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Symbolic messages in Reward

Reward carries strong messages. If you want to see what an organization values, look at what it pays for, not what it says. Words are cheap and it is easy to make statements about what is important in an organization. However, if you say one thing, but pay for something quite different you can guess which message will have the greater effect on what people will actually do.

That is not to say you should pay for everything; far from it. But if you are to take a strategic approach to reward, you need to consider very carefully the alignment between what the reward system is saying and what is the stated culture and values of the business. As Tyson (1995) says, ‘Monetary rewards may not motivate in the long term, but they certainly symbolise the value corporations attach to specific behaviours – for example rewarding long service, interpreted as loyalty, or rewarding performance above other attributes.’

Let’s take a couple of examples – long service awards and sales bonuses.

Long service awards

It is fairly common for employers to use some form of long service award. Typically, they provide a gift or cash and some degree of celebration to acknowledge a period of service with the employer. Long service awards have been around for a very long time. Go to a local museum and you are likely to find a piece of silverware engraved with a date in the 19th century awarded to an employee by some company or institution for 25 years plus service. Her Majesty’s Revenue and Customs (HMRC) have a specific tax concession to allow certain long service awards (for at least 20 years) to be made tax free. The concession was introduced in the mid–1970s when a career in a single employer was still the norm.

But whilst such awards are still very common, we need to question their fit in a modern organisation in this fast moving technology driven society where many of the largest companies in the world are only a few years old. Young people joining the job market today would be horrified at the idea of staying 40 years with the same employer. Jobs for life are dead, and have been for many years. Values in organisations are around effectiveness, commitment, engagement, challenge etc. How many organizations reflect long service as a core value? Almost none.

The value may not be high, but the message of a long service award is clear: we value long service. Of higher cost and carrying similar messages are service related benefits such as holiday and defined benefit pension plans. There are some professions – mostly in the public sector – where long service is valued highly.If you really do value long service for itself, fine; it may be appropriate to use awards to recognise it. But most organisations do not. So I suggest that long service awards are, for the most part, a throwback to a bygone age where they were simply mile stones in a 40 year career. If really thought through, they are unlikely to reflect the values of most organisations, so they carry the wrong message. Therefore, most organisations should review if their long service awards should be part of their reward strategy.

Sales bonuses

It is no surprise that sales bonuses or commissions are generally designed to increase sales. If a bonus works well as an incentive, the recipient is likely to try to achieve the result that the bonus is incentivising. If valued by the recipient, the incentive value of the bonus is likely to be the key driver of behaviours in pursuance of the incentive.

But as we know, over recent years there have been very many examples, primarily in financial services, of miss-selling. Typically, this has been due to sales being made to people for whom the service or product is unsuitable. A good deal of this has been blamed on the role of incentive bonuses. This should not come as a surprise as the reward carries a strong message.

In many cases the company will have given training and guidelines on the suitability of what is being sold. But the bonus plan does not discriminate – a sale is a sale and the bonus gets paid. So whilst the company may, somewhat naively, believe that the salespeople’s behaviour will be modified by what is taught or said, the simple sales message carried by the bonus is too strong. If you want to use financial incentives you need to incentivise the right things.

The rhetoric reality gap

The two examples above illustrate the same point – you should examine carefully what message each element of reward is carrying and ensure it is what you want. If it is not, where there is a rhetoric reality gap, change it. You have to make sure that the desired message and the reward are aligned.

You can find these sorts of conflicts between the messages that the reward system carries and the desired or stated aims or values everywhere. Here are some more examples; are any of these familiar?

Rhetoric
  • We pay for performance
  • We are customer focused
  • Contribution to team success is key
  • We value contribution and performance
  • We push down decision making to all
Reality
  • Only as a tiny % of total cash
  • We incentivize sales
  • Pay reviews are based on individual objectives
  • We have service based benefits and pensions
  • There is no choice in any parts of reward

Extract from Reward Management, to be published by Kogan Page, April 2014

So what is Reward Strategy?

Definitions

My own definition of reward strategy is, ‘an approach to reward based on a set of coherent principles in support of the organization’s aims.’ But there are many others.

Armstrong & Murlis (2004) note the importance of direction as an element in a reward strategy: ‘Reward strategy determines the direction in which reward management innovations and developments should go to support the business strategy, how they should be integrated, the priority that should be given to initiatives and the pace at which they should be implemented’.

Duncan Brown (2001) says that, ‘…reward strategy is ultimately a way of thinking that you can apply to any reward issue arising in your organization, to see how you can create value from it.’

Three other unattributed definitions of reward strategy I have come across are:

  • ‘The incorporation of business issues into decisions on reward policies’.
  • ‘An integrating approach, linking company strategy, employee behaviours and outcomes’.
  • ‘A means of ensuring that reward systems actively help businesses to go where they need to’.

Direction and aim

A fundamental element of reward strategy reflected in all of these definitions is to support the organization. That is not to say that reward strategy should be only reactive. But the approach taken needs to reflect the culture and aims of the organization. In some cases it can help to drive change. Certainly as part of the HR strategy getting reward ‘right’ can help deliver solutions that help drive strategy. But you do need to understand the aims and values of the business.

A survey of business leaders concluded ‘…HR must develop a deep understanding of the business – in the same way, and using the same ‘language’, as other managers. The measures it proposes must be tied to business outcomes: the impact on customer service, the reduction in costs, the support of a specific new growth area, the increase in staff loyalty and so on.’ (KPMG, 2012)

Armstrong and Murlis (2004) say that reward strategy:

‘…clarifies what the organization wants to do in the longer term to develop and implement reward policies, practices and processes that will further the achievement of its business goals. It is a declaration of intent, which establishes priorities for developing and acting on reward plans that can be aligned to business and HR strategies and to the needs of people in the organization.’

You can define what reward strategy means for your own organization. But whatever definition you decide on, it is important to see reward strategy squarely in the context of the organization’s business strategy and HR strategy.

Organisational context

There is a paradox in that product development, marketing and sales are greeted with plaudits when coming up with a new product, process or approach to market. It is the new that can beat the competitors in this fast changing world. But when HR come up with a new idea it can often be greeted with the question, ‘what do our competitors do?’ This reaction, of course, does not acknowledge the uniqueness of the particular organization’s culture.

Whilst we must reward people to ensure that we can compete effectively in the appropriate employment markets, the way we do so should reflect our particular organization. It is the culture and values that defines the brand and reward should reflect these, not blindly follow the market. So I strongly advocate an approach of ‘best fit’ not ‘best practice’. Not ‘me tooism’ but, ‘what will work for us?’ Whilst there will be some issues on legal compliance which need to be followed, in general ‘best practice’ is an invalid concept. Certainly look at what others are doing, but develop the reward strategy that is right for you, not some other larger organization down the road with a different history and culture.

A survey of WorldatWork members (Workspan, 2012) found that whilst two-thirds of respondents agreed or strongly agreed that, ‘Our compensation function is focused on creating unique/tailored compensation solutions for our business’, 42% said that there needed to be a greater focus on this for the future.

You should also guard against following the latest fad that seems to be doing the rounds. But rather, evaluate its fit for your organization based on evidence. This can be particularly sensitive when it is the chief executive who makes the suggestion as something he has come across that he thinks you should have in your organization.

Components

Reward strategy may be the overall approach you take, but there are other related terms that we should touch on. I do not think we need to agonise over which term means exactly what, rather use the terms in the way that works best for your organization. But I give here my suggestions on how the following terms may be used:

  • Reward Philosophy – (also Reward principles) the description of the beliefs of reward and how it should operate within the organization. It may be linked to the organization’s values. It is overarching and is used to broadly frame the reward strategy.

  • Design principles – when introducing change, the principles agreed at a high level that will guide the changes.

  • Reward Framework – the broad overview of the related and possibly interlinked elements of reward. May be diagrammatic to illustrate how the pieces of reward fit together.

  • Reward Policy – the detailed policies on specific elements of reward which give the flexibility, discretion and limits. Typically, this will cover the main ‘rules’ about reward and may be part of the terms and conditions of employment.

  • Reward Procedure – the detailed procedure and processes that explain what exactly has to be done by different people to enable an element of reward to change or be introduced, typically giving work flow of forms, authorisation levels etc. For example, annual pay review process or absence procedure.

References

Armstrong, M & Murlis, H (2004) Reward Management, Kogan Page, London

Brown, D (2001) Reward Strategies: From intent to impact, CIPD, London

(KPMG, 2012) Rethinking human resources in a changing world, www.kpmg.com

(Workspan, December 2012, Beyond spreadsheets)

This article has been adapted from Reward Management, by Michael Rose, published by Kogan Page in 2014. The book is available direct from Kogan Page with a 25% discount via this link.

But does it work in theory?

We need to make decisions based on evidence and relevant research. Whilst research may be of academic interest, in the world of work we need research that helps make the best decision and avoid the unintended consequences.

I have found that drawing on relevant models and research can help challenge the unsubstantiated but firmly held beliefs of many business leaders.

I have listed here 11 models and theories that are relevant to an understanding of different elements of reward and engagement and how reward fits into the totality of HR interventions. They come from an appendix in my latest book Reward Management.

For each theory presented I indicate the elements of reward, or reward related programmes to which I believe they are most relevant.

Whilst you can find more details on these models and theories from many sources Perkins S.J. and White G.W. (2008) Employee Reward covers many of them in some detail.

1. Endowment effect

Endowment effect, also known as ‘status quo bias’, is the phenomenon in which most people put a considerably higher price for a product that they own than they would be prepared to pay for it. People tend to try to avoid what they see as a loss. Thaler (1980)

Relevance – retention plans, incentive plans, reward communications

2. Equity theory

Equity theory assumes that employees seek to maintain an equitable ratio between the inputs they bring to the employee relationship and the outcomes they receive from it. So this is about an employee’s perception of what they receive as an employee for what they have to give. But it not just the employer employee relationship. Of critical importance is the way in which employees evaluate their own input/output ratios based on their comparison with the input/outcome ratios of other employees. In other words an individual may be demotivated if their perception is that they are paid less than someone else doing a similar role.

Inputs in this context include the employee’s time, expertise, qualifications, experience, intangible personal qualities such as drive and ambition, and interpersonal skills. Outcomes include reward and flexible work arrangements. Employees who perceive inequity or injustice will seek to reduce it, either by distorting inputs and/or outcomes in their own minds (‘cognitive distortion’), directly altering inputs and/or outcomes, or leaving the organization.

Relevance – pay structures, pay review mechanisms, performance related pay, engagement

3. Expectancy Theory

Vroom’s expectancy theory (1964) says that the strength of any motivation will vary according to:

  • the desires for a particular outcome,
  • the expectancy that action will lead to the outcome, and
  • the likelihood that the goal can be achieved.

It is the consequences of attaining a goal that is significant rather than the intrinsic value of the goal itself. The theory is based on a rational cognitive approach, which assumes that a person will, in effect, weigh up the value to them of an outcome in terms of its consequences as well as the likelihood of it happening. So according to the theory people will pursue that level of performance that they believe will maximise their overall best interest. This would then predict that a reward given that was not contingent on behaviour, or was not expected to be contingent would have no effect on the choices that an individual makes.

Relevance – Incentive bonus plans

4. Hierarchy of needs

Maslow considers that there is a hierarchy of needs that is a fundamental part of motivation.

In Maslow’s model it is only when a lower order need (such as health, food, drink, shelter, warmth, sleep) has been satisfied that a need higher up the hierarchy (such as self-esteem and esteem from others) may become a cause of motivation. A criticism of this ‘ordered approach’ is that it implies that everyone requires a similar amount of the basic needs (Hertzberg, 1968).

In most western countries the basic needs are met to a great extent for most people in work; food, water, shelter, security, freedom from fear and anxiety and chaos are taken for granted. These needs may be perceived in terms of salary providing the income necessary to meet basic needs of food and shelter. Benefits such as pension, life assurance and medical insurance provide some part of the safety need. The contractual terms may provide security of tenure and belonging needs may be provided by group membership. The state is also likely to provide some form of welfare benefits if needed to meet at least the basic needs.

Relevance – recognition plans, benefits, engagement

5. Labour market theory

This ‘classical’ labour market theory considers the market for labour to be a rational market where the relationship between supply and demand will determine the price of labour. The underlying assumptions are that workers can chose between work and leisure and employers can choose to hire or not. The theory follows the same economic model of supply and demand where demand increases the price until supply increases to meet it at a point of equilibrium.

This overly pure model does not reflect the modern understanding of behaviours – as reflected now in behavioural economics, where a number of Nobel prize winners for economics have been psychologists. However, it is important in our understanding of market pressures on salary levels.

Relevance – pay market

6. Operant conditioning

Skinner developed the model of ‘Operant conditioning’ from work primarily on animals. This research found that an animal that responded voluntarily to a stimulus (for example a lever in the box) and was rewarded by food as a consequence of its voluntary action tended to repeat the behaviour. The voluntary behaviour was being reinforced by the food. This positive reinforcement was a core element of Skinner’s operant theory of motivation. ‘A positive reinforcer is a stimulus which, when added to a situation, strengthens the probability of an operant response.’ (Skinner, 1953)

The opposite of this positive reinforcement is ‘extinction’ where under repeated non-reinforcement the behaviour decreases and eventually disappears. In the context of pay this may suggest that the expectation and regular delivery of monthly or weekly pay means that it will have little or no motivation effect.

Skinner’s theory would argue that, ‘…the only tool needed for worker motivation is the presence or absence of positive reinforcement. In other words, managers do not, as a general rule, need to use punishment in order to control behaviour.’ (Steers and Porter, 1991 pp 73–74)

Relevance – recognition

7. Organizational citizenship

Organ (1988) defines organizational citizenship as, ‘individual behaviour that is discretionary, not directly or explicitly recognized by the formal reward system, and that in the aggregate promotes the effective functioning of the organization. Organ’s definition includes three critical elements of organizational citizenship behaviours (OCBs):

  • OCBs are thought of as discretionary behaviours, which are not part of the job description, and are performed by the employee as a result of personal choice.
  • OCBs go above and beyond that which is an enforceable requirement of the job description.
  • OCBs contribute positively to overall organizational effectiveness.

A simple way of thinking about organizational citizenship is that it is the extent to which an employee’s voluntary support contributes to their employer’s success. If treated well by their employer, the employee wants to reciprocate by doing their best.

Relevance – engagement, recognition

8. Psychological contract

This is normally seen as the unwritten contract that exists between employer and employee. It has been defined as, ‘a set of beliefs about what each party is entitled to receive, and obligated to give in exchange for another party’s contributions.’ Perkins (2008). These will typically be values such as fairness and trust and to a large extent will reflect the culture within the organization.

Relevance – reward philosophy and strategy, communications, engagement

9. Theory X and Theory Y

McGregor’s theory X assumes that people are inherently lazy and therefore must be motivated by outside incentives. Their natural goals are counter-productive with those of the organization therefore they must be controlled by external forces to get them to work towards the goals of the organization; people are basically incapable of self-discipline and self-control. Theory Y assumes that human motives fall within a hierarchy, from the most basic through to self-actualisation (similar to Maslow’s theory). People are primarily self-motivated and self-controlled; there is no inherent conflict between the goals of the individual and more effective organizational performance; employees will integrate their own goals with those of the organization. (McGregor, 1960 quoted in Schein, 1980)

Theory X would take a rational-economic perspective and advocate the need for extrinsic reinforcement within an assumption that people are primarily motivated by economic incentives and will do whatever gives them the greatest economic gain. Theory Y would argue for the dominance of intrinsic reward.

Relevance – incentives, engagement

10. Two-factor theory

Hertzberg’s research of accountants and engineers in the 1950s asked the subjects to recall examples of situations where they had positive and negative feelings about the job. (Hertzberg, 1959) Based on the responses, Hertzberg’s theory is that there are factors which are satisfiers that can change behaviour positively as ‘motivators’ relating to job content – achievement, recognition, work itself, responsibility and advancement. There are also ‘hygiene factors‘, which act as dissatisfiers, relating to job context – company policy and administration, supervision, salary, interpersonal relations and working conditions. Although these are commonly the main source of dissatisfaction they do not become a source of motivation if ‘reversed.’

Hertzberg criticises Maslow’s hierarchy concept that suggests an order of need. (Hertzberg, 1959, p110) However, he describes a study undertaken by Fantz where Maslow’s three lower level needs were equated to the hygiene factors and the three higher needs represented the motivators. Hertzberg seems to accept this relationship between the two models of motivation. Hertzberg (1968)

Relevance – recognition, engagement

11. Utility theory

Primarily a theory in economics and investment that although it is impossible to measure the utility derived from a good or service, it is usually possible to rank the alternatives in their order of preference to the consumer. The principle of expected utility maximization states that a rational investor, when faced with a choice among a set of competing feasible investment alternatives, acts to select an investment which maximizes his expected utility of wealth.

In our terms Utility theory is interested in people’s preferences or values. The simple point of interest is that different people will have different preferences, getting greater utility from some parts of their reward and terms and conditions than others.

Relevance – benefits, flexible benefits, employee communications

Seven themes for the future of reward

1. Employee engagement

Reward needs to be considered in terms of its impact on engagement — align reward to values, make reward solutions part of the whole of the ‘joined up’ employee value proposition, challenge assumptions on extrinsic reward, use qualitative not just quantitative measures.

2. Millennium generation

The millennium generation want to be seen to make a difference and receive great feedback, want freedom and their own time but a good salary. In reward we will need to:

  • Find ways to give people more control over time; use different contracts
  • Concentrate on the outputs, not the inputs
  • Develop new and even more flexible benefit plans
  • Ensure better feedback mechanisms and communicate pay messages clearly.

3. Social networking

Information can no longer be controlled by companies as it used to be. You can find out what it is like to work for a particular organisation through the social media sites. People will be even better informed about your organisation including pay and benefit levels with exchanges of pay data. Therefore, rethink what is ‘confidential’. As data will be exchanged anyway outside the organisation look at introducing forums and internal social media sites such as Yammer. Get the performance management system in shape as it will be scrutinised even more.

4. Life expectancy

Life expectancy continues to increase and we have not yet had the leap from the world of genetics. Across Europe state retirement pension ages have increased and will continue to do so. Defined benefit pension plans are mostly closed to new employees and are closing rapidly to existing employees. There will be further moves from state to company pension schemes. DB schemes will be closed to all employees and new tax effective savings vehicles will develop.

5. Environment

Environment issues are mainstream and employees expect to see their companies implement changes to save energy. We will move to considering the ‘whole carbon footprint’ of products and of people: home, travel, work. Reward related issues will be:

  • Bonuses will need to reflect environmental impact
  • There will be a radical change to cars and a reduction in conventional company cars and no company provided fuel
  • Greener options will be the norm in flexible benefits plans
  • Greater need to communicate change with low environmental impact – recycled or ideally no paper: electronic only.

6. Shareholder pressure

Over the last few years there has been an increase in shareholders objecting to companies executive reward policies. Shareholders, reinforced by further corporate governance legislation, will want to see an appropriate level of reward that reflects company performance. Greater care will be needed in designing executive compensation working with the Remuneration Committee taking a longer term view of what company success looks like and the appropriate levels of reward and the potential reputational issues in designing termination terms in executive contracts.

7. Pace of change

The pace of change will continue to increase. Reward programmes will need constant review to ensure that they are fit for purpose. This means greater flexibility in reward and perhaps some new thinking on the relationship between common corporate wide programmes and more discretion to meet the needs of parts of the organisation that have changed.

The future of employee reward?

One thing about writing on the future is that at the time of writing you cannot be wrong even though you almost certainly will be. However, by the time the future becomes the present almost everyone will have forgotten what you predicted. So with that comfort in mind I give here some of my ideas on how I see the future of reward over the next 5 to 10 years. I have identified six themes and for each I suggest the impact on reward. Some seem to me pretty obvious and just look like a continuation of existing trends. Others may be new.

1. Employee Engagement

The case is now proved that there is a positive correlation between levels of employee engagement and a great number of business measures. For example, Gallup found in 2006 that of 23,910 business units, those in the top half of employee engagement scores had 27% higher profitability than those in the bottom half. The more highly engaged – average 2.7 day’s sickness a year. Disengaged employees average 6.2 days a year. Gallup also found that the earnings per share growth of 89 companies with engagement scores in the top quartile was 2.6 times that of organisations with below average engagement scores.

And it looks like the HR community has now got it. A survey of UK HR professionals found that employee engagement was their number one priority. 55% of respondents were measuring engagement and 88% were trying to improve it. (The State of Human Resources Survey, 2010). So what about the implications on reward for the future? I suggest the following four will be key:

  • Align staff reward to values
  • Work together with Learning and Development colleagues on issues and solutions – make them more ‘joined up’
  • Challenge assumptions on extrinsic reward
  • Use qualitative not just quantitative measures.

2. Generation Y

In a recent survey (Personnel Today, September 2008) the three most important job factors for this generation were: Holiday entitlement, Recognition for good work and Salary/bonus.

The twenty somethings making up generation Y seem to be full of paradoxes. Environmentally aware, but often selfish; wanting to be seen to make a difference but with an entitlement mentality; wanting freedom and their own time but a good salary. This will continue to be a challenge for HR and Reward in particular. I see that the implications for reward strategy are that we will need to:

  • Find ways to give people more control over time; use different contracts
  • Concentrate on the outputs, not the inputs
  • Develop new and even more flexible benefit plans
  • Ensure better feedback mechanisms and communicate pay messages clearly.

3. Social Networking

This virtual world is developing very rapidly. We used to look for answers in books. Then we looked at the internet. Now we ask people via the internet. Information can no longer be controlled by companies as it used to be. You can find out what it’s like to work for a particular organisation because people tell you through the social networking sites. Things will become even more transparent. People will be even better informed about your organisation including pay and benefit levels with exchanges of pay data. My initial thoughts on the implication for reward management are:

  • Rethink your pay policy and what is ‘confidential’; as it is less likely to be
  • As data will be exchanged anyway outside the organisation look at introducing forums
  • Get the performance management system in shape as it will be scrutinised even more.

4. Life expectancy

Life expectancy continues to increase and we have not yet had a leap from the world of genetics; but it will come within the next 10 years.

The Euroland crisis has forced some governments to increase their unsustainable state pension ages. Most defined benefit pension plans are closed to new members and closing to existing members. Some acquisitions are being stymied by the pension fund liabilities. Companies and governments need to have this issue on the front of their agenda. So I expect the following:

  • There will be a further move from state to company pension provision
  • Defined benefit plans will all close to existing members
  • New tax effective savings vehicles will develop.

5. Environment

Environmental issues have now become mainstream. We have or are reaching a tipping point. People are (being forced to) look at their carbon footprint at home and expect to see their companies implement changes to save energy. We will move to considering the ‘whole carbon footprint’ of products and of people: home, travel, work. This will continue as an important issue and will have further implications on how people are employed. Reward related issues will be:

  • Bonuses will need to reflect environmental impact
  • There will be more home working
  • There will be a radical change to cars and a reduction in company cars and no company provided fuel
  • Greener options will be the norm in flexible benefits plans
  • Greater need to communicate change with low environmental impact – recycled or ideally no paper: electronic only.

6. Shareholder pressure

Over the last few years there has been an increase in shareholders objecting to companies executive reward policies. Shareholders want to see an appropriate level of reward that reflects company performance. Executives are in the spotlight and are being held to account more than ever. This can only increase over the next few years. The obvious issues for executive reward are:

  • The need to take great care in designing executive compensation working with the Remuneration committee
  • Take a longer term view of what company success looks like and the appropriate levels of reward
  • Consider carefully the potential reputational issues in designing termination terms in executive contracts.