Rewards Strategies for Real: Moving from Intent to Impact
By Duncan Brown
Towers Perrin
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People who influence pay and rewards practices would today
regard it as a criticism to describe those practices as
"non-strategic." In earlier decades, compensation practitioners
were strongly influenced by government policies, ideas of
professional "best practices" and tradition. In the mid-1980s,
many practitioners were criticized for their narrow-minded,
reactive, technical and administrative approaches.i
Since then, though, the notion of strategic human resources
management has become pervasive. Pay has apparently been
revolutionized by increasing competition, globalization, skills
shortages and new technologies. They have moved pay from a
peripheral role to center stage in influencing and achieving
corporate objectives.
Armed with copies of Edward Lawler's Strategic Pay and Jay
Schuster and Patricia Zingheim's New Pay as guidebooks,
industry
professionals
have
spent
the
past
decade
enthusiastically righting yesterday's wrongs and pursuing the
strategic approach, defined by Lawler as "an integrated rewards
approach linking company strategy, pay systems and employee
behaviors."
In their latest book, Schuster and Zingheim paint an enticing
portrait of "sweeping and dramatic pay transitions," and of
companies "using pay to lead change." HR practitioners have
been
transformed,
shedding
the
persona
of
backroom
administrators to don the hat of respected boardroom advisers
and change agents who help bring strategy to reality.
The exhortations and claimed benefits of the strategic rewards
approach have become more strident and expansive than ever,
while non-strategic rewards have taken their place on the
back-burner. Schuster and Zingheim concur, describing the old
"steady state" approach as a recipe for organizational road-kill.
And, with regard to the gains related to this new, more strategic
role, one U.S. consulting firm recently claimed to have proof that
"effective reward[s] strategies boost shareholder value by 9.2
percent."
Intent and Illusion
There is no doubt that organizations are responding to this
normative HR orthodoxy. Of more than 1,000 companies in 15
countries surveyed by Towers Perrin, 78 percent have an
articulated rewards strategy -- virtually double the number in
the mid-1990s. Also, 94 percent of the companies made
significant changes to their rewards practices in the late 1990s,
and 96 percent said they planned for more modifications.
The intention is clear: linking rewards more closely to the
company's key success factors is a core component of these
strategies, and they appear to be driving the radical levels of
change described by Zingheim and Schuster. (See Figure 1.)
The Towers Perrin research also found that the largest
proportion of a compensation specialist's time is consumed by
developing policies and changes, while rewards administration
demands the least time. In formulating rewards changes, the
action could also be considered strategic, because board
members were consulted 75 percent of the time.
But is it as easy as pulling rewards lever 'A' to achieve business
results 'B,' as so much industry literature implies? Or are grand
rewards strategies in reality as author John Purcell describes
them: "An illusion in the boardroom"?
The Issues
Critics of the rewards strategy concept have become increasingly
vocal in Europe, focusing on the problems of implementation.
Based on their research, Annette Cox and Purcell believe that "a
combination of internal pressures, history and expectations
makes the strategic use of reward[s] systems extremely difficult
to achieve," thereby making pay systems stronger sources of
competitive disadvantage, rather than advantage.
In reality, "managing reward[s] is a job of short-term damage
limitation, not the strategic lever for change that appears so
seductive in the writings of American commentators," according
to Marc Thompson, fellow at Templeton College Oxford.
Apparently, those American commentators ignore the common
realities
of
change
overload
and
initiative
indigestion,
overworked and incompetent line managers, suspicious staff and
truculent trade unions.
However, commentators and authors Richard Henderson and
Howard Risher do point out that "pay decisions are mostly
short-run, messy and political." In their writings, authors Ira
Kay and Jeffrey Pfeffer attack the over-reliance on financial
rewards, the ineffectiveness of pay for performance and other
"myths" of pay strongly reinforcing the business strategy.
About two-thirds of 460 Towers Perrin survey participants in
Europe are experiencing such difficulties which focus on the
implementation and operating processes, notably:
Ineffective communications (45 percent)
Lack of appropriate line manager skills (28 percent)
There are many examples of under-informed, under-resourced
line managers struggling to make sense of complicated new
rewards schemes implemented by their corporate compensation
staffs. There are undoubtedly instances of:
Pay
schemes
still
heavily
influenced
by
tradition
and
pragmatism
Knee-jerk responses to skills shortages
Copying predominant market and supposed "best practices."
Perhaps most concerning, though, are the cases of strategic
determinism -- a gung-ho approach to rewards that some
organizations have taken, possibly fueled by their reading. One
example is that of attempts to link pay to the key business goal of
customer service in the absence of any reliable and tested
performance measures. Another example is that of team bonuses
introduced to support a core corporate value. In fluid
organizations these can create barriers to mobility and produce
considerable administrative and operating complexity.
Are all of these rewards strategies just wish statements with no
basis in operating reality, but suspiciously close to what everyone
else in the market is doing? Should HR professionals abandon
these grandiose ideas and retreat to their administrative
backrooms? Is a minimized-hassle rewards strategy the only
viable course in this new era of hyper change?
An HR top dog at a United Kingdom bank even admitted, "We
deliberately didn't have a reward[s] strategy. The business
would have reacted against the scale of the transformation
involved and the resources required. It would have been a
nine-day wonder."
Yet, this bank had spent the prior three years using grading
redesigns, incentive plans and flexible benefits as powerful tools
to reinforce the transition from a traditional mutual building
society to becoming a retail bank.
Reasons a Strategic Rewards Approach Is Essential
Reward Decisions Are Significant
Strategic decisions can be defined as those thatii:
Require top management involvement
Is future oriented?
Entail considerable resources and influence on the long-term
performance of the organization.
Even the most specific reward decisions -- such as, how to
integrate base pay structures in a merging energy company, or
change the performance measures in an executive incentive plan
-- seem to meet these criteria.
Rule of Cause and Effect
Increasingly, an impressive body of research supports the theory
that particular rewards practices cause specific improvements in
corporate
performance.
relationships
between
Studies
have
business
demonstrated
performance,
the
employee
commitment and a basket of HR rewards and practices.
Additionally, Towers Perrin research has found a correlation
between business returns to shareholders and particular
practices, including more use of variable pay and a more open
approach to rewards communications.
Shift from a Financial Focus to Human Capital
The sources of sustainable competitive advantage have shifted
from financial to human capital. In an increasingly faster
moving knowledge- and information-based economy, and with a
talent war still underway, organizations are limited in their
choices. In failing to reward and recognize what makes the
business a success, or to change the rewards system as the results
shift, then prepare to bid a fond farewell to those people and the
company's success.
Don't Be Allergic to Change
Implementing rewards changes may be difficult but, in this new
economic scenario, the options of either doing nothing or
deciding that change is too sensitive and difficult to undertake
are
becoming
talent-hungry,
far
more
dangerous.
team-based,
Less
hierarchical,
customer-oriented
and
contribution-focused organizations no longer can tolerate
multiple-grade
structures,
cost-of-living
adjustments
and
expensive, undervalued benefits packages. Intervention and a
guiding strategy are necessary. Consider these examples:
Fear of Change
A large U.K. insurance company used to pay its sales force with
commission on product margins. While it is quite difficult to
change such a culturally ingrained and long-standing practice, a
disastrous year in the mid-1990s culminated in a massive
regulatory fine for pension "mis-selling." The commission-laden
compensation approach was identified as an important
contributor, and plan reform became a top priority for the new
CEO. Now, sales bonuses are much less highly geared and
focused on customer service measures.
Not Making a Decision Is a Decision
In another real-life scenario, in which inaction came back to
haunt an organization, a UK pharmaceutical operation ignored
market globalization and continued to pay its executives within a
local, job-evaluated pay structure. It recently lost a top executive
to a U.S.-based competitor.
Reigning in the Beast
Rewards practices can rapidly become an albatross that damage
corporate effectiveness and staff morale, even in fast-growing
organizations. For example, a mobile phone company's
entrepreneurial founders managed pay on a personal basis and
opposed the rigid "big company" structures that many had
experienced early in their careers. Yet, with more than 4,000
employees and no form of formal pay organization or specialist
support, managers spent literally half of their time dealing with
personal pay issues and negotiations.
Rewards changes are essential to support a shift in business
strategy and a response to new situations. Another case in point
is Royal Bank of Scotland. While a move to business unit-based
pay arrangements and cafeteria rewards was not painless, the
organization's pay now is determined by value to the business,
rather than by status.
From Intent to Impact: Ingredients of the New Rewards
Strategy Approach
Rather than throwing out the proverbial rewards strategy baby
with the bath water, the original rewards strategy concept needs
to be redefined. Similar to the shift that the business strategy
discipline has achieved, it is a move from strategy, structure and
systems to purpose, process and people [Bartlett and Ghoshal].
There are three main components of this fundamental shift in
focus:
Set a Clear, Simple Direction
Compensation professionals need to:
Abandon the obsession with detailed and complex top-down
designs
Set a clear direction and vision for HR and rewards practices
that are understandable and supportable
Adopt a flexible and adaptable approach with regard to how the
vision should be realized.
Eisenhardt and Sull explained in a 2001 Harvard Business
Review article: "When the business landscape was simple,
companies could afford to have complex strategies. But now that
business is so complex, smart companies have a new approach: a
few straightforward, shared, hard-and-fast rules that define
direction without confining it."
Similarly, to have genuinely living strategies in HR and rewards,
one can neither address the contemporary business landscape
with complex individual designs, nor with dry plans. Instead,
one needs to work with dynamic, integrated systems and
processes, building an appropriate vision through a focus on
trust and aspirations.
For example, it cannot be assumed that linking rewards to
increasing shareholder value will be meaningful and motivating
to the bulk of employees.
Take a Tailored, Flexible Approach
There is a need to learn and adapt in pursuit of this vision, to
adopt a flexible, dynamic and responsive approach, rather than
presuming to design the perfect program. Martin Ferber, Pfizer
Research's HR director in Europe, describes Pfizer's approach
to a broad series of pay changes as being similar to research
activities: "consulting, challenging, testing, improving as we go,
as part of a long-term, evolutionary process."
Towers Perrin research illustrates that much contemporary
rewards work is of this tinkering, blended nature, having a clear
business and rewards direction and set of goals, but
open-minded and with multiple approaches in terms of how to
pursue them. In the process of tailoring appropriate schemes
they are:
Borrowing ideas from the past and present, along with various
sectors, and integrating what once were distinct North American
and European practices
Combining newer approaches, such as team and competency pay,
into existing individual and performance pay approaches
Moving into broader pay bands and flexible rewards, often in a
sequence of changes, at a pace that matches both the rate of
people's buy-in and the development of the management
capability to deliver the strategy in practice.
Be Process- and Employee-Focused
Rewards strategy development often has been a narrow,
analytical redesign exercise of specialists trying to produce the
perfectly business-aligned scheme. Half of the HR departments
in the Towers Perrin research failed to share their strategies with
their line management colleagues. A paltry 7 percent involved
employees directly in developing the strategy, or consulted with
them regarding the redesign of incentive schemes. It is no
wonder that the majority of rewards strategies stay on the
drawing board.
There is a wealth of research evidence to demonstrate what
Angela Bowey found 20-plus years ago: The success of rewards
changes bears little relationship to the specific design of the
programs adopted. Instead, it relies on clear objectives and
intensive attention to the related processes of employee
communications, performance management, teambuilding, etc.
John Purcell's current longitudinal research into successful HR
strategies concludes that the focus needs to be on HR process
that support the successful introduction of change, rather than
on so-called high performance work practices. This revised
rewards strategy model is already in action, as the two mini-case
studies
illustrate.
(See
"Rewards
in
a
European
Car
Manufacturer Dealership" and "An International Energy
Company's Trading Division.")
From Rhetoric to Reality
The genuine revolution in rewards management in the past
decade has been the move to genuinely embrace a much broader
business agenda and strategic perspective beyond the traditional
design and administration focus. Effective rewards policies need
to have clear, planned goals and a well-defined link to business
objectives and requirements. Of course, we also need
well-designed programs that meet those needs. But that's not
enough.
An outdated, narrow, wholly business-driven and top-down
model of strategy is unsuitable for this contemporary, rapidly
changing human capital-driven world. For organizations to fully
realize in practice the written rewards strategy goals, there
needs to be:
Attention to a clear and shared vision and direction
A flexible and adaptable approach
Vastly improved reward processes that better meet employee
needs.
In this 21st-century world of complexity, ubiquity, paradox and
wave theories, organizations have to abandon outdated rewards
concepts of Newtonian physics, machines and levers, revolutions
and master plans. Instead, they need to borrow models from the
biological sciences. Organic change, evolution and adaptation
are increasingly becoming the characteristics of strategic
rewards changes today.
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Author
Duncan Brown (brownd@towers.com) is a principal in Towers
Perrin's London office, where he has worked since 1985. Brown
earned an M.A. from Cambridge University and an M.B.A. from
the London Business School. He is a Fellow of the Chartered
Institute of Personnel and Development and chairs its Rewards
Forum. His books include Paying for Contribution, and Reward
Strategies: From Intent to Impact, and he has published articles
in journals including People Management, Personnel Today and
Compensation and Benefits Review.
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Endnotes
i Luis R.Gomez-Mejia
ii John Pearce and Richard Robinson, authors of Formulation,
Implementation and Control of Competitive Strategy
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