Source: theHRDIRECTOR
Date: March 2006
Author: Richard Higginson, Director, International Benefits - GlaxoSmithKline

A recent survey of 360 companies in 19 European countries has raised some serious questions about the value of company reward schemes. Richard Higginson, director of international benefits, GlaxoSmithKline, suggests that, when it comes to devising reward strategies, hr departments might well have ‘lost the plot’!

The survey1, by Mercer Human Resource Consulting, found that if schemes are to be of real benefit to organisations, there needs to be a sea change in the way that they are viewed. The findings make for some alarming reading;

• Only three in 10 companies believe their rewards programme is very effective in attracting and retaining employees

• Only two in 10 believe their rewards programme is very effective in influencing their employees’ behaviours

• Only five in 10 differentiate between high and low performers in rewarding employees

So how and why are we getting our reward packages so wrong? I think it is a combination of factors, the first of which is that we, in HR, have lost the plot.

I spent the best part of two years at the start of this decade helping subsidiary companies design new rewards programmes after a big merger. The fundamental question we always ask in designing rewards programmes is: Who are the customers of the rewards programme? The answer is, of course, the employees. So, obviously the first thing we do is to ask them what they want in the rewards package. Do we hell! HR decides. Or, at best, HR gathers a small team of managers from different departments and this team decides. Middlesex University Business School reports that only 12% of companies consult their employees about changes to the rewards programme. I am surprised it is even that many!

“an obsession in HR with reward surveys”

HR also places far more emphasis on what the company’s competitors are giving their people than on what their own employees want the company to give them. There is an obsession in HR with reward surveys, which I find weird. Why do we get so paranoid about what everyone else is doing? Why do we have element X in our package? Because all our competitors have element X and we need to remain competitive. So what? If our employees were really crying out for element X they would clear their desk and go and work for one of our competitors.

I spent many frustrating months in 2005 steering one of our European subsidiaries in the direction of a Defined Contribution pension plan to replace its Defined Benefit plan. Despite the deficit in the old DB plan having nearly crippled the company a couple of years before, and a general acceptance that it would continue to be a hugely expensive and unpredictable item in the future, it proved incredibly difficult to persuade the company’s management to let go of it.

Over and over again I heard the same argument from HR and the management team: we need to keep the DB plan because all our local competitors have DB plans. True, they were in an area of high employment and surrounded by a dozen direct competitors. But should that matter? I highlighted the fact that our employees work for us, not for our competitors. Ah, everyone replied, but if we take the DB plan away, our employees will all go and work for our competitors. Nonsense, I retorted, you keep telling me how we are the best payers in the area, have the best working environment, the best managers; and you also keep telling me how difficult it is to communicate the value of the pension plan to the younger members of the workforce. No-one is going to leave us just because Bloggs and Co down the road has a sexier pension plan.

“reward costs will become unsustainable in the next five years”

The same Mercer survey found that almost one third of companies think reward costs will become unsustainable in the next five years. (Indeed, a senior manager in my own company blames the fact that we have such a large reward bill on having too many employees, which is a little simplistic but maybe he has a point.) But are we really spending too much on reward, or is it rather that we are pumping in money without evaluating the return on investment?

The likelihood is that we are spending too much on things employees don’t care much about and too little on things they do appreciate. Having over 20,000 employees in the UK, my own firm manages to secure relatively low cost medical insurance per head. Take it out of the reward package and there would be
an outcry. However, reduce the grant levels on a very expensive and generous share option plan, as we did last year, and no-one bats an eyelid. The last few years’ options are currently underwater and people therefore perceive them to be worthless.

Similarly, Microsoft dropped its traditional UK staff Christmas party a couple of years ago and the outcry was so great it made the newspapers. “Microsoft cancels Christmas!” ran one headline. The fact that the company had decided to replace the Christmas bash with a spectacular, and spectacularly expensive, summer party, was overlooked. Something of very little financial cost but of great symbolic value had been taken away.

“people value different things at different times”

When it comes to valuing things, there are a couple of added complications. Firstly, people value different things at different times of their career. An obvious example is pensions: people naturally attach far more value to their pension scheme the closer they are to retirement. In one country, GSK recently stopped all pension contributions to anyone under 30, paying them additional salary instead.

Secondly, if we reverse this we find a further complication: employers need to use different elements of the employment ‘deal’ at different stages of an employee’s career in the company. For example, to attract people to the company in the first place, base pay and employer reputation are to the fore. But once they have joined the company, these slip down the list and job satisfaction and career development become more important.

So what should we be doing to ensure that our rewards programmes really do help to motivate and retain our employees?

• Firstly consult them. Stop wasting money on reward surveys – looking at what everyone else gets – and find out what our own people want.

• Fire some HR managers. If any of them says, ‘ooh dear me no, asking people what they really want will just raise their expectations’, then fire them. Or at least mark their personnel file ‘pathetic wimp’.

• Analyse our investment in reward. The target is to determine:

1. What is the optimum level of reward investment in employees? i.e. how big should the pie be?

2. What is the optimum allocation of that investment? i.e. how big should each slice be?

Last year GSK decided to ask its employees what they think about the current rewards programme. We surveyed 8,500 employees in the UK and US (out of a total of nearly 50,000) and are doing the same with the rest of the world this year (a similar proportion of a further 50,000).