% of the employees are full-time), shifts are
stable, benefits are generous, and salaries are well above market levels, and all employees
receive management training.
Provide Bonus
The other solution for Luisa is to keep the tradition going and continue to pay out bonuses as she
has been doing for the past 30 years. Rodrigo, the Vice President of human resources stated that
employees should not be held responsible for the poor results and thanks to their efforts, the
company’s numbers are not much worse. As a result of the company’s efforts, sales per
employee are almost 20% higher than other supermarkets. The company has many employees
that have remained loyal to the company. Rosa, a loyal employee, has been with the company
for over 10 years. Because of Superado’s employees, the company is competitive and goes the
extra mile for its customers.
If the company fails to pay out bonuses, it risks the possibility of losing its employees to
competitors. Grandplace is a competitor that just moved into the neighborhood and is poaching
Superado’s employees and customers. There are rumors that Grandplace is offering signing
bonuses to Superado’s current employees. Moreover, the employees have been receiving
bonuses for many years and nonpayment in bonuses may be seen as a breach of trust. Being in
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the retail food business, it is extremely important to have good employees. Providing bonuses
during such hard times will reinforce the company’s culture, sense of pride and belonging on a
team. Having the employee’s commitment during a hard time is critical.
Changing up the Bonus
Rather than doing an all or nothing proposition, Luisa could come up with a solution that could
benefit both the company and its employees. Coming up with an amount that is reasonable to
pay out in bonuses would be the first step. Once that is determined, the money can be allocated
in a differentiated way. A suggested solution by Nicolas Hollanders is to allocate store-level
employees 50% of their target bonus, middle managers 25% of their target bonus and Luisa and
the executive team would take no bonus. Using this method for allocating bonuses would send a
clear message. Nicolas Hollanders stated that this method would demonstrate employee
appreciation and it will also relay a message that economic pressures are present and that hard
work will need to continue.
Pros and Cons of Suggested Solutions
Withholding the Bonus
Pros
Since the company is experiencing a sharp fall in their sales this year, withholding a bonus
would save the company a lot of money that they can put towards gaining more customers and
retaining their competitive advantage.
There is also evidence that retaining employees is not all about the money. As Mary Cianni and
Peter Gundy (2013) explain their outcomes of survey given in their article Putting Performance
Back Into Retention, “One striking finding is that companies that are the most successful in
retaining employees beyond the desired retention period are those that know that retention is not
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just about money.” They prove that there are various other ways to retain employees including
promotion from within or personal outreach from top managers.
“Establishing [employee-employee relationships] on the basis of compensation alone turns your
employee into a mercenary for hire: the next organization to come along with a better offer will
prove a more attractive proposition” (McKeown, 2002). Although the employees of Superado are
expecting their bonuses, they are all committed employees and have that employee-employee
relationship with each other. They may be disappointed by not getting the bonus, but they know
they are appreciated and they are happy with their job. Not only that, but they also have stable
shifts, generous benefits, and competitive salaries to keep them at this company.
Cons
Grandplace is trying to poach employees with their signing bonuses and if Superado’s employees
do not get their bonuses, they may be willing to move to a different company. According to the
article Pay (Be)for(e) Performance: The Signing Bonus as an Incentive Device, “Essentially a
signing bonus says “You’re going to be happy as an employee of this firm and we’ll prove it to
you by giving you money up front, no strings attached”” (Wesep&Dickersin, 2010). A signing
bonus is a way for Grandplace to lure the employees of Superado in, and without a bonus given
to these employees, they may need the extra money and take Grandplace’s signing bonus. Even
if these employees are committed to Superado, they may feel the Superado bonus is as necessary
as the salary itself to making a living.
Provide Bonus
Pros
“Jones of First Transitions says he has received several requests recently to help structure what
he calls "stay-put bonuses" for key people clients want to make sure they keep. "They want those
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people to be there during whatever time frame when there is all this change going on," he says.
"You take care of your best people. In times of changes, those are the people most likely to be
recruited elsewhere. We want to work hard to retain those people who are high
performers"(Finkel, 2013). If Superado's gives the bonuses that they give every year, they will
continue to retain their employees and these employees will continue to work hard and stay
committed to Superado’s.
Cons
Since the company is known for giving the same bonuses for the past 30 years, they are
practicing some form of institutionalism. According to Patrick Wright and Gary McMahan,
“organization practices can be institutionalized through an imprinting process whereby the
practices adopted at the beginning of the organization’s history remain embedded in the
organization” (1992). Superado’s should not only give out this bonus because they have been
doing it for such a long time. Employees should really try and work hard for the bonus rather
than knowing they will get it as long as they perform to a certain level.
Changing up the Bonus
Pros
There are many ways to reward employees besides giving them the €200 bonus that they are
expecting. According to the President and COO of Aflac, Paul Amos II, “We give monthly
rewards for individual achievements. While we often give out cash bonuses or trips to our annual
convention, we also recognize folks by giving them a day off to volunteer for causes like Habitat
for Humanity, which builds homes for the needy” (Kimes, 2008). Although the employees are
not getting the full bonus, they are receiving other types of acknowledgement which can
sometimes even be more motivational than compensation as shown above.
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Another article Bounce the Bonus Richer Rewards Exist, talks about how many companies are
cutting back their financial-incentive plans and in place, using other non-financial motivators
which tend to be just as effective if not more. “the economic slump offers business leaders a
chance to more effectively reward talented employees by emphasizing non-financial motivators
rather than bonuses” (Birchfield, 2010) but this article also says that bonuses are the “currency of
appreciation” when the economy is in good shape. If Superado’s is able to continue to pay their
employees bonuses (at a lower level) as well as give them non-financial motivators, the evidence
is clear that their employees will still be motivated and effective, as well as committed to this
firm.
Cons
Although Superado’s bonus plan states that they will only give bonuses if they meet the
company’s growth targets, employees are used to the complete bonuses they have been receiving
for the past 30 years. When speaking about the British court case Attrill and others vs. Dresdner
Kleinwort, “Ed Bowyer, an employment partner at law firm Hogan Lovells, said: "While the
facts of the case are unique, the judgment sends a warning to employers that where a clear
promise is made to staff that substantial bonuses will be awarded, the courts will hold them to
that promise even where finances of the business change and making such bonuses is no longer
in the financial best interests of the employer"” (Silvera, 2013). In this case, the employer was
obliged to pay bonuses of £400 million but both the bonus pool and the size of the bonuses were
reduced. The court ruled that this was a breach of contract, which caused a loss of trust between
the employees and the employers.
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Conclusion including managerial implication
According to the study of Pfeffer (2005), Superado has ultimately successfully most of the HR
practices in developing the competitive advantage through management. They are employment
security, high wages, incentive pay, information sharing, participation and empowerment,
training and skill development…
After going through all the possible approaches as well as the pros and cons of all the solutions
that are listed above, the suggestion that Luisa Fernandez should do is to give out the bonus with
some changes based upon the company’s financial statement and the general condition of the
whole market.
There are some rationales for the decision. First of all, Superado has remained its culture and
organizational commitment to the employees for a long time (during more than 30 years of
operation). The bonus represents one or two months’ pay for most employees, depending on their
length of services, which means approximately 90 percent of Superado has qualified for the
bonus. This also implies that Superado’s bonus has been successful in employee retention and
will keep the employee’s trust. Secondly, even without the bonus, Superado offers much more
than other chain did with permanent contracts and full time employment, generous benefits and
management training; and most of all, salaries are well above market levels. Superado has
created the employment security for its employees. Thirdly, the employees have been considered
as the strategy in developing Superado. Thus, the potential costs and benefits of bonus on has
determined the positive performance of the employees. On the other hand, besides those
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strategic approaches to keeping the employees, bonus is the key to reward the employees’
achievement and has been part of incentives, which lead to organization’s success. Therefore,
giving bonus is necessary.
Furthermore, Luisa remains her visiting to the store and conducts the self-managed team practice
when giving the opportunity to her employees (Jorge and his team is one of the best performance
in the region) .
However, the changes in giving bonus should be based on the Superado’s financial statement as
it hardly spends €200 million out of €220 million revenue. The drop-off in Superado’s revenue
did not come from the decrease in sales or management. It was under the crisis of the whole
market and the economy in general. The hard work of the employees is determined by the 20
percent higher in sale per employee compared to other supermarkets. As Becker B., and his
colleagues (2001) mentioned on their study “you must gauge the variability of the impact of
employee performance on firm financial performance”.
The managerial approach that is considered is to give the bonus with the changes. According to
Nicolas Hollanders-Belgian food retailer Delhaize Group-has proposed, Luisa – Superado CEO,
can take no bonus. The executive team will take the 5% bonus. The middle managers will
receive 25% of their target bonus and the store-level employees should be given 50% of theirs.
Moreover, Luisa-the CEO-needs to send out a clear message about the reason of the decision
related to the bonus changing as well as motivates the entire employees to try harder in order to
keep the Superado standing still during the crisis.
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References
Becker B., Huselid M., Ulrich D. 2001. The HR Scorecard: Linking people, strategy and performance.
Harvard Business School Press. MA: Boston.
Birchfield, R. 2010. Bounce the bonus richer rewards exist. New Zealand Management. 57(7): 28-29.
Cianni, M, Gundy, P. 2013. Putting performance back into retention. Financial Executive, 28(9): 73-77.
Finkel, E. 2013. Best places: Companies, employees that know how to thrive in uncertain times. Modern
Healthcare. 4-9.
Kimes, M. 2008.Were having a bad year. How can I keep employees motivated without giving bonuses?
Fortune. 158(10): 28.
McKeown, L. 2002. Retaining top employees. New York: McGraw Hill.
Pfeffer. J. 2005. Producing sustainable competitive advantage through the effective management of
people.Academy of Management Executive. 19(4).
Silvera, I. 2013. Employers must take care on pay promises. Employee Benefits. 13.
Wesep, V, Dickersin, E. 2010. Pay (be)for(e) performance: The signing bonus as an incentive device.
Review of Financial Studies.23(10): 3812-3848.
Wright, P, McMahan, G. 2002. Theoretical perspectives for strategic human resource
management.Journal of Management. 18(2): 295-316.
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