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 middle-

man 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 IdentificationThe 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 BonusesFailing 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 BonusThe 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 BonusRather 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.

ConsGrandplace 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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