Whether you are considering overhauling your reward structure or not, it’s clear that reward has changed. Could your remuneration strategy be more effective? Denis Crowe gives some tips.
 

How far is the culture of bonuses in banks to blame for the financial crisis? Vince Cable has gone on the record to say that: “there is quite a lot of hard evidence from politicians and others that bonus schemes did encourage people to take excessive risks, which in turn led to the financial crisis.”

As we head towards a new financial year, organisations need to consider their reward strategies going forward – including what to do if they have been unable to award a pay increase and whether to place even more emphasis on performance related rewards. There have been several significant influences on UK reward management recently that need to be taken into account:

• An economic downturn that may now be slowing – although the green shoots are tentative at best 
• Outrage over top salaries and bonus payments in the banking sector given levels of Government investment in some banks
• Pay freezes or even cuts in the private and public sectors
• Higher taxes for high earners
• Whether or not money is a key motivator, other aspects of work continue to engage employees more than pure monetary reward.

One of the consequences of the banking crisis was the focus it placed on remuneration packages, in particular, the ‘balance’ between fixed and variable pay. Economic pundits began to question the fairness of some of the enormous packages disbursed in the financial and other sectors – especially where some Banks had received large loans from Government to bolster their capital structures.

The new Government in the UK was quick to jump on the fairness band wagon. Shortly after taking office, it announced that the Cabinet would take pay cuts of 5% and set up a Pay Commission to ensure that senior civil servants and NHS managers do not earn more than 20 times the salary of the employees in the lowest paid organisations.

Expanding roles
The three key elements of a successful reward strategy are:

• To ensure that the demands of each job role are clearly articulated at all times and can be measured
• That each individual knows what is expected of them at all times
• That each individual knows what they need to do in order to progress to any new role.

Take, for instance, the story of Jerome Kerviel, the rogue trader from Société Générale who has been on trial for his attempt to hide a €5 billion hole in his trading account. What is interesting about this case is the fact that Kerviel had so much freedom of action.

His defence was that although he broke the bank’s rules by exceeding his nominal trading limits, every other trader – both in the Bank and elsewhere – were doing the same thing. Furthermore, that it was the subprime mortgage crisis and the global financial meltdown that was to blame.

Officially, Kerviel was supposed to cover trades in one direction by making smaller trades in the other direction. If he had done this, the losses (and gains) would have been mitigated. Could this scandal have been avoided if Société Générale placed more controls over freedom of action?

One of the dilemmas of job measurement is that it focuses, quite rightly, on the job and not the person. And yet, we are constantly being reminded that we need more flexibility of roles in order to increase efficiencies and motivate individuals seeking to expand and improve what they do.

Job measurement is only part of this process although it provides the base upon which to build all the remaining HR processes.

Matching to the market
Once the roles have been measured, the next step is to decide how much the jobs are worth in the labour market where they are certainly subject to the laws of labour supply and demand.

One interesting aspect of the financial crisis is the widespread use of pay freezes as well as pay cuts. Hence, in real terms, many will have seen base salary fall and emphasis switched to performance-related pay and bonuses.

However, given the bad press that bonuses appear to be receiving, the move may be away from bonuses towards share-based arrangements; linking remuneration to longer-term profit.

Another change – driven in part by the regulators such as the Financial Services Authority – is for greater transparency so that staff pay and total remuneration will have to be declared and linked to sound risk management.

The focus will also change from short-term gains towards longer term viability; with improved capital ratios, remuneration practices that encourage risk taking will be discouraged and the long-term viability of financial institutions will be given more weight.

Linking pay to performance
As we have argued in the past, ‘performance simply is not simple’. It is a complex combination of results produced (the WHAT or outputs), behaviours displayed and activities engaged in (the HOW or investments in future outputs and in the culture and capability of the organisation) and development (the GROWTH or increase in capability to face new challenges, take on new tasks and achieve higher goals in the future).

Financial incentives are seen as the primary tool for aligning individuals’ behaviours with organisational objectives. Three reasons are usually given why incentives improve organisational performance:

• When appropriately designed incentives promote greater effort from individuals
• When aligned to the correct performance measures, they help to focus individual effort on an organisation’s values and priorities
• Differential incentives will drive performance as they will attract the right kind of people and put off those not motivated by financial return.

When undertaking a review of your reward strategy you should return to the basics and consider how strongly your employees are motivated by extrinsic factors, such as pay, or intrinsic job features, such as decision-making and having meaningful work that makes a difference.

Individual incentives and highly differentiated reward and recognition make sense when performance can be objectively assessed and when performance is primarily the result of individual effort rather than the product of interdependent activity.

One thing is clear, future reward strategies will need to balance three competing influences; flexible roles, labour market realities and short versus longer-term real performance improvement with the desire of employees to balance both extrinsic and intrinsic factors.

Denis Crowe is Head of Reward Management Consulting at Pilat HR Solutions