Employees face bonus drought as NSE firms issue profit warnings

Kenya’s formal sector workers are headed for a tough year following a steep drop in corporate earnings last year that is expected to significantly reduce or wipe out bonus payments altogether.

That reality has been brought home by the fact that a record 17 publicly traded companies issued profit warnings last year, alerting investors of reduced earnings and even losses, leaving little room for dividend and bonus payments.

The list of companies that issued profit warnings includes Standard Chartered Bank Kenya, Britam, Car & General, ARM Cement and UAP Holdings.

The earnings shortfalls resulted from a mix of a deteriorating macroeconomic environment and challenges that were unique to some of the firms.

These negative outcomes are expected to reflect in the directors’ decisions to pay dividends and bonuses, analysts said, pointing to past trends.

“I would expect a rational board of directors to reduce the bonus payouts to reflect their company’s financial performance,” said Robert Bunyi of Mavuno Capital.

But Mr Bunyi observed that cutting or suspending bonuses often sends a dispiriting signal to employees, forcing a few companies to leave bonus schemes unchanged, especially if they believe the earnings dip will be short-lived.

More Kenyan firms have in the past decade embraced bonus schemes as part of a growing basket of employee motivation programmes that have expanded to include stock options.

The financial services sector, led by banks, insurers and asset managers, remains one of the biggest payers of bonuses.

Ordinarily, bonuses move in tandem with corporate earnings growth, meaning that payments for 2015 are likely to come down substantially based on the record profit warnings that are seen as a bellwether of the broader economic performance.

“There is obviously a relationship between bonuses and performance,” said Kimani Njoroge, the Human Capital Partner at consultancy firm Deloitte East Africa.

Mr Kimani noted that most companies pay annual bonuses based on the performance recorded in the preceding financial year, with attempts to vary the payments based on an individual’s contribution to the bottom-line.

READ: Profit alerts hit a record high in 2015

Some firms, however, don’t seek to reward individual performance and instead run a standard payout structure where employees are paid a fraction or a multiple of their annual salary.

The bonus and other compensation for senior executives may be based on a medium-term performance, reflecting the strategic nature of their roles.

While bonus payouts are expected to drop in aggregate, analysts said individual firms will make their decisions based on their respective financial performance.

A few companies have unique criteria that detach performance payouts from profitability.

The Nairobi Securities Exchange-listed Centum Investment, for example, pays employees bonuses based on how fast they grow the company’s net assets.

Some 90 employees of Centum were recently allotted a bonus pot of Sh1.1 billion for their performance in the year ended March 2015, translating to an average individual payout of Sh11.1 million.

This came after they beat the company’s set target of raising shareholder funds by 15 per cent each year.

READ: Centum doubles employees bonus payout to Sh1 billion

The employees are entitled to 20 per cent of any return above the set benchmark, with the absolute payout also based on individual performance.

Centum’s net assets rose 39.1 per cent to Sh32 billion in the year, beating the Sh26.4 billion target based on the company’s performance criteria.

This created an excess of Sh5.5 billion in absolute terms, of which up to Sh1.1 billion was available for allocation to the staff, making Centum’s bonus scheme arguably the largest in per capita terms.

Mr Bunyi added that besides reducing bonuses, the widening economic malaise is set to limit the creation of new job opportunities in the short term.

“I also worry about job losses and a hiring freeze,” Mr Bunyi said, adding that weaker corporate earnings are likely to increase job insecurity going forward.

Stanchart is, for instance, cutting scores of jobs after recording a substantial earnings fall that has seen the lender issue a profit warning for the full year ended December 2015.

Retrenchment at the bank comes after its London-based parent Standard Chartered Plc in November announced it plans to eliminate 15,000 jobs worldwide by 2018.

Stanchart’s net profit had already dropped by a quarter in the nine months ended September amid a flat loan book and interest income.

While the profitability of some companies has been hurt by unique challenges, the deterioration of the macroeconomic environment has been a powerful denominator in bringing down earnings.

Besides, a weakening of national currencies, including the Kenyan shilling, has resulted in major foreign exchange losses and thinned margins for companies like Car & General and Sameer Africa.

Others with foreign currency loans like TPS Eastern Africa and ARM Cement have seen their unrealised foreign exchange losses rise substantially also thanks to the weak shilling.

The local currency has depreciated 11.2 per cent against the dollar over the past 12 months to trade at 102 units to the greenback.

The Central Bank of Kenya was also forced to raise interest rates to strengthen the shilling — after it declined to lows of 106 units to the dollar in September — in a move that raised finance costs for indebted companies.

Dominant firms with little debt or those in special sectors such as utilities have, however, emerged unscathed and are posting higher profits that could see them enhance their staff compensation schemes.

The list includes Safaricom, KCB and KenGen that all reported substantial full-year or interim earnings growth last year.

Interest rates on short-term treasuries have risen in recent weeks to hit new highs of 13.8 per cent yesterday, raising the spectre of a tougher operating environment for business this year.