Employee reward has been described as the field of business which boasts the widest gap between rhetoric and reality.
This page looks at the mistakes most commonly made when devising a reward strategy. It gives you:
A background to the theory behind reward strategy
The ten most common mistakes made by employers around reward strategy
In conclusion, the two most common mistakes.
Reward Strategy ‘Theory’
Implicit in the notion of reward strategy is that of over-arching coherence. This means that all the parts of a reward strategy (the underpinning reward philosophy, the pay structure, its market positioning and the rules of progression through the organisation) join together in a mutually supportive way. We might also reasonably expect a reward strategy to support the business strategy of the company which has derived it. Other characteristics might include:
Integration with other HR policies and practices - performance management, training and development, career progression etc.
An impact on the culture of the organisation and on the behaviour of individuals.
High potential for individuals to gain a clear Line of Sight (Lawler, 1990), whereby reward lubricates the connection between individual efforts and improved corporate performance.
Thus, a business pursuing an innovation-led strategy might wish to encourage creativity, risk-taking and collaborative behaviour. To reinforce these behaviours, the firm may choose a mixture of collective and individual rewards focusing on medium-term performance, supported by broadly-banded jobs together with high investment in learning and development. Of course, differing business strategies will require alternative approaches to reward and HR.
So, to maximise the chances of success, a reward strategy should:
1. Support and be derived from the business strategy
2. Drive sustainable improvements in business performance
3. Bring about and reinforce cultural change
4. Integrate with the rest of HR policy and practice
5. Keep the payroll under control.
What are the 10 most common mistakes?
They boil down to mistakes of design or delivery in the following areas:
1. Starting at the end
2. Having no success criteria
3. Trusting the business strategy
4. Equating complexity with flexibility
5. Confusing speed with haste
6. Focusing on excellence
7. Ignoring pay architecture
8. Failing to get real buy-in
9. Having too much faith in line managers
10. Failing to integrate reward with the other strands of HR
Let us examine each of them in turn.
1. Starting at the end
Many organisations decide on the precise kind of reward system which they wish to use and then work backwards. This is often driven by a desire to respond to the actions of competitors. For example, it is common for organisations to decide that they wish to introduce incentive pay, or individual performance-related pay, or team bonuses without being clear about the kind of employee behaviour which will be demanded by the business strategy.
This means that organisations often set up project teams to design and deliver reward systems to a pre-determined deadline before they are clear about the strategic contribution which these systems are expected to make. This allows little or no scope for reward systems to be aligned with business strategy. The result may well be a pay system which rewards individual contribution, while the organisation is seeking to promote team working. Organisations which start at the end are frequently ignoring their own recent history of pay system successes and failures.
2. Having no success criteria
A key element of having a reward system which contributes to the delivery of business strategy is the existence of a clear set of principles which underpin the approach being chosen. Many organisations embark on the process of designing a new reward system without articulating their underlying reward philosophy. This usually means that the organisation has no systematic way of knowing how it will judge the success of the resulting reward system. Furthermore, the absence of even a simple list of success criteria increases the likelihood of inherent inconsistencies in the objectives of the pay system.
3. Trusting the business strategy
Having placed so much emphasis on business strategy, it is perhaps paradoxical that many organisations are poor at making their business strategy explicit, or communicating it in a way which allows it to be interpreted for the purposes of HR system design. One common problem is that the average time between changes in business strategy is getting shorter. Organisations are changing their structures or are merging with others with increasing frequency. An average pay system often takes two years to bed down: in many organisations this is too long to wait. This makes the process of aligning business strategy and reward strategy all the more difficult, especially if the business strategy is either unclear, poorly articulated or subject to radical changes in direction.
4. Equating complexity with flexibility
As workforces have become increasingly diverse, so many businesses have assumed that their pay systems should contain many components. For example, over recent years we have seen an expansion in the use of flexible benefits systems (e.g. cafeteria benefits) which have been introduced based on the assumption that employees attach value to a higher degree of choice over elements of their pay. The major problem with overly complex pay systems is that they violate the simplicity principle. Simplicity in pay system design is critical if an organisation wants its employees and line managers to make the psychological link
between performance and reward. Experience has shown that pay systems which are not easy to understand or operate are the most likely to fail.
5. Confusing speed with haste
In today's fast-moving business world it is very common to find that organisations are seeking to introduce pay systems to often impossible deadlines. Unfortunately, cutting corners in pay system design (e.g. by minimising on consultation or pay modelling) frequently results in cultural, financial and employee relations problems which can take many years to resolve.
6. Focusing on excellence
Many senior managers take the misguided view that a reward system should focus on the top 10 per cent of their employees. This is often prompted by an understandable desire to promote excellence in the organisation. However, this approach ignores the fact that the success of the organisation depends upon the efforts of the 80 per cent of employees who are performing satisfactorily. Ideally, reward systems should allow the organisation to reward improvements in performance among the majority, rather than excellence among the minority. Nothing is guaranteed to alienate this majority more than making them feel ignored in favour of the high fliers who can, by and large, look after themselves.
7. Ignoring pay architecture
Especially when reward is linked to performance, employers spend 95 per cent of their time debating how they will spend five per cent of their salary bill. Making this mistake can mean that the organisation is not paying proper attention to its grading structure or its pay architecture.
8. Failing to get real 'buy-in'
Other than in exceptional circumstances, most senior and line managers have unsophisticated views about reward. They see the payroll primarily as a cost, and are keen to keep its growth under strict control. Yet, given their influence over the culture of the organisation and the contribution and motivation of individuals, these managers also need to understand what a powerful tool reward can be. When organisations fail to achieve leverage over culture and contribution through reward, it is often because they have failed to win sufficient 'buy-in' or commitment from senior and line managers. Effort should be focused on winning buy-in from this key group of stakeholders early in the process of pay system design.
9. Too much faith in line managers
Most large organisations have spent much of the last decade pushing accountability for 'people management' down to line managers. In the context of reward, this has meant that they have had to operate as the 'end-user' of many reward systems and associated mechanisms (such as performance management). Line managers often find making differential judgements about staff performance (resulting in pay consequences) very difficult and uncomfortable. There are many examples of performance pay 'pots' which, rather than being targeted at good performers, have been shared out on a virtually equal basis. Part of the problem is that line managers do not like giving bad news, nor do they have a very good understanding of pay. A key rule is to avoid designing a pay system which is beyond the capacity of the average line manager, and this is a persuasive argument for simplicity.
10. Failing to integrate reward with the other strands of HR
An important theoretical benefit of reward strategy is that it should allow reward to be effectively integrated with other HR processes. Thus, appraisal, competencies, job design, career progression etc. should each line up alongside reward as part of a coherent approach to managing people effectively. All too often this level of coherence is difficult to attain.
One reason may be that these processes were not designed to be coherent, possibly because 'ownership' of each in the organisation is split between different functions, or because they were introduced at different times.
Another may be that they have become incoherent through misuse, often by line managers who have not been trained or supported effectively. Whatever the reason, the impact is usually the same: underperformance of the pay system. This can manifest itself either as mild frustration that reward is not leading to anticipated results or, in the worst cases, as a 'lightening rod' for disillusionment and anger about a range of wider organisational issues.
Conclusion
Most organisations can tolerate the consequences of making one or two of these mistakes as they journey along the path towards coherence in pay strategy. However, making several of them at the same time may seriously impede the extent to which a pay system can meet the objectives which have been set for it. Indeed, there may also be serious morale, motivation, cost and employee relations consequences.
Of all of the 'mistakes' described above, our experience is that two of them are most commonly associated with underperformance (at best) or system meltdown (at worst).
The first is to over complicate things. It is so easy to become embroiled in the complexities and technical details of pay system design and to lose sight of the 'big picture'. Many pay systems fail because they violate the 'simplicity' principle.
The second is to leave behind your line managers. No matter how elegantly designed the pay system, if the folk who bear the brunt of making it work find doing so beyond their capability then it is 'dead in the water'.
Pay systems have the dramatic potential to be one of the biggest positive influences on employee behaviour and performance. Organisations placing reward at the foundation of their HR strategy need to ensure that this foundation can bear the weight of all that is built upon it.
References
Kessler I, (1995), Reward Systems, in J Storey (Ed.) Human Resources Management: A Critical Text, London: International Thomson Business Press.
Lawler E (1990), Strategic Pay, San Francisco, CA: Jossey Bass.