Bad news for future pensioners: chills must have run down many spines with the news that Rentokil Initial may become the first major British company to close its final salary scheme to existing staff, as opposed to newcomers. The board wants to move everybody into a ‘defined contribution’ scheme, in which the pension costs are not open-ended. The directors are trying to escape from the bind that has left many firms facing huge deficits in their pension funds - £325 million in this instance.
The firm’s businesses, ranging from burglar alarms to pest control, are faring none too well at present. Once a growth star, but now fallen, it needs all the commitment it can get from its employees – and the pension, in the good old days of rising stock markets and high interest rates, was one sound, dead-safe way of sharing the benefits of success with the employees who committed their lives and (one hopes) their loyalty to the business. As a blog respondent points out:
‘Sharing the benefit of success is so vital…organisations reluctant to believe this sooner or later share the benefit of doubt - low level of motivation, reduced organisational commitment, decline in job commitment, etc.’
The note adds, very rightly, that probably many executives and business owners haven’t got a grip on this issue – which is a good enough reason for many people to get discouraged from realising their potential value to the business. To retire on half or two-thirds of final salary is only a fair reward for people who have created its wealth by their contributions. A company that can’t afford to finance their later years can’t have been any great shakes at rewarding the investors, either.
The investors and the pensioners may, of course, be one and the same if there’s a scheme for turning all employees into shareholders. I recall a study that compared the results of two batches of companies, one of which totally outdid the other on all financial measures. The US study attributed this stunning outperformance to what I named ‘magic ingredient x’. It was potent stuff. X companies over 18 years enjoyed a rise in share value of 682% on an earnings per share jump of 311%.
A clutch of non-x companies, in contrast, saw their shares rise only 298% on 119% more sales. The magic was managed by having any kind of share scheme for employees. QED? Not quite. Who can demonstrate whether the outperformers succeeded because they had a share scheme, or installed such a scheme because they were successful businesses whose values included sharing the wealth?
The answer doesn’t really matter. Cutting the employees into the fortunes of the business is a moral as well a materially beneficial course of action. Likewise, non-x companies which pay their senior executives gigantic salaries and bonuses, coupled with what used to be called ‘top hat’ pensions and massive stock options, are run by greedy people who don’t deserve business success – and very probably won’t get it.
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