Reynolds overhauls Telecom's bonus structure - and not everybody's happy

Over the weekend - as you do - I leafed through the latest edition of Telecom's inhouse magazine, "co."

The cover story is "Bringing back the cool factor".

Two thoughts struck me:

1.When did Telecom lose the cool factor?

and

2. With art direction like this (see images right), can we be 100% certain that said cool factor has returned?

Actually, the article in question holds some interesting quotes from new-ish chief marketing officer Kieren Cooney, whom some will remember from his stint as Vodafone's general manager of new media.

Apple's handset is damned with faint praise.

"The iPhone is clearly a great phone, but the fact we don't proactively [ha! - CK] sell it is becoming less and less of an issue, with the rise of other phones, like those that run Android and Windows 7," Mr Cooney says.

"iPhone is like the Model T- Ford of smartphones - it's reliable, innovative and everybody knows exactly what they're getting. 

Telecom decided it wanted to become the market leader in Android, Mr Cooney says, and that decision is paying off. 

The CMO's comments mirror recent Android-centric statements from chief executive Paul Reynolds and CFO Nick Olson (and of course the wall-to-wall Google Android message in Telecom's ads, which must be chilling to Nokia) - and are fascinating for those who follow handset politics.

With smartphone sales lifting, and average revenue per user in the segment rising, the Android strategy has indeed been successful so far (flanked by Gen-i, which offers clients iPhone and Windows 7 handsets too, and broad public awareness that Apple's handset runs just fine on XT).

What's happening to the bonus
The magazine is candid on the subject of bonuses, too. 

An article by Dr Reynolds (whom I hope wasn't responsible for the headline, "What'$ happening to the bonu$"), addresses a recent internal announcement that no short term incentives will be paid until the company clears "a $700 million free cashflow hurdle".*

The article lays things pretty bare, and it's an approach certainly makes for a more compelling read than your average company rag.

"Our shareholders judge how health and sustainable our business is from our free cash flow, so this figure must be robust to maintain their confidence," writes Dr Reynolds.

That includes Dr Reynolds' own bonus,and those of executives, as well as the rank-and-file. (But not sales teams. Ouch. Might be some glares around the water cooler over that one).

Another change: "In business units such as Gen-i, Retail and T&SS, most people will have had business performance solely alighted with the success of their business unit. This has changed. This component is now split between the group and business unit, so everyone is incentivised together."

Structural separation may be on the cards as Crown fibre looms but, for now, bonuses are moving under one tent.

Incentivised to spend less
Among other changes, Dr Reynolds outlines that, "We're also incentivising budget holders to spend less - preventing the 'it's the year so spend up your budget to hit your forecast targets' kind of behaviour that's been prevalent."

Push-back
"Feedback internally, and yes, I see and hear it too, has been mixed," Dr Reynolds writes.

"From senior managers, it's almost reluctantly [sic] positive - emphatically understanding why the business needs to do it, but from a personal perspective, wishing it wasn't so.

"Others across the business are outwardly concerned what this means for their finances and the potential impact on their families.

"Having a large part of your incentive payment tied to the actions of the whole company may well seem unfair to some ... However, if we are serious about working together as one, about succeeding together as one, then we must align ourselves this way.

Bonuses depend on Telecom delivering stronger results, but after years of significant growth, the telecommunications industry is now experiencing aftershocks.

"Traditional sources of revenue are declining - and in some cases, fast ... as a business, our revenues - the fuel that pays our wages and enables us to invest for the future - have been declining."

He wraps up:

"The time we have left to repurpose our business for long-term sustainability is running out."

The good news
The better news (at least, assuming Dr Reynolds is talking about a $700 million goal for the full financial year) is that the company seems on track to jump his hurdle.

In Telecom's most recent half-year report (for the six months to December 31), free cashflow was defined as ebitda minus capital expenditure (that is, money earned after money invested).

And for that period, free cash flow was $388 million (an increase of $16 million, or 4.3%, over the first half of the company's 2010 financial year).

* The article doesn't specify, but a Telecom spokesman subsequently told NBR that the $700 million free cash goal was for the full financial year; that is, the 12 months to June 30, 2011.