Employee incentive schemes: What do retailers need to know?

Why are we talking about it now?

Sports giant Sports Direct said it will hit its full-year EBITDA target of £215m, meaning each member of staff is in line to take home shares worth £31,000. Chief executive Dave Forsey believes its employee incentive scheme has underpinned its strong trading.

The retailer introduced a further scheme last December for its founder Mike Ashley, who stands to take home 6 million shares worth £16m, if it hits its next three ‘super-stretch’ EBITDA targets, culminating in EBITDA of £325m in 2015.

Why do retailers introduce schemes?

The can help communicate clearly what is important to an organisation and what employees need to do to fulfil management’s objectives. Having an incentive can encourage staff to act like business owners, according to CIPD performance and rewards adviser Charles Cotton.

He says: “It can motivate staff to go that extra mile.”

Incentive schemes also promote employee retention because staff feel part of an organisation, rather than there to simply pick up a salary. Share schemes, such as Sports Direct’s, give a strong reason for employees to stay at the company.

What form of schemes do retailers operate?

Share-based schemes are most commonly used in public companies according to Cotton, because they don’t inflate the wage bill. Cotton believes investors prefer a share option as it encourages employees to act as business owners. Many major-listed retailers offer staff the opportunity to buy discounted shares according to Cotton; 216,000 Tesco staff shared £105.5m in its share ownership incentive scheme when it matured in 2010. Non-cash incentives such as trips overseas are often also commonly used. 

Sports Direct uses profits as the criteria on which pay-out is based. However, others such as McDonald’s choose to set service objectives using mystery shopper results to determine what rewards are given.

What are the pitfalls of adopting such schemes?

If the incentive is profits-based it can encourage staff to prioritise sales at the expense of service. Cotton says: “It can cloud other important management focuses by incentivising short-term sales. It can also increase competition for sales in-store so staff act as individuals, rather than as members of a team.”

Cotton believes retailers operating profits-based schemes should support the initiative by investing in staff training to make sure service does not suffer.