MANAGING A REWARD STRATEGY
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History of Reward
The aims of a reward strategy are to try and be systematic about which HR
mechanisms attract, retain and motivate staff. Historically the view was that
salaries were what attracted a person to an organisation, benefits kept them
there, while bonus and incentive schemes motivated them. Reward was
regarded as consisting of three distinctive parts:
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Remuneration - covering such aspects as job evaluation, salary structures
and incentive schemes.
Benefits - which tend to be offered to all employees irrespective of their
grade, such as paid leave, employee assistance programmes or Christmas
parties.
Perquisites - which are benefits that tend to provided to discrete categories of
employees, such as a company car/car allowance, private healthcare or
concierge service.
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Reward Today
More recently, this divide between which parts of reward are best suited for
attraction and recruitment, retention and motivation has broken down. Modern
research shows that individuals are attracted, retained and engaged by a whole
range of financial and non-financial rewards and that these can change over time
depending on their personal circumstances.
The financial elements of a package are not considered particularly important by
individuals in some situations. For instance, people at the beginning of their
career may be more interested in getting access to training and career
development. People at the end of their career are more concerned with job
satisfaction rathe than pay necessarily; those with childcare responsibilities are
more concerned about work life balance policies and flexibility.
It is crucial when creating a reward policy that organisations try to ensure that they
align their practices to the needs of the organisation and employees, and integrate
the various elements of the reward package so that they support, rather than
contradict, one another. They also need to mee the requirements of the legal and
regulatory environment.
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Reward strategy
Any reward strategy should clearly spell out the aim of the various reward
elements, integrate them in a coherent way and tell employees what they can
expect to receive and why. This strategy needs to be written, communicated and
understood throughout the organisation. It is the yardstick by which reward
elements are measured and evaluated and manages the expectations of all
employees. Without a clear reward strategy, the various elements will at best seem
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like individual initiatives and at worse employees will be left to form their own
opinions about what the organisation is trying to achieve.
However, on its own, a reward strategy is not going to be effective unless the
organisation has the ability to execute it. Research for CIPD (Chartered Institute of
Personnel and Development) reward management surveys shows that the most
common causes of problems in implementing a reward strategy effectively are the
skills and abilities of line managers to actually implement the strategy as intended.
Attitudes are also an issue, with a sizeable proportion or organisations citing
problems as lack of support from top managers, front-line managers, staff and
unions. The other stumbling blocks to success are process related, either poor
communications and/or lack of support systems. It is important to address these
when creating or amending a reward strategy.
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Elements of Modern Reward systems (all sectors)
Common elements across ALL sector reward systems
Base pay
How pay structures are managed
How pay progression and awards are managed
Variable pay
Short term bonuses and Incentives
Perks and benefits
Non-financial benefits
4.1
Base pay
How base pay levels are determined
The CIPD survey on Reward Management shows that when it comes to
determining salary levels whether ranges or mid-points, the key factors are:
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market rates
job evaluation
ability to pay.
There are variations by sector, for example job evaluation is an important market
pricing tool in the public sector, market rates drive salary levels for private sector
service employers, while ability to pay is a factor for manufacturing and production
firms
Of those who use market rates, research shows that the most common method of
getting information to determine salary rates is from pay surveys (international,
national, local or job function), reviewing job adverts, national pay research by
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general HR consultancies or specialist companies such as Incomes Data Services
(IDS) or Industrial Relations Services (IRS) and job-evaluated pay databases.
When it comes to adopting a market position in respect of base pay, the most
popular approach is to try to match the median. There are variations by sector, for
instance manufacturing and production firms are least likely to opt for the upper
quartile. For total cash (base pay plus bonus), there is a shift in market positioning
with more employers aligning themselves to the upper quartile and being more
discriminating, with management and technical/professional occupations more
likely to have their total cash pay linked to the upper quartile. However, this is
usually stated as being for upper quartile performance, which is much harder to
determine than the market level of total cash pay.
4.2
How pay structures are managed
According to CIPD reward management, pay structures are 'all about valuing jobs
and understanding how jobs relate to one another and the external market.
Employees and their individual competence, experience, and standards of
performance should fit into, and be valued by the structure.'
CIPD research shows that the more common approaches to managing pay
structures include:
narrow graded pay structures – a narrow graded structure is a sequence
of job levels. All jobs in a particular level or grade are broadly of equal value to the
organisation. Each grade may have a single salary or a range of salaries
associated with it. Where there is only a single salary linked with a grade, all
employees whose jobs fall in the same grade are paid at the same rate. Where
each grade has a range of salaries, the level of pay for individual employees in a
grade range could depend on their performance or their length of service.
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broadbands – a broad-banded pay structure combines a broader range of
jobs within a small number of grades or bands. As a consequence, the range of
pay in a band is significantly higher than in a narrow graded pay structure. This can
allow pay to be managed more flexibly and salary levels and relativities can readily
linked to the market. For instance, under a narrow-graded scheme, employees
could only increase their salary typically via promotion to a higher grade.
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individual pay rates, ranges or ‘spot’ salaries – an individual job
structure places each separate job in its own grade, with its own salary or salary
range. In other words, there is only one job to a grade. Such a structure is useful
where the job content for individual positions varies widely, or where flexibility in
response to rapid organisational change or market-pressure is vital.
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job-family pay structure – this consists of separate pay structures for
occupational grouping or job families. Job families may be task-based, covering
specific workgroups, or generic, covering similar types of work across functions.
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pay spines – consist of a series of incremental points stretching from the
highest- to the lowest-paid jobs.
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The CIPD latest reward management survey shows the most popular approaches
to managing pay structures are:
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individual pay rates/ranges/spot salaries (44% of respondents)
broadbands (40%)
job families/career grades (31%)
narrow graded pay structures (22%)
pay spines (16%)
However, there are variations by sector and occupational group, For instance, pay
spines, which provide for a greater degree of control and certainty, are common at
all levels in the public sector, while individual pay rates, ranges or ‘spot’ salaries,
which allow for greater flexibility, are more common in the private sector. By
occupation, individual pay rates, ranges or ‘spot’ salaries are common for senior
managers, while clerical and manual grades are more likely to be covered by
narrow graded pay structures.
4.3
How pay progression and awards are managed
CIPD research shows that the most common approach is to link movement to an
assessment of individual performance, followed by competency and market rates.
There are variations by sector, with individual performance more of a factor in both
parts of the private sector, while length of service is more widespread in the
voluntary and public sectors. Many employers have adopted a hybrid approach
that bases progression on more than one factor, for example, a contribution
approach which examines what has been achieved (individual, team or
organisational performance) and how it has been achieved (by looking at
competencies and/or skills).
Most organisations expect that ‘satisfactory’ performers will progress to a target
point in their pay range. Among private sector service employers, the target point is
the mid point in the range, while in the public sector the target point is close to the
top of the range. In the voluntary and manufacturing and production sectors,
employers are roughly split as to whether the target point is at the mid point or
towards the top end of the pay band.
Fixing overall pay awards and the general pay structure movement (commonly
known as the annual pay award or cost of living uplift) usually involves looking at:
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inflation
organisational performance
movement in market rates
the ‘going rate’ of pay awards elsewhere.
Again, there are variations by sector. For instance, in the public sector the key
determinant is how much the government gives them and how much the unions
will demand while this later factor is not generally an issue for private sector
companies.
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4.4
Variable pay
Short-term bonuses and incentives
In general, there is a widespread use of short-term bonus and incentive awards,
either to encourage future performance (incentives) or to recognise past
performance (bonus). However, there are variations by sector, with bonus and
incentive schemes being much more common in the private sector. Of those with a
scheme, the most common type is that linked to an individual’s performance,
followed by collective approaches, the most popular being those driven by
business results (such as profit or revenue targets) and combination schemes
(combining both individual performance measures with collective measures, such
as unit- or team-based). Most organisations have more than one scheme, with the
average number per organisation being three. The advantages of variable pay is
that, in theory, it only pays when there is something to pay out and it is generally
not pensionable which means no additional on-costs.
However, again, pay is not the only way to reward or incentivise employees. Many
organisations use gift vouchers or arrange trips or experiences, while others find a
simple ‘thank you’ from an individual’s line manager or the chief executive can
have positive effects.
The CIPD recent reward management survey found that 36% of organisations use
a non-cash bonus or incentive scheme. This varies by sector with private sector
service employers being more likely to sue such a scheme (44%) and voluntary
sector organisations less likely (17%). Private sector organisations are more likely
to use a form of recognition that has a cash value (retail vouchers) while the public
sector are more likely to use a non-cash form of recognition (such as being allowed
to leave work early).
Employee perks and benefits
The CIPD reward management surveys show a wide range of perks and benefits
on offer to employees, from the traditional such as paid leave, occupational sick
pay, occupational pensions and healthcare benefits to newer ones such as on-site
massages, concierge benefits and bicycles. Some benefits, such as work-based
pensions, are tax-efficient methods of remuneration.
There are various reasons why employers offer employees benefits. For some, it is
to match market practice, for others it is to provide employees with some measure
of security, such as occupational sick pay, while others use them to retain
employees, such as occupational pension schemes. The same research shows
many organisations examining voluntary and flexible benefits schemes. Voluntary
benefits (where employers provide third-party goods and services at a discount)
excite most interest. Flexible benefits schemes (also known as 'cafeteria benefits'
or 'flex plans') are formalised systems that allow employees to vary their pay and
benefits package in order to satisfy their personal requirements. Flexible benefits
are generally only evident in employers with over 1,000 employees, and almost
one-quarter of organisations with over 5,000 employees operate them.
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Non-financial rewards
While pay and benefits are important, and getting them wrong can have dire
consequences for the organisation, they are not the only rewards that employers
should consider. Research shows that non-financial rewards can be just as
important. These include:
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opportunities for personal and career development
flexible working (such as working from home or flexitime)
being involved in decisions that affect how and when employees do their
work
a pleasant working environment
good performance management and appraisals
recognition, such as through an employee of a month award or team-based
events.
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Summary of the CIPD viewpoint on Reward
Employers need to consider what they are rewarding and try and align what
employees want with the needs of the business. There are various elements to
reward from the financial to the non-financial and it’s important that employers
chose the appropriate mix of base to variable pay, fixed to flexible benefits, and
pay to non-pay rewards.
Employers should be also aware of the signals that pay sends out about the
organisation, so it is important that this is recognised and an appropriate
communications strategy adopted to explain to staff what behaviours, values and
performances the organisation is rewarding, how and why.
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Elements of Reward systems in the Voluntary sector
Reward in the voluntary sector is a hit and miss affair. And in addition, there is no
one organisation that collects data systematically on how the vol sector approaches
this issue. With managers increasingly crossing over from the private sector there are
more reward management systems that mimic what might be traditionally thought of
as private sector policies such as PRP.
There are some factors that are fairly commonly acknowledged about vol sector
reward:
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Pay is about 20% under private sector pay rates at senior manager and
manager level, but is about the same at assistant and admin level.
Pay rates cant fall too far behind otherwise the sector wont be able to recruit
any one skilled at all.
Motivation is usually assumed to be about working in a caring or more value
based environment where employees can feel good about what they do or
contribute to. This is usually felt to be more important than the monetary
reward, therefore incentives schemes based on money are not thought to
stimulate performance.
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Some employees are very motivated by the `cause’ and will work for very little
monetary reward.
Most organisations do not rely on this `voluntaristic’ attitude however and
realise that they have to use the market rates to attract the knowledge and
professional skills they need.
The vol sector has used local government practices as a comparator more
than the private sector.
How does this all translate into the pay structures common in the vol sector?
6.1
Base pay
Base pay in the sector usually uses a combination of all three of the below
elements.
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market rates
job evaluation
ability to pay.
Job evaluation is commonly used to determine relative ranking of posts,
market rates across the voluntary sector to set actual pay levels and ability
to pay from funding sources limits what can be achieved finacially.
Some combination of all these factors is then used to derive a pay scale.
6.2
How pay structures are managed
This tends to be based on narrow points ranges and pay spines rather than the other
mechanisms. (The NJC system combines both elements of this).
6.3
How pay progression and awards are managed
The commonest method of progression in the voluntary sector is length of service.
PrP is rarely used in the voluntary sector (9% of orgs use it for all posts and 4% for
some posts) (See Appendix A for fuller discussion)
Where do new postholders start on the grade - any flexibility?
Once a grade has been fixed for each job, it is then necessary to fix the position of
each individual within the grade. An organisation should have a policy on how
negotiable this process is. Some organisations are inflexible, starting all workers on
the bottom point of the grade, others take certain factors into consideration. For
example :- Their existing salary and Experience or qualifications
(I would recommend normally starting all new staff on the bottom point of the relevant
grade, otherwise this can lead to difficulties among staff on the same grade with
different starting points.) In exceptional circumstances you could start staff on the
next point up in order to attract them into the organisation. Directors could have
discretion of say one starting points for each post. Bearing in mind that if each post
has a three scale point range, and lets say they get an incremental point increase
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each year for length of service, starting them two points up this range means they hit
the BAR earlier in their career. This affects people who stay longer with VE more
than those who come and go quickly.
(Average length of stay in the voluntary sector is 2-3 years. But some workers stay a
lot longer. Average length of stay in the organisation?)
Length of service - Increments
The simplest review is to award each worker an incremental rise for length of service.
This rewards workers for staying in the job and also implies an increase owing to
increased general experience over the year.
Incremental points are common in the sector. Although opinion and practice is
divided about how incremental steps are awarded. The number of incremental
points varies between three and seven in my experience. If the aim of increments
is to give staff who either stay longer or perform well a rise, then three incremental
points is adequate. Increments give a sense of progression over time, which is
usually the case in complex organisations, they allow a sense of achievement for
staff for length of service.
The bar is the top of the grade beyond which a post holder can't progress without the
post being regraded into the next grade. I would not recommend more than 3
increments for each grade, otherwise the system becomes too expensive.
(I would favour the assumption that staff will get the increment unless they have
failed to meet expected standards and targets set during the regular supervision and
appraisal mechanisms.) Also if staff are failing to met targets set, this should be dealt
with outside of the appraisal mechanism through poor performance systems. This
does imply that the appraisal mechanisms are robust enough o be able to set targets
well and realistically.
Incremental date is either the anniversary of the postholder joining the organisation,
or at a set date each year for all staff and staff usually have to have been confirmed
in post to get the increment. Increments can be withheld in exceptional
circumstances.
Performance
Some organisations have a practice of awarding workers increments for good
performance. Less than 14% of voluntary organisations have a PrP scheme in place,
and then usually for managers only or for groups of staff eg fundraisers. This has to
be done at a regular review meeting for all workers and combined with a standard of
achievement laid out when workers start a job, that can be evaluated clearly.
The argument for performance awards is that it motivates good performance.
However it is much easier to reward staff on this basis where they have easily
measurable output [sales volume !]. There is almost universal agreement that it only
works where performance management is already sophisticated and managers well
trained in operating it. PrP is very unpopular amongst most staff, and mitigates
against open decision making on pay. (See Appendix A for longer discussion).
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6.4
Variable pay: Benefits
The Vol sector tends not to pay bonuses or incentives – but does try and give
increased benefits to staff. The most common benefits which have a financial
element in the voluntary sector (% of orgs paying them) (CR research 2009) are:
Great than statutory holidays - managers (97%)
Contributory Pension Scheme (88%)
Great than statutory holidays - other staff (88%)
Life Assurance scheme (67%)
Greater than statutory sick pay (83%)
Greater than statutory Maternity pay (33%)
Long Term ill/Disability health insurance (24%)
Provision of a car Senior managers (15%)
Private health insurance (26.8%)
Employee Assistance Programmes are common across the sector
Results From 2007 ACEVO salary survey (For Chief execs only)
19% of CEs had some form of PRP with £3000 being the median award in 2006/7
Great than statutory holidays (75% have 25 days plus)
Professional indemnity insurance 66%
Greater than statutory Sick entitlement 66%
Enhanced pension 25%
Sabbatical 25%
Permanent health insurance 18%
Private health insurance 16%
Car allowance 10%
Car 4.6%
Non-financial rewards
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Conclusion
Reward isn’t simple. But what is important is to tailor the organisation’s scheme to
be relevant to the motivation and needs of your staff.
It might be worth while to analyse the whole benefits and non financial rewards
package and see where it can be sold more or improved. Perhaps convas staff on
what they wouold find rewarding or motivating?
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APPENDIX A
PERFORMANCE RELATED PAY
The most recent and most relevant statistics come from a Charity Reward
Survey of the voluntary sector in 2007 which showed that 13.8% of those
organisations surveyed had some form of Performance related pay. Of those
that used it, 66.7% applied it to all staff, 16.7% to shop staff, 11.1% to
fundraisers, and 22.2% to other staff.
75% or the organisations using PrP link it to appraisals and 37.%% to
productivity.
The latest Performance Pay trends in the UK from the CIPD report from 1997.
For Management Employees
Individual performance related pay
Team based performance related pay
Skill or competency based pay
Profit related pay
Share ownership schemes
Yes %
40
8
6
35
17
For Non Management Employees
Individual performance related pay
Team based performance related pay
Skill or competency based pay
Profit related pay
Share ownership schemes
Yes%
25
8
11
34
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Findings from a range of other research on PrP indicate:
`Physicists may be on the verge of integrating quantum mechanics and relativity
into a unified theory of almost everything - but social/behaviourial scientists are
not on the very of developing a single unified model to explain all facet of
employee motivation and behaviour.'
* few if any previous studies demonstrated a causal link between individual
PRP and increases in productivity.
In the not-for profit sector there are few opportunities for `profit' there may be
tensions between the non-profit making ethos and individualistic philosophy
conveyed by PRP. In the operation of PRP problems arise because:
- few employers had clearly articulated objectives against which they could
measure subsequent success or failure.
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- the values employers are trying to inculcate through the schemes may
come into conflict with the values of employees an tensions may arise
because of employers beliefs about employees' motivations and behaviours.
PRP rests heavily on three assumptions
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that you can measure individual differences in behaviour
that pay differences can be related to performance differences and will be
perceived as being related.
that individuals will increase their efforts to gain more rewards, resulting
in increased performance.
This was described in a paper as a `whole approach based on three
questionable assumptions and a reductionist viewpoint that human beings are
rational and are only concerned with external rewards.
The survey confirmed earlier findings of `no convincing evidence' on a link
between individual PRP and improvements in productivity.
CBI Survey 2001 Only 13% of private sector companies believe PrP contributes
to current competitive advantage.
Performance Management IDS study 626 PRP has to be based on a good
quality performance management system run by highly skilled managers.
Human Resource Management Journal article `Performance Management and
the Psychologicalcontract' while PRP is typically used as a signal to express
organisational intentions and to create an entrepreneurial and self motivated
workforce - significant difficulties in two areas: presence of mixed management
messages and employee perceptions of fairness and accuracy.
Is there Merit in Pay in `Across the Board' in theory merit pay should work - if
employees can make a clear link between their work and their rewards they'll do
better work - but the link is fragile. The incentive effect of PRP tends to be
negligible.
Conclusions
It is more important to identify what motivates employees of an organisation
before attempting to put in place any scheme to improve performance via pay.
Performance management isn't just about motivation but is about organisational
culture. Any chance of it working at all needs:
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Clear identification of the aims of any PRP scheme.
Consultation with employees about performance management and PRP
systems.
Performance management must come before PRP and must be
embedded in the organisation's operations and culture.
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The role of line managers is crucial, if they are to make judgements that
will impact on their team's pay they need to be very clear what they are
doing and why.
Other Issues:
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Performance can probably be improved just as well by concentrating on
developing employees and getting a positive organisational culture.
Monitoring pay schemes becomes twice as difficult with PRP
Where does the `extra' money come from?
Gill Taylor
23/9/09
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