For reward systems to operate effectively and deliver value in any organisation, their design should reflect and support organisational goals and underpin the overall business and people strategies. So what do you need to consider when developing a reward strategy? Mark Edelsten, European Partner, Mercer Human Resource Consulting offers advice.
Concept of a reward strategy
The concept of a “reward strategy” is not a simple one. In practice, people often use the term to describe a wide range of activities, ideas and processes that are sometimes rather loosely connected. This is because different people have different perspectives on what is important about “reward”.
Employment background and skill set often contribute to this. Investment bankers are only really interested in bonuses while board directors are interested in share schemes. Actuaries are usually interested in pension arrangements and trade union representatives are mainly concerned with base pay.
It is also common to find “reward policies” confused with “reward strategies”. Some people use the words “reward strategy” to describe their market positioning with data (i.e. where they sit in relation to market data), others use it to describe the design of board remuneration, incentive design or pensions arrangements. The phrase can mean whatever anyone chooses it to mean.
Although the concept is not always easy to comprehend, the idea that a business needs a reward strategy is not a new one. For at least a century, it has been recognised that reward systems and processes have a subtle, often hidden, but powerful effect on employee performance and motivation, career planning and choices, attitudes and expectations.
As a result, over time it has gradually become clear that, for reward systems to operate effectively and deliver value in any organisation, their design should reflect and support organisational goals and underpin the overall business and people strategies.
Therefore, the concept of strategic alignment has been applied to reward systems and processes just as it has to other organisational systems and processes. In practice, using reward systems to reinforce organisational change can be extremely effective.
On the other hand, there are limitations to relying on reward as a management tool and performance manipulator. It is common place that reward systems are also used to drive change in employee and organisational performance and motivation, for example, threatened bonus cuts, the unannounced removal of pay increases or the introduction of increased pension contributions.
Reward as a change driver
Reward systems represent a powerful management lever, but not the only one. Reliance on reward as the sole driver of change inevitably leads to internal conflict and disruption, and typically fails to deliver the required change. In the end, there is no substitute for vision and leadership. Thinking about reward strategy and its alignment to business strategy will often prompt this, but not supply it directly.
Developing a reward strategy – the deliverables
So how actually do you develop a reward strategy? What do you do in practice? First, let us be clear about the deliverables.
In practice, organisations need to know at a detailed level, for each horizontal level in the organisation and for each vertical job family, what the base pay, incentives, share schemes, benefits and pension design principles should be. The reward principles will describe data and market positioning, pay and benefit management processes and systems procedures, structures and potential flexibility requirements for all items of compensation.
This framework will typically be suitable for a total remuneration strategy. A total reward strategy will need to go further and cover motivation, performance, career, behavioural, responsibility and accountability issues for all horizontal and vertical employee groups. In an environment of increased employment opportunity, choice and mobility, employers have to think about “more than pay” for reward strategies to be effective.
Often the end deliverable will be a Total Remuneration or Total Reward model specific to the organisation, which seeks to convey the overall opportunity and “employee offer” in a brief but clear format. This end model can be used as a platform for change – if required – or to reinforce an existing strategy.
With these as the deliverables, the question then is, how do you create a reward strategy? The key here is to develop a diagnostic or analytical process to evaluate an organisation’s reward systems and processes.
Key themes to investigate
- To what extent do the organisation’s mission, vision and values align with each other?
- How far do current job measurement and evaluation approaches align with the organisation’s values?
- What sort of hierarchies and silos are created by the current reward systems? What sort of behaviours does this generate? How does this affect employee tenure and careers?
- How far do the organisation’s incentive systems reinforce the business mission, and vision? How clearly does the organisation communicate and drive its goals via the performance management system?
- How much value for money is derived from the current reward investments? Are the available funds invested in the right way now and for the future?
The process of developing an appropriate reward strategy is to clarify the organisation’s approach and to determine a best fit approach. The process involves probing from the business strategy and people or HR strategy from various perspectives. This can involve qualitative and quantitative analysis and the use of tools and detailed process. It also requires careful and sensitive project facilitation.
We refer to the process as “alignment” but in reality it is a great deal broader than this. An effective strategy will not only align reward and business strategy, but also address governance and risk issues, integrate the key processes of performance and reward, and seek to identify how to deliver value for money through reward investments.
This then is a powerful agenda for change. A reward strategy can become a key tool for the HR director to demonstrate the value and importance for the HR function as a strategic player within the organisation.