The benefits of building a strong reward strategy

Written by
Changeboard Team

28 Jun 2010

28 Jun 2010 • by Changeboard Team

Reward needs to change

While it's clear that the recession has had a profound impact on the business environment, at Hay Group we wanted a better picture of how reward policy in particular has been affected. So we undertook a comprehensive survey of reward strategy in more than 230 organizations across 29 countries, the Results of which are outlined in our report, 'The changing face of reward'.

Participants in the survey were unanimous - when it comes to reward, there can be no return to business as usual. A number of sloppy practices crept into reward policy during the boom years but those organizations that survived the recession are facing a changed landscape. The world is a tougher, more cost-conscious, performance-orientated place.

Key Challenge - to maximise ROI on reward

Organizations in every sector and region are struggling to rebuild profitability. With revenue growth difficult to achieve, most are focusing instead on cutting costs and in squeezing every ounce of value out of their existing resources and budget. Increased efficiency and return on investment have become the core drivers of profit growth - organizations are intent on doing more, with less.

Nowhere are these choices more apparent than in reward. Direct reward costs have already been cut to the bone and most organizations are left with the Challenge of coaxing better performance from their employees without the resources to fund a generous compensation strategy. So they must find new ways of maximising the return on their investment in reward.

What are the key trends in reward?

Focus on performance

Performance has become the fundamental focus of most organisations. We at Hay Group ran a survey of reward strategy, involving 230 organisations across 29 countries. Many respondents talked about a shift from a culture of ‘entitlement’ and ‘paternalism’ to one of ‘performance’. In practical terms this means we are seeing a greater differentiation of reward based on individual performance. As one respondent told us: “We are using the money more wisely. We are moving away from a ‘spread the peanut butter approach’ to one of ‘feeding the eagles.”

Pay for performance is not a new concept but the study confirms that organisations are paying far greater attention to performance metrics, and are seeking to create a culture of performance by aligning rewards to the performance metrics that drive profit and growth.

Protecting key talent

Retaining and rewarding top performers, high potentials and those with scarce skills were identified as key priorities for almost every participant in the study. However, with limited resources available to reward key talent, organisations are resorting to more imaginative ways to ensure that these valued employees remain engaged, offering career paths, global mobility and targeted development programs as well as higher monetary rewards.

Shift towards total reward

Benefits and pensions represent a significant portion of the total reward bill (often as much as 40%), and yet are often overlooked or their value underestimated by employees. The option for organisations is to trim these benefits, or concentrate on communicating their value to employees more effectively than they have done in the past.

Reward has moved up the organisational agenda

Reward has become a board-level issue over the past few years, partly as a result of the perceived risk associated with reward policy. We are seeing an increasing trend for organizations to build risk management and assessment into reward policy. The role of the compensation committee in particular is undergoing radical changes, with a much greater remit to oversee all reward programs and understand their impact on costs and risk. 

While the focus on risk is desirable, we raise one item of concern. There is a danger that the increased scrutiny surrounding reward is leading many organizations to be more circumspect in their reward strategies, stifling innovation at a time when nimble reward strategy would serve organizations well.

What are the implications for reward?

Reward has moved up the organisational agenda. What is clear from our research is that performance has become the key driver in the post-recession world. Reward – and a new focus on total reward that is closely tied to performance – will play a crucial role in allowing organisations to compete in this new environment.

The best organisations understand that reward strategy plays a fundamental part in their success. A solid reward policy encourages better performance (and therefore growth), but also reinforces corporate strategy. Our study showed clearly that the most competitive organisations are intent on carefully directing their investment in reward to encourage the best possible returns and are using a variety of tactics, including variable pay, differentiated reward and performance metrics, to achieve this objective.

Steps to optimising your reward strategy

The first step is to ensure that reward policy is aligned closely to organisational strategy. In practical terms, this means making sure that:

  • The right performance metrics are in place
  • Reward programs are closely tied to metrics
  • Performance and rewards are appropriately differentiated
  • Supporting management processes are in place
  • Leaders have the capability and commitment to implement reward programs effectively.

The role of variable pay

Variable pay plays a critical role in motivating performance. The best organisations balance the use of short and long-term incentives based on the nature of each role, and push short-term incentives down through the organisation to convey the idea that individual performance affects the success (or otherwise) of the business. Incentives are linked to medium and long-term targets that support sustainability and performance over the longer term.

Understanding value of reward and benefits

The new trends in reward strategy cannot succeed without a solid foundation of good communication, based on strong leadership. At every stage – the drive towards variable pay, a closer link between performance and reward, differentiation of high performers, retention of talent and a trend towards total reward – there is a risk that the return on investment will be lost because leaders and managers have not clearly communicated the organisation’s intention and strategy.

What has sometimes been lost in the drive for growth is a focus on employees’ understanding of the value of their pay and benefits package, and how it is linked to their performance and that of the organisation. Our studies of the world’s 'Most Admired Companies' have shown that the best organisations do not necessarily pay their people more – although they do tend to identify key workers and top performers and pay them well – but they do a better job of communicating the value of the total reward package to their employees.

One of the most vital elements of any reward strategy will be good communication, and recognition by management that reward is not always well understood by their people. Communication tools such as total reward statements will help ensure that employees have a clear picture of the overall value of their reward package, and not just the base pay component.  

Strengthening foundations through reward

For many, the recession has been an opportunity to retrench and reassess. Organizations have seized the chance to clarify their reward strategy and seal any cracks in the foundations, improving and strengthening their reward and performance management systems.

Panic and the need to cut costs may have been the significant drivers, but the lasting legacy is a concentration on the optimization of pay and its close linkage to performance and business strategy.

Report: The changing face of reward

Developing and delivering reward programs that are cost effective, drive performance, build talent and avoid undue risks – these are the challenges ahead for most organizations, according to Hay Group's 'Changing face of reward' research. 

Based on interviews with more than 230 organizations in 29 countries, this study looks at how organisations are addressing the challenges of reward management in a new business environment.

Read the research findings by downloading the PDF.