‘Sloppy’ reward practices changing: Study

Cost containment, performance improvement, engagement top priorities

In many ways, the recession has been a wake-up call for companies when it comes to rewarding employees, according to a study from Hay Group.

During the boom years, “sloppy practice” crept into the reward processes but, with the economic downturn, many organizations have been forced to seriously consider who — and what — they are paying for.

“Before the recession, there were inefficiencies that didn’t play as big a role, even though payroll is by far the largest component of any company’s profit-and-loss statement. But still, the need for the most efficient ROI wasn’t a priority because financially things were generally good,” said Karl Aboud, national reward practice leader at Hay Group in Toronto.

The recession will leave a lasting legacy, with no return to business as usual but a tougher, more cost-conscious, performance-oriented world, according to the survey of senior HR specialists from more than 230 companies in 29 countries.

Companies are facing four main challenges: cost containment, performance improvement, talent engagement and risk management, according to The Changing Face of Reward. Tension between cost containment and talent engagement is a strong theme, with concerns about retention and motivation, particularly among top performers, high potentials and employees with scarce skills.

There’s been a laziness in the past, said Aboud, with companies throwing money at people to retain them.

“The recession said, ‘You can’t do that anymore’ so, all of a sudden, companies are saying, ‘What should we do to keep people?’” he said. “And something that should have been obvious for years is focus on the other things that matter to people — the total employment relationship — as opposed to trying to buy your way to keep people, which is inefficient and not affordable.”

As a result, companies are focusing more on intangible rewards such as motivational leadership, challenging work and career development to boost engagement, found Hay Group.

When it comes to tangible rewards, it’s about having competitive base pay to attract people and a bonus plan to retain people by appropriately paying superior performers for being superior performers, said Aboud, with direct-drive pay schemes that recognize and reward the efforts.

“The mix of elements will stay generally similar. You’re going to see the mix with the long term come away from stock options and more toward restricted shares, because stock options are now expensed within the (profit-and-loss statements),” he said. “Base is going to be as aggressive as it was. Short term, long term and pensions, you’re still going to have them all, but you’ll see a slight mix as I say, from options to restricted shares.”

For top executives, there is a push for more long-term incentives, though there are limitations given the tax rules in Canada, said Marc Ullman, lead of the executive compensation practice at Towers Watson in Toronto. While shareholders are demanding longer targets, there is a three-year limitation on salary deferral arrangements, unless treasury shares are used — though companies then lose the tax deduction.

But companies are improving when it comes to differentiating, so the best performers are given more than average and poor performers, he said.

“Companies are forced to say, ‘OK, I have a smaller pot to play with, I need to use my dollars way better,’” said Ullman. “It’s been an interesting decade, ever since the dot-com coming and going. It really put comp on the front pages and (the recession) sort of just fuelled the fire more.”

Employers have leaner workforces along with a greater reliance on their best people, many of whom have taken on wider roles because of restructuring, for limited or no incremental increase in compensation, found Hay Group. Therein lies the challenge, said Susan Hunter, a senior consultant in the human capital practice at Aon in Toronto.

“While on the one hand you’re containing costs, you need to strike the right balance around an environment that’s still very competitive and your key talent, your high-calibre performers, are always going to be attractive in this market,” she said. “What (organizations are) doing is a real focus on whether the plan designs, rewards, benefits are really driving the results and motivating individuals.”

“Definitely cost containment around programs and plan design and program offerings is top of mind,” said Hunter

Reward is more than ever under the microscope, found the study, with CEOs asking:

• What performance are we getting in return for what we pay?

• What is the effectiveness of all the costs allocated to reward?

• What is the return on investment?

As a consequence, compensation committees are increasingly expected to oversee not only the compensation of executive directors but variable pay arrangements across a company, particularly from the perspective of risk.

“Compensation committees are asking questions about compensation programs further down the organization because they want to make sure there is an ROI,” said Ullman.

Emerging from recession

How employers are using rewards

Cost containment and talent management are two big priorities for organizations coming out of the recession, according to a Hay Group survey of 230 HR professionals in 29 countries. Below are reward strategies being used by companies to tackle challenges in the ­recovery, according to The Changing Face of Reward.

Pay for performance: A much greater focus on creating a culture of performance through aligning rewards to the performance metrics that drive profit and revenue growth.

Mission-critical roles: Companies are channelling the limited ­rewards available to vital employees. They are also taking a total ­reward approach by offering clear career paths, global mobility and targeted development programs as well as higher monetary rewards.

Variable pay: Companies are increasingly awarding a greater share of total rewards to variable pay to increase focus on critical goals and reduce the vulnerability of companies to high fixed-reward costs. However, they are also re-examining measures used to assess performance to reduce the risk of disproportionate bonuses.

Centralization: Reward policies and programs are increasingly being centralized to ensure a consistent focus on key objectives and reduce costs and risk.

Market benchmarking: There is a surprisingly strong focus on benchmarking, driven by a desire to ensure top talent is paid ­competitively against the market and organizations are not paying too much in other areas.

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