Bonuses when Times are Tough

Rachel Olivera pulled into a parking spot behind of one of

Seville's Mercadona stores but paused before getting out of

the car. This was usually the best part of her week — visiting

one of her company's supermarkets, talking to the store

manager, walking through the aisles, watching the employees

interact with the customers.

She'd been doing it since she was a little girl, tagging along

with her father as he grew his business from one small market

in central Seville into one of Spain's largest grocery retailers,

with more than 1,000 locations across the country. He'd kept

up his site visits for 30 years, even after he'd gotten sick.

When Rachel took over as CEO after his death, she'd vowed

to continue the tradition.

Today, though, she felt uneasy. Jorge Ramos, the manager of

the store she was about to tour, had asked her to briefly

address the staff, and she knew it would not be the usual

cheerful exchange of ideas. Spain was on the verge of a

recession, and everyone was worried about money. Someone

was bound to ask her whether Mercadona would pay bonuses

this year. And she didn't yet have an answer.

Is the Party Over?

The previous night, Rachel had met with Maria Alva,

Mercadona's finance vice president. Preliminary group results

for 2008 had revealed sharp falls both in the number of

transactions per store per day and in the average value of each.

The company had enjoyed steady increases in sales and profits

for the past 15 years, but it was now up against the harsh

reality of an economic crisis, and it was going to miss its

targets.

Maria did not mince words. "You understand what this means,

Rachel," she said. "We can't pay annual bonuses this year.

Our policy is quite clear: Even if the employees have met their

individual performance targets and the local stores have met

theirs, we give bonuses only if we also meet the company's

growth targets." She gave Rachel a hard look. "So you're

going to have to make the call: No one gets a bonus this year.

Not you, not me, not the store managers, not the cashiers, not

anyone."

Rachel had suspected that this was a possibility, but she

wasn't entirely prepared to take such a drastic step. "I

understand the position we're in, but this is going to come as a

huge shock to our employees. You know as well as I do that

everyone thinks of the bonuses as part of their salary. They

count on them, especially around the holidays." Mercadona's

bonuses represented one to two months' pay for most

employees, depending on their length of service, and in a

typical year about 90% of people qualified.

Maria shrugged. "The policy is the policy."

Rachel took a deep breath. "I think we need Rodrigo's

perspective on this." She dialed the extension of Mercadona's

vice president of human resources, and he picked up on the

first ring. In less than a minute, he'd joined them.

Rodrigo Mendoza had worked closely with Rachel's father,

and she valued his advice. She briefed him on the bonus issue.

He'd clearly seen it coming.

"Look, the crisis has affected everyone, not just us," he said.

"But we can hardly hold our employees responsible for the

poor results. In fact, it's thanks to their efforts that our

numbers aren't much worse. Sales per employee are almost

20% higher than at other supermarkets."

"That may be," Maria replied. "But it doesn't change the fact

that we can't pay out bonuses of €200 million in a year when

we've made only €220 million. What if the recession gets

worse? Anything we pay out now would have to be made up

next year by raising prices, which would send our customers

running to Carrefour or Grandplace. That would mean even

worse results," Maria continued. She pointed to the stack of

financial reports she'd dropped on Rachel's desk. "We're

talking about the stability of the company here. In the long

run, the employees will care more about having a secure job

than they will about one year's bonus."

She paused and softened her voice. "Of course, we have to

recognize that times have changed, and we should lower our

performance targets for next year. We could even revise our

policy on bonuses so that they reflect performance relative to

our peers. But I think a bonus is out of the question for this

year."

Rodrigo didn't respond to Maria directly; instead he looked at

Rachel. "Your father always said, 'You have to give to get.' If

you don't treat employees well, they won't work hard for you.

We're competitive because our people go the extra mile for

customers." Rodrigo leaned in, visibly agitated. "Will they

keep doing that if you take away their bonuses? You can't risk

it, especially when times are this tough. Just think about what

your father would do."

Maria looked exasperated. "No, think about what we need to

do as a company in this economic climate."

Rachel thanked them, and then considered her options as the

two filed out of her office. Even without the bonus,

Mercadona offered much more than other chains. Employees

had permanent contracts, and most workers — 85% of them

— were full-time. Shifts were stable, benefits were generous,

and salaries were well above market levels. And all employees

received management training. Would they really give all that

up for a part-time, low-wage, no-benefits job at another

retailer just because Mercadona didn't pay bonuses this year?

She didn't think so. Mercadona was an outstanding employer,

and its low turnover rate — 3.8% — reflected that. Still,

bonuses had been part of the deal for 30 years. How could she

change that?Hard at Work

Rachel was still mulling over her problem in the parking lot in

Seville's outskirts when someone knocked on her car window.

It was Jorge, the store manager.

"Glad you remembered to park in the back," he teased as she

got out of the car.

That's where staff and management at all Mercadona stores

always parked their cars. The front was kept clear for "los

jefes," or "the bosses," which is how employees were taught

to refer to customers. Concern for the jefes' needs was also

behind the company's unusual pricing model. While most

Spanish supermarkets varied prices throughout the year with

frequent promotions, Mercadona kept its prices low but

steady.

Rachel's father had always believed that customers prefer

predictability, and so far, the evidence was on his side.

Jorge walked Rachel inside and began her routine tour. They

started in the warehouse at the back of the store, where

workers were unloading pallets of food from delivery trucks,

then reloading the pallets with waste for the recycling center.

Next, they walked through the store itself, where the goods

were laid out in six simple sections (meats, fish, baked goods,

fruit and vegetables, cosmetics, and a deli), each with its own

distinctive decor. In the fruit section, Jorge called over a

plump, middle-aged employee with a warm smile.

"Rachel, you remember Rosa," he said. "She's been with us

nearly 10 years, almost since the opening of the store. She's

the one who came up with the loose produce idea."

Rachel remembered it well. Mercadona used to sell its fruit

and vegetables waxed and packed for presentation. Although

the produce looked nicer, some shoppers had in recent years

started buying their fruit and vegetables from competitors

instead. In talking to her customers Rosa had discovered that

most of them found the packaging unnecessary. And they

resented being forced to buy packs of six apples, for example,

when they only needed two — especially since it made the

purchase more expensive. She'd suggested switching to loose

produce at her store, sales had picked back up, and every other

site quickly adopted the practice. "Rosa, tell Rachel what we

were talking about yesterday," Jorge prompted.

Rosa beamed. "It's like this, senora," she began. "We see the

jefes getting more and more worried about their budgets. I

think we can help them if we cut down on the product range. I

know it seems odd, but when they see all the things we have,

they get overwhelmed. They have to make hard choices about

what they really need versus what they might like to have. If

we help them avoid that pressure by offering really good deals

on fewer products, I think we'll end up getting more business,

not less."

"Interesting idea, Rosa, thank you," said Rachel. "Jorge must

be thrilled to have you."

"Yes, I certainly am," he said. "In fact, I'm happy to have

everyone in this store. I don't think I've ever seen a team work

harder or smarter than I have in the past few months. We're

really pulling together."

Rachel and Jorge kept walking. "There's something I wanted

to mention to you," he said, suddenly less cheerful.

"Grandplace has just moved into our neighborhood with a

small-store format. It's trying to poach our customers — and

our employees. Rosa said a manager was talking with people

at the bus stop last week."

Rachel nodded ruefully. "I've heard the same thing from

several other store managers. They're even offering signing

bonuses."

"No one has left yet," Jorge said, "at least not this store.

Everyone's happy here. But I just wanted to make sure you

knew."

Rachel was about to respond, but something near the exit

caught Jorge's eye and he quickly excused himself. Looking

over, Rachel saw four people queued up at one of the cash

registers. Always diligent, Jorge had probably gone to open

another checkout line.

Time to Adjust?

After the store closed for the day, employees began to gather

for the staff meeting. Rachel glanced through her notes.

Jorge would open with a presentation on the store's

performance over the past year and its goals going forward,

then ask Rachel to take over. She planned to first congratulate

Jorge and his team since their store had been one of the best

performers in the region.

But then she would have to present the estimates on

Mercadona's group performance, which would show that not

all stores had been doing as well and that the company would

miss its annual sales and profit targets.

During the Q&A session, someone would surely raise the

bonus question. Rachel knew that anything less than a frank

and straightforward answer would be unacceptable. And once

she'd given employees an indication, she'd have to stick to it

to remain credible. Many of the store's staffers knew

employees at other Mercadona sites. The news would spread

quickly.

Looking around at the gathering crowd chatting excitedly,

Rachel felt a sudden rush of gratitude toward the employees. It

was their daily efforts, year after year, that had made her

father's company what it was today, and for that alone, they

deserved a bonus. Yet, as financial tables in her notes

reminded her, the economic reality had changed, next year

might be even worse, and it was her responsibility to see to it

that Mercadona survived and thrived.

 Should Mercadona give its employees annual

bonuses?