‘Best fit’ replaces ‘best practice’ in total rewards (Guest commentary)

It's critical that compensation plans support the business strategy

Over the last 20 years, the American concept of “top-down” strategic total rewards and HR management has dominated thinking and practice.

Large U.S. firms such as General Electric, consultancies and authors have been highly influential on this front. In Pay People Right!, Patricia Zingheim and Jay Schuster talked about compensation managers “flying” around the organization like Top Gun pilots, zapping out ineffective and misaligned pay practices. If only it were so easy.

There are numerous risks to pursuing such a strategy. There can be too much focus on planning at the expense of practice and too many resources directed at design rather than delivery. There can be too much concentration in the HR function and the boardroom, rather than on front-line managers and employees. And there can be too much emphasis on concept and not enough communications. Does this sound familiar in the Canadian context?

In the United Kingdom, a different approach to reward management seems to be emerging, according to research I conducted with Michael Armstrong, managing partner of the website e-reward. But there’s a bit of a paradox. On the one hand, heads of HR said it’s critical that compensation arrangements support the business strategy.

Yet, on the other hand, total reward strategies simply don’t appear to be materializing. Only 35 per cent of organizations in the U.K. had a reward strategy in 2006, according to the Chartered Institute of Personnel and Development’s (CIPD) Reward Management 2006 survey of 535 employers representing 1.4 million workers. The reason cited by two-thirds of respondents in our studies was difficulties with implementation. Professor John Purcell, HR professor at the University of Bath, described many strategies as “illusions in the boardroom” that have little influence in reality.

So a strategic approach to total compensation seems vitally important, yet fiendishly difficult to deliver. In the U.K., some organizations are addressing the dilemma with a shift in the concept of what a total rewards strategy is and how it’s practiced. What are the characteristics of this new school of thinking? There are four common themes that may have some relevance for Canadian employers.

Strategies should have clear, straightforward goals. Organizations are paying more attention to delivering and managing reward changes through a more realistic, evolutionary approach. Paul Craven of drug giant GlaxoSmithKline said, “don’t expect people to change overnight and don’t try to force change.”

Contemporary compensation strategies should have clear and straightforward goals and not be over-engineered. At beverage maker Diageo, Nicky Demby said, “reward schemes will not be introduced or updated without assessing whether there is a good reason … it must add value, rather than create work.”

Pay attention to line managers and communicate with employees. Michael West, a professor of organizational research at Aston Business School in Birmingham, has conducted research that shows effective reward strategies depend on “line managers who are warm, supportive and enabling, encouraging high levels of employee commitment.”

Staff communications and involvement was overwhelmingly the focus of our discussions with reward directors. Extensive communications underpinned the two-year program of reward reforms at telecommunications firm BT. As Caroline Waters put it, “being able to talk very openly to people about reward is vital.” Reward success, as Tim Fevyer at Lloyds TSB bank explained, “hinges on the degree to which employees feel a sense of ownership.”

Putting the needs of employees first. The overall objective of total rewards at Diageo is “to release the potential of every employee to deliver Diageo’s performance goals.” Organizations such as Nationwide and Standard Chartered can demonstrate clear relationships between HR and compensation practices, employee commitment and customer and financial performance in their branches.

Twenty eight per cent of employers in the CIPD survey are using flexible and voluntary benefits. Debates about the pros and cons of performance-related pay have been replaced by attempts to create rewarding environments that are conducive to employee commitment and performance.

More diversity in plan design. In terms of scheme designs, much greater diversity is evident as employers tailor practices to suit their business context, goals and culture. “Best fit” is thankfully replacing “best practice.” While reward strategies in the 1990s drove the hasty implementation of approaches, such as individual performance pay, the CIPD survey shows tailoring and melding is now the norm:

•only 13 per cent of firms are basing pay increases solely on individual performance, compared to more than half relating them to a broader assessment of contribution; and

•11 per cent of bonus plans are team-based, but 38 per cent use a mixture of collective and individual criteria.

With more attention on implementation, managing change, employee involvement and engagement and ensuring long-term adaptability and sustainability, the full potential of rewards to reinforce high performance is far more likely to be realized.

Duncan Brown is assistant director-general at the Chartered Institute of Personnel and Development in London and co-author of Strategic Reward: Making it Happen with Michael Armstrong, joint managing partner of the website e-reward.

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