Reward plays a central role in business success

Written by
Changeboard Team

02 Aug 2010

02 Aug 2010 • by Changeboard Team

Moving HR from transactional to strategic

Business experts the world over are of the opinion that the true source of competitive advantage has evolved from areas of finance and technology to rest firmly within the field of human resources. 

The recession has sharpened the focus on HR functions, and consequently an increasing number of organisations are now looking to HR to fulfill a more strategic role. HR professionals are being asked to go beyond the transactional delivery of traditional HR services and act as true drivers of change. 

This evolution is more apparent in the reward function than any other, with organisations recognising that reward has a central role to play in employee motivation and engagement. This is particularly significant today, as we know that a highly motivated and engaged workforce will deliver competitive advantage through higher levels of individual and consequently organisational performance.

Changing demands on reward

'The changing face of reward' research recently published by Hay Group highlights that reward can account for up to 70% of an organisation’s total costs. In an era where cost management may represent the difference between survival and shutdown, it's unsurprising that reward has emerged as an issue of direct concern for the most senior levels of management.

This research study shows that CEOs are asking:

  • What performance are we getting in return for what we pay?
  • What is the effectiveness of the costs allocated to reward?
  • What is the return on investment?

It would be doing reward a disservice to say that the increased attention was due solely to cost awareness. Hay Group research shows organisations are now evaluating their whole approach to reward and reward communication as they begin to see it as an opportunity and not just a cost.

As a result of this increased attention, and with many organisations finally recognizing the truth behind the statement 'our people are our most significant asset', it's not a shock that new demands are being made of reward and those who specialise in its management.

Reward professionals are expected to get closer to the business and to adopt a much broader mindset. Their Challenge is building and sustaining a workforce which is engaged and focused on delivering performance that will help the organisation to climb out of the recession and directly support future success. However, this is not easy to achieve and failure carries a number of risks.

The link between reward & business strategy

To obtain the greatest value from reward, particularly in a supposedly post-recession economy, it's imperative to consider alignment to strategy and employee needs and effective communication.

Alignment with business strategy

If reward is not aligned with the business strategy, it may actually derail an organisation’s success by encouraging inappropriate behaviours and performance. For example, take the sales professional who is rewarded according to achievement against personal sales targets. This may have been entirely appropriate in the past, but what if the business strategy needed to help the firm climb out of the recession requires more of a team-based effort to increase the total sales size or number of products sold?

Clearly, the existing reward approach will not be encouraging or rewarding the right behaviours, sending employees confusing and inconsistent messages. This will pose a significant risk on the part of the organisation in that they will be hoping employees see and act on the bigger picture, even though there may be a personal cost to that action. It is therefore essential for an organisation to ensure that reward and business strategy change together and that this alignment is sustained.

Alignment to employee needs

Failure to align reward with employee needs can damage employee motivation and engagement and could cause high employee turnover. There are plenty of examples of organisations who have been offering the same (or very similar reward packages) for many years and when asked why the answer is often simply, ‘because it’s what we've always done’. As organisations struggle to rebuild their business after the recession, there's a risk that turnover will be among the higher performing or high potential individuals who are critical to the business, but who are also likely to be in demand in the market.

An example of alignment with employee needs can be seen in a large, UK based highly international call centre. The majority of their workforce (in excess of 80%) were aged under 30 and a very large proportion of them were working in the UK on Visas before continuing their travels or (as they said) 'returning home to get a proper job'.

For all of the right reasons, the employer wanted to look after its people and do the best it could for them. As part of the package they provided an exceptionally generous (and consequently expensive) pension scheme and were surprised and disappointed when employees did not rate it as important in employee surveys. After consultation with the employees, they removed it and provided a basic stakeholder pension plan in its place.

They also introduced an employee recognition scheme which awarded a European City break for the top performing individual in each area (for the employee and their partner). The scheme created a real buzz and both individual and organisational performance soared as people competed for the award. It also saved the employer many thousands of pounds annually and was therefore a real win:win scenario brought about by ensuring that the offering was truly aligned to the nature and needs of the workforce.

Communicating the value of the package

Even where alignment with the workforce is achieved, there is a need to ensure that employees actually understand the true nature of their package and their entitlement. Failing to do this would be as significant a waste of money as the point above and arguably more so as efforts may well have taken place to update the package. 

One of the emerging trends in the recession has been for organisations to really rethink their approach to communicating reward. As organisations have had to impose pay restrictions and manage low paying bonus schemes, they have taken the opportunity to remind employees of their total entitlement and the benefits employees receive through working for them.

In some organisations, this has taken the form of a simple restatement of entitlement. For many others, this has gone beyond pay and benefits and they have really begun to reconsider their employer brand. These are often organisations that spend a great deal of time and effort thinking about their brand from a customer's perspective but have perhaps forgotten to consider how they deliver their brand promise to their own employees. While the use of total reward statements will help employees better understand their package, when such activity has been supported with regular HR / employee communications and briefings, the feedback is generally more positive.

Reward an opportunity to be seized

The recession has put reward firmly on the agenda in organisations around the world and across all sectors. New demands are being placed on reward professionals as reward costs are scrutinsed and return on investment monitored. However, there's a growing acceptance that a strategic approach to reward can deliver improved business performance and in turn, competitive advantage.

There are many challenges involved in getting reward ‘right,’ and it's not without risk but the positive news is that senior management teams are starting to acknowledge the opportunity and value that reward can bring. For instance, the growing prevalence of a 'total reward' approach shows that organisations are seeing the importance of going beyond the traditional remit of compensation and benefits into the realms of intrinsic and extrinsic reward.

Increasingly, senior management are looking to their reward functions for leadership in how best to engage employees and deliver desired performance. As a result, the reward profession has become central to helping lift these businesses out of the recession.