Reward Blog

Rewarding Sex

2013-06-19T14:41:21Z

By Colin Miller, Kent County Council. Equality of pay has been on the agenda for decades. This might be in the soft touch genre such as passing whisper in the corporate blurb about how important it is to treat everyone fairly or it could be something a bit more hard core such as a full blown equal pay audit - especially if you publish it online for all employees to see. In this day and age of post modernistic everything, how we reward people properly and fairly should be mainstreamed and not kept ‘under the covers’.

I’m seeing the future as having the expectation and desire to account for decisions the organisation makes. This may be why certain groups of staff need to by paid more, why there are differences in the benefits offered by grade (becoming harder to justify this now) or why there are gender related pay differences. I’m also hoping, by adopting this approach, what actually happens is that organisations identify old fashioned, unwarranted or misogynistic approaches and unceremoniously ‘dump’ them.

From the 2013 CIPD Reward Survey results, it is more likely that organisations are transparent in their approach to employee benefits rather than in the realms of pay. However, new regulations, public expectation, and pressure from key interest groups or shareholders all outline a clear direction of travel.

As we boldly stumble into the bright new future we should embrace these warm notions and get on with it. Openness within pay in practice, employee benefits or total reward should shine through and ensure that everyone, independent of sex (gender) or any other aspect of equality, feels fulfilled at work or at least fairly rewarded.

Culture still important in reward

2013-06-10T10:43:00Z

By Tony Hatton-Gore. Rewardhr Ltd.

Standards of corporate behaviour have been in the news again, raising inevitable questions about the role of reward. The recent CIPD Employee Outlook report Focus on rebuilding trust in the City highlighted the on-going lack of confidence in reward practices in financial services and Charles Cotton wrote about this last week. Major banks continue to hit the headlines over business practices and Sir Adrian Cadbury was interviewed on The Today programme comparing the standard of corporate ethics now and 20 years ago.

The media focus emphasises high levels of pay but I still believe in the total reward model (i.e. it is not just about the money). It is robust and applies in all sectors, to organisations with different value sets and in all stages of the economic cycle.

Key principles of good reward management apply whether the organisation in a bank or a not for profit – aligning people with the organisation’s objectives and values, engaging them by offering a comprehensive and attractive deal and recognising achievement. All these are about living the values.

I attended the CIPD Central London Branch event celebrating the CIPD centenary and was heartened to hear the speakers endorse the view that values are still important in HR. This was my interpretation of the content from a great panel of speakers who expressed this theme in different ways:

The drivers of engagement include opportunity and wellbeing, involvement, trust, pride in the brand (Tanith Dodge)
It is important to be true to the culture (Frank Douglas)
Integrity is the most important characteristic for an HR director (Bev White, Linda Kennedy)

This reinforced my confidence in the importance of reward reflecting organisational values. It seems that corporate values are where reward and ethics coincide and it is key to ensure that the linkage between them works.

My instinct is that the way to keep reward fresh and relevant is to regularly test the reward offering against the values and to act on the findings if they are not consistent. It should be straightforward to look at the core values and identify the practical implications for reward.

For example if we say we value customer focus do we incentivize and recognise delivery/quality/service and promote pride and affiliation in employees to ensure they are engaged and adding value? If we say we encourage excellence do we promote effective performance management and give managers the tools to understand how to manage high performers and make effective reward decisions?

This is about establishing the feedback loop to demonstrate that reward strategy continues to support the business and, crucially, expressing how we do this in reward communication for managers and employees.

From excesses and the City to a new reward approach

2013-06-06T08:37:00Z

Charles Cotton, CIPD Reward Adviser

The Employee Outlook: Focus on rebuilding trust in the City throws up some interesting findings regarding financial sector workers’ (brokerage and investment, banking, and insurance) attitudes to their and their colleagues’ pay. For instance, 75% think that some people in their organisation are still paid excessively, 64% believe how some of their colleagues are rewarded and for what is still not clear, and 32% regard the new rules and regulations around reward as a disincentive. But how, in the future, should we think about rewarding those working within this sector?

Traditionally, financial service organisations have often used financial rewards to manage employees and, to a certain extent, employees themselves have come to expect to be managed through salary rises and bonuses. The theory was that the opportunity to earn good pay meant that individuals would be self-motivated to perform and would only require ‘light touch’ supervision. HR focused on talent attraction and development and reward was often a case of ensuring pay was market competitive. Employer concerns about talent being tempted away by rivals tended to encourage firms to be coy when communicating to staff about pay, as well as deferring reward for seniors.

However, this approach is having to change. The current economic downturn and increasing regulation and legislation are restricting how much employers operating in this sector can reward their staff and for what.

The challenge for likes of banks and insurance firms is not to create even more sophisticated and complex structured compensation packages to counter these restrictions, which may be self defeating if they are hard for staff, or shareholders, to understand. Instead, they should review their total reward packages and how employees are managed, other than through carrots and sticks.

This is not to downplay the disruptions that will be faced by those working in financial services as they transition from the old to the new approach and the challenges posed by ideologically-driven, rather than evidence-based, legislation and regulation. It will be difficult to change some employee expectations and create new reward approaches that are transparent, felt fair and are aligned to the new drivers of the business.

We should accept that some bank employees will feel betrayed that their effort is no longer financially recognised as it once was and may be tempted to leave the sector or move overseas to escape the new restrictions. However, the question is whether such individuals possess the new attitudes, behaviours and skills that are now required by a banking system moving towards long-term sustainable performance.

There is the danger that talented individuals may be put off from entering financial services now that the potential rewards are lower. However, while some may be put off, for others the attractiveness of this sector is not solely due to its financial rewards. Instead, career opportunities, interesting and challenging roles, status and values are seen as important and firms should look at how they can leverage these elements.

Of course, one of the unintended consequences of increased legislation and regulation is that it reduces the ability of senior workers to exhibit autonomy, mastery and purpose in their jobs. So, senior employees are in danger of seeing their jobs becoming both financially and non-financially less rewarding. It could also mean that the gifted and talented are put off from applying to work in that sector as the jobs are no longer exciting. To counter this, employers must look at work and job design and career opportunities to ensure roles remain challenging and interesting.

There is also the opportunity for financial service firms to review those tasks lower down the pecking order. As more focus is given to the how as well as the what, front line roles can be redesigned to make them attractive to those who do these jobs.

To conclude, it is going to be tough for employers in this sector to re-evaluate their core purpose and the values which should define behavioural expectations and norms. However, it is also an exciting time for HR professionals working in this sector as they create new approaches to reward and recognition that support the new expectations that both the organisation and employees now need.

It's all of our "BIS"iness

2013-06-03T14:28:00Z

I was born two weeks early; I just couldn't wait to arrive. In fact, impatience has been a character trait ever since, despite the well-intentioned counselling "all good things come to those who wait". Waiting has never been something I enjoyed, but my current reason for waiting is almost over... My very well-informed spies tell me that the new remuneration reporting regulations are about to be confirmed, prior to coming into force in October.

Unless you've been living in a Tibetan yurt for the last year, you'll know that the Department for Business, Innovation & Skills - aka BIS - has been consulting on ways to make remuneration reporting simpler and more comprehensive. Increased transparency of boardroom pay has to be a good thing; shareholders must be able to understand how directors are being rewarded and, importantly, for what so that they can hold them to account.

The current regulations have been needing an overhaul for a while, as the standard of disclosure varies enormously across the FTSE. If you're a retail shareholder, or even an institutional investor, deciphering the remuneration report can be a task and a half, and that's assuming the information you're looking for is provided in the first place.

While complying with the new regulations will require a significant amount of preparation and careful drafting, I'm hoping that the end result will be clearer disclosure and the use of fewer bland clichés: "aligning managements' interests with shareholders", "growing shareholder value", and "exceptional pay for exceptional performance"...yawn, yawn!

But there is a flip-side to all of this: with greater disclosure comes greater responsibility of the company to act appropriately, and to have all manner of stakeholders, such as current and former employees, trades unions and pressure groups, reading the new remuneration report and wondering whether this is a company that truly lives up to the values it espouses...and they won't stay quiet.

So companies will need to have their plans in place as the regulations are launched for they will become not only my business, as Group Reward Director, but those of a much wider body of company personnel. These regulations will become all of our "BIS"iness.

(B)end it like Beckham? The best rewards are yet to come...

2013-05-21T08:28:00Z

By Sylvia Doyle, Reward First People Consulting.

David Beckham, reported to be ‘the greatest footballer of all times’ played his last home game for Paris Saint-Germain yesterday before he retires from professional football at the age of 38. Hailing from Leytonstone London, Beckham is now as famous for advertising that well-known brand of designer underwear (so my tween-age boys tell me) as for his on-the-pitch football.

He is also famous for his earnings. Last year alone he generated an estimated personal income of £28.3m. Not bad given that his reward package attracts less negative press than executives in financial services.

>Last year alone he generated an estimated personal income of £28.3m

Okay, I am not going to argue the case as to whether Beckham’s package is justified or proportionate. Though it has been based on talent on the pitch above his speaking skills. I believe the more interesting point is that in Beckham’s career to date, let’s call it his phase one career, cash rewards have been a highly visible component.

However the ambassadorial role he played alongside this in 2005 to promote the City’s bid to bring the Olympic games to London was pivotal. London won the 2012 bid. While the rosy glow of what many describe as ‘the greatest Olympics’ still lingers the non-cash rewards in terms of earning respect and recognition for his achievements also feature.

So while Beckham’s phase two career may not be based on his core talent of football, it capitalises on the strong ‘brand’ he has earned through his non-footballing activities. His work in encouraging children and young people into sport offers Beckham a ‘give back’ opportunity that might not have been on the cards 20 years ago. Surely for the man where cash is clearly a hygiene factor, those intangible aspects of total rewards are more relevant.

While the ‘say-do’ gap in both corporate life and rewards (“people are our greatest asset…”) continue to create tension, there is also an opportunity for business leaders to apply some altruism. This can achieve far more for corporate reputations than just focusing on shorter term goals AND produce stronger and more lasting success. This also supports the intangible elements of the total rewards agenda that we talk about though don’t always follow through.

What do you think?

I’d like to hear your views and also hope to see some of you at the 2013 CIPD Reward Conference this week.

Where ever I lay my hat (that’s my home office)

2013-04-29T13:33:00Z

Alan Measures, Moog

Marissa Mayer – recently appointed as President and CEO of Yahoo - received a lot of press coverage following her decision \ ultimatum to come and work in the office or work for another company. The announcement provoked a debate on productivity and the merits or otherwise of working from home. From where I sat (in my office, at home of course) the discussion that followed mostly missed the more central issues of trust and indirect or intrinsic benefits.

I should declare that I am fortunate enough to enjoy the best of both worlds; an employer that trusts me to work at home as much as I want, and still generous enough to provide me with an office when I prefer (or when it’s half term, when the travelling is easier and the noise levels at home increase). This isn’t just an arrangement that significantly aids my productivity, it’s one I value strongly, and see as a key benefit of working for Moog. So a couple of days a week I substitute most of the two and a half hours I would spend commuting for more time working, and benefit from a bit more sleep, and quite a lot less money spent on petrol.

As a reward person, I’ve always been an advocate for giving people what they value, if you can, rather than what you want them to have. To that end, I’ve argued for “light touch” regulation on areas like job titles, working from home and dress code, and that we all end up better off sanctioning the occasional abuse by the minority rather than letting this fear of abuse define what we give.

It’s a philosophy that has more than once got me into trouble. I set up a switch to a smart casual dress code with one former employer who had a sizable call centre where it was proving difficult to find and then keep staff. I reasoned that a causal dress policy might make jobs there a little more appealing and a little less costly. It led to an email from the CEO that you could see had been typed with such venom the keyboard must have sunk about an inch into the desk. I was to be held personally responsible for the decline in productivity that was now inevitable, as well as the lost customers he thought would recoil at the sight of men in M&S chinos and polo shirt. I suppose I didn’t help by replying and speculating how much more successful Richard Branson or Bill Gates could have been had they invested in a tie. Branson’s take on the changes at Yahoo were pretty clear – you have to trust your staff.

Google’s CFO Patrick Pichette talks about there being “something magical about sharing meals” but for me there’s something difficult to swallow in Google’s anti telecommuting stance given their products, and makes me wonder if it’s really just about money and control. Alexandra Shulman, British editor of Vogue laid out a defence of Meyer’s actions but it’s worth noting how in the last two paragraphs it all comes down to her desire for her team to be accessible on her terms, as and when she wants them to be.

And what about the money? Well, it’s worth heeding what happened to Robert Propst the man who designed the first work cubicles for Herman Miller. His Action Office designs aimed to increase efficiency, privacy, and create a better work environment. It didn’t take long for some companies to see that his designs could be modified to fit as many more employees into the smallest possible space. It had the opposite effect to what Propst had intended and he later described cubicle based workplaces as a “monolithic insanity”. Clearly the relationship between proximity and productivity needs to be explored with care.

Real time information: payroll compliance or a reward opportunity?

2013-04-17T13:33:37Z

By Deborah Moon, HR Consultant

The beginning of April brought with it the implementation of a number of key Government policy changes, including those affecting the NHS, legal aid, taxation and welfare reform. Early April is also traditionally one of the main times of the year when changes to employment legislation take effect but this year was, perhaps, particularly notable in that it brought with it what has been described as “the biggest shake-up to PAYE in 70 years”, i.e. the introduction of real time information (RTI), replacing the end-of-year regime for the purposes of HMRC reporting.

But how have HR and Reward professionals, planned, prepared for and reacted to that change? Have they seen this as yet another additional regulatory burden, presenting a series of obstacles needing to be overcome? Is it regarded as yet one more transactional process, adding to the myriad of other operational challenges, designed to make busy working lives yet more difficult? Or has it been more thoughtfully considered and regarded, offering additional strategic opportunities and possibilities in the way that workforce information is utilised to support remuneration policy and practice?

A recent CIPD Reward Forum workshop brought together both experts and practitioners to consider and reflect upon both the operational and strategic issues and challenges faced by organisations in preparing for RTI, as well as considering the future for reward administration more broadly. A summary of that workshop and key lessons learned is set out in the event report Preparing for real-time information, a simple case of compliance or a shift to modern reward practice?

Clearly, in preparing for, implementing and managing RTI, there are a number of key operational considerations, including those relating to data quality and security, the role and relationship between HR and payroll (whether an internal or externally-managed function), the supporting systems and processes, arrangements for collecting and capturing the relevant information and communicating with both line managers and the wider workforce. But although the specific nature of the issues will vary, are these not all critical elements which underpin reward practices more broadly and which are of fundamental importance to their effective management?

Can the change to RTI, with the potential benefits arising from regularly updated reward information, be utilised to support and enhance other remuneration practices? Is the approach taken to managing reward data within an organisation, reflective of and aligned with its business needs and workforce requirements? With the growing diversity of and complexity in remuneration practices, is there a need for a more critical and strategic approach to the collection, storage and utilisation of pay and benefits information?

As organisations become familiar with and reflect on their experiences with RTI, does it also provide a learning opportunity for the management of other reward changes? Can we be confident that in planning and preparing for these we don’t just focus on the technical and administrative details, but approach these in a way which maximises their organisational value? Do we ensure they are clearly communicated and in a way which is most meaningful to those affected? As well as securing organisational compliance, delivering broader business benefits will make an important contribution to achieving a more tangible return for our time and resource investment.

P.S. Look out for details of the next Reward Forum on 13 June

No new initiatives, just better implementation of the programmes we know

2013-04-11T10:31:00Z

Clive Wright, Hyperion HR Ltd

I was having a discussion recently with some of my professional colleagues when it turned to thoughts around what the latest reward initiatives are. In the past the trend has been for new reward ideas to develop in the United States and then come across the Atlantic for us to implement in our own way in the UK. We then in turn have used these ideas, adapted them to our style of operation and often passed them on to our colleagues on the continent.

But over the last few years there have been very few programmes that have come across from the US and the trend here has been more for the development of reward programmes that are right for our companies rather than adopting the latest idea from the across the pond. This, of course, is a much better approach as we are implementing programmes that are the right fit for our companies rather than taking the latest fad or idea that has been introduced. This approach of ‘best fit’ rather than ‘best practice’ develops reward programmes that are more closely linked to business objectives.

There are a number of areas where I think good improvements are being made. Firstly there is the whole area of using evidence and business based information to support the introduction of new reward programmes. Having the details and data that link new initiatives to the benefits for the business means that there is immediate support for the new programmes and less opportunity the line managers to decide to opt out of the initiative.

The best book I have found to help reward professionals develop this approach is “Evidence-Based Reward Management” by Michael Armstrong, Duncan Brown and Peter Reilly. Their book is well worth a read and will help you identify how you can create measurable business impact on your pay reward practices. Alternatively you might consider attending the Developing a Reward Strategy course run by the CIPD.

The second area that we will need to look at and for which we’ll need to develop new approaches is the use of social media in managing and communicating reward. Employees can use external or internal social media without restriction or censorship which can lead to both good and bad outcomes. To paraphrase a recent blog from the CIPD Group on LinkedIn it’s no secret that employees increasingly go online to discuss companies, products and brands, seek advice and offer guidance to others. Yet it’s often difficult to see where and how to influence these conversations, which take place across an ever-increasing number of platforms and may happen either in seconds or over the course of weeks.

But unless we take steps to manage messages positively and influence the use of social media we will be leaving the outcome to chance and the strong possibility that is not being used in the best interests of the company. Companies need to look at this with four primary functions in mind; they need to monitor, respond, amplify, and lead employee use of social media. Being able to identify exactly how, when and where social media influences employees helps HR and executives to craft communication strategies that take advantage of social media and use it to engage with employees.

And as we come out of recession and deal with some of the unhealthy values that got us into trouble in the first place, the third area that we need to be considering is how to influence and develop employee behaviours suitable for our new organisations. I’ve recently been reading an interesting book called “Homo Imitans: The Art of Social Infection: Viral Change in Action” by Leandro Herrero. In this book Leandro argues that the best way to introduce change successfully is to change behaviours and the best way to do this is to virally infect organisations and ensure that employees ‘catch’ the new behaviours bug. He describes it as an epidemic of goodness. The behaviours that need to develop depend on the organisation and the change that is needed but the best ways to develop this social infection with behaviours at the core is through social media.

Reward can play an important role in this viral infection but at the core of the change that Leandro advocates is the use of social media, both within organisations and in the general social environment.

So to sum up, as a reward profession we are now not introducing new programmes just because they seem to be good ideas or because someone else found them successful, but taking time to ensure that current programmes are those that we are consider really do support business objectives and, wherever possible, that we are taking advantage of technology and new communication tools to influence behaviours and improve the use and understanding of our reward programmes.

Regulate to Accumulate?

2013-03-18T12:52:37Z

From a FTSE 100 group reward director

If Charles Dickens were to visit Britain today, thankfully, he’d find a country much changed from the Victorian era in which he lived. Gone are the dark satanic mills, workhouses, child labour, capital punishment and smallpox. Yet, the themes he captured so eloquently and amusingly in his novels are still as relevant now, as they were back in 1870 when he died. As a journalist and social commentator, he would have relished last year’s ‘shareholder spring’, and found even greater writing material in the furore over bankers’ bonuses. Today, certain public figures leave themselves open to be as parodied as their 1800’s counterparts.

While I take great pleasure reading that Pip, Oliver Twist and David Copperfield eventually lead happy lives despite their initial hardships, how will Britain’s story end? With tighter remuneration regulation currently going through Parliament, and even more fundamental legislative changes to limit variable pay being agreed in the EU, I worry that this could be a knee-jerk and politically-motivated reaction to address the failings of the few. The banking crisis highlighted that some organisations had fundamentally lacked control in their operating systems, but was remuneration to blame? While highly leveraged incentives possibly played a part, systemic failure to understand the complex deals being agreed and the risks associated with them were more likely the root causes, in my view.

Although, I believe, we no longer have the same class divide that was the DNA of Victorian society, Britain is still a country consisting of the ‘haves’ and the ‘have nots’. For a Chief Executive, Hedge Fund Manager or City Trader to earn millions of pounds a year is anathema for most people – wealth that is totally inconceivable to the ordinary person – yet how much value do these individuals generate for their companies, for their shareholders and, ultimately, for society? Clearly we must balance risk and reward, but, as I see it, it is more the ‘how’ and not the ‘how much’ that should be considered and, if necessary, regulated. It’s an easy headline to lambaste the CEO for his bonus, pension fund or share awards; he is a ready target for the news-hungry hacks. Payment should never be made for failure, but it’s how we guard against failure that is paramount. Legislating remuneration to control what is paid, how it is paid and when it is paid is not the answer and, in my view, it will never solve the underlying issue of how value is created and how it is measured.

So we just need to wait and see how the story unfolds. I continue to have “Great Expectations” but fear that we are moving towards “Hard Times”.

More pay regulation – Doh!

2013-03-04T15:51:00Z

By Ian Davidson, Consultant

Introduction
I am spending a lot of time at the moment reviewing the various global approaches on remuneration regulation. It suddenly struck me, in a Homer Simpson moment, to ask a basic question. Does more remuneration regulation lead to better reward outcomes? It turns out not. In fact, regulation is a poor solution to a low level problem that will throw up more issues than it resolves. The real reasons behind the regulatory assault appears to be more to do with political expediency and an easy target rather than resolving issues of market failure.

Few would argue that shareholders and remuneration committees are closer to the issues of executive remuneration than regulators and shareholder advocacy groups taking a generic tick box approach could ever be. The regulations do not only fail to discourage the behaviour that they believe, incorrectly, led to the financial crisis but they are storing up problems for organisations over the next few years just when the focus should be on economic and organisational recovery.
Does regulation solve the problem?

Professor Ian Tonks of Bath University argues persuasively that statistically, pay performance sensitivity in banks is actually no higher than other sectors and overall is quite low. The relatively small performance-related element of executive pay means that there is little evidence that executive compensation in the banking sector is dependent on short term financial performance. He notes that as Conhon et at (2010) shows that the role of compensation in promoting excessive risk taking prior to the crisis was dwarfed by the roles of lose monetary policy, social housing policies and financial innovation – which of course falls largely under the very politicians and regulators that now endeavour to regulate on pay. As Weight (2012) notes the key determinate of levels of executive pay is organisational size.

So the evidence points to the fact that executive pay in banking had very little to do with market failure and thus regulating it will have a very limited, if any, impact on the probability of further market issues – as if the current LIBOR issues did not prove that fact with greater eloquence that this commentator could hope to achieve.

Does it work?
So does the regulation of pay work? The answer is not really. The CIPD submission to the UK Government’s banking inquiry showed that the issue is mostly around culture; a view greatly supported by the actions of the new CEO of Barclays who is attempting a massive transformation of the Bank’s culture in response to its multiple failings. Reward is but one small part of a much bigger issue. But the FSA in the UK, the FCIC in the US and the EU capital requirements directive all link remuneration structures to market failure; with surprisingly little robust evidence to support this assumption.

In general the approach is to defer large parts of the bonus payment in to the future and also that a large part of the deferred portion must be paid in equity or similar instruments. The deferred part of the bonus is subject to malus and claw back. What is worse is the EU proposal that bonuses be no more than one times base salary.

Potential outcomes

It is all downside for the employer
The most interesting and critical part of this analysis is what will the results of these limitations? First of all the approach to limit bonus payments to one times salary. At its most simple level it is going to mean large hikes in base salary. We have already seen this occurring in response to regulators demands for a greater balance between fixed and variable remuneration. For employers increasing fixed salary has a very large down side. It massively increases fixed costs at the same time as the same regulators are demanding greater capital holdings – doh! The benefit of having a flexible bonus system is that you can pay out when times are good and not pay when cash is tight. In addition salary payments are not performance driven or risk adjusted; so you are undermining the very strategy on which the assumption of market failure is based.

This leads on to a second issue for employers that are closely linked to the first point. If you defer large parts of the bonus over multiple years you are forcing employers to pay cash out when they may have much better uses for this resource – including building capital reserves or returning cash to shareholders. Thus the regulations on pay are hampering the very important role of management in managing the cash resources of their business. Oh, of course shareholder advocacy groups say do not dilute share capital – the regulators say pay bonuses in equity instruments – doh!

It is largely (but not completely) downside for the employee
The regulators seem to be ignoring two very important financial concepts when introducing regulations on pay; as are shareholder advocacy groups such as ISS when making similar demands on executive pay. These are the time value of money and the fact that the risker the financial vehicle the more return it has to generate. (Although this is a double edged sword as we will see later). A cash bonus of £500 today is worth more than £500 paid next year or the year after. To give the equivalent in today’s money of £500 in two years’ time would mean paying out perhaps £535 - and that is using quite a modest discount rate. You then say to your employee I promise to pay you £535 in two years’ time; BUT if we do not perform well, or if someone in the organisation misbehaves and we lose money we reserve the right to reduce or not to pay the bonus. An intelligent employee will look at her organisation and what is happening in other organisations and say “well, I think there is a 10% chance each year over the next three years that I will lose my bonus”. So the deferred bonus is not worth £500 to me in three years’ time; it is worth £432. So the employee can either accept a lower value, uncertain payment in the future or look to her employer to increase the bonus to make up the lower future value. Not an ideal employee engagement scenario.

The double edged sword of equity
Regulators and shareholder advocacy groups are insisting that a large percentage of deferred bonuses are paid in equity or similar instruments such as cocos. (Broadly, conditional bonds). For the employee this is a double edged sword. On one side, equity levels can produce very good results. For example, Goldman Sachs share price has had an annual increase of around 23% over the last three years. So if your bonus was deferred in to stock it would have doubled over three and a half years with little or no effort by you. For the regulators and the politicians this means that stock based bonus pay-outs have the possibility of being very much higher than originally forecast. Not exactly the policy outcome that was hoped for. The other side of the sword for employees is the uncertainty factor. Goldman Sachs shares may have increased; but many organisations share prices will not have risen; or given share price volatility have a high probability of being at a lower level at the very point of vesting. Uncertainty, as noted above, reduces value. In the eyes of a rational employee a bonus deferred in to stock over say three years must be discounted to a much lower level that the actual value awarded. (Although the concept of “actual value” here is quite nebulous). Some traders that I know have discounted future equity based deferred bonuses to close to zero due to the risk (and perhaps their own financial time horizons). Thus the deferred bonus in to equity ceases to be a retention tool unless you have to be one of the lucky Goldman Sachs employees – but then you do not know if you are going to be in a job in three years….doh!

The other arguable point about deferring bonuses in to equity is that it actually increases risky behaviour. Why? A deferred bonus in equity cannot drop in value below zero for the employee so there is a limited downside. However, if taking a business risk increases the probability of equity upside then there is no rational reason for an employee or a director for that matter, not to take that risk. So, instead of regulators and politicians providing policy that reduces financial risk the current approach appears to increase the risk, reduce flexibility and increase fixed costs; not an ideal policy outcome with no clear winners and the potential for everyone to lose – doh!

Conclusion
The evidence points to the efforts by regulators to provide prescriptive regulation on pay and bonuses; particularly in the banking sector, to be deeply flawed. They are trying to solve a problem which played only a small part in the near global market failure. They would be better to focus on the more important issues of lose monetary policy, culture and poor financial regulation of complex financial instruments. The pay regulations are counterproductive and have a high probability of not delivering the desired policy outcomes but making the situation worse and more risky than it was before – doh!

I believe the time is right for evidence based, principled regulation around high pay. Not for any reasons to do with market failure but because we must at least start to take heed of the arguments around social justice while appreciating that in a demand driven market economy the concept of “fair pay” is, like Plato’s table, something of an unobtainable but delightful concept.

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The way we do things here

2013-02-27T08:49:00Z

By Glen Jenkins, CIPD Reward Examiner

I was talking to an American at a dinner party recently who was an expatriate working for a company here in the UK. His international experience had taken him to work in Canada, Mexico, Brazil and now in the UK and among other things we got around to talking about international rewards and how American expatriates were faring in this time of austerity.

The discussion moved on to whether there was such a thing as a global reward strategy. I pointed out that recent international reward surveys had indicated that 60% of companies working in an international environment claimed they were increasingly centralising their reward decisions and developing a global reward strategy. Many of these companies were seeing this as a key feature of their management of employees on international assignments.

I was therefore surprised to hear that my expatriate friend strongly felt that there was no such thing as a global reward strategy because it was so difficult to manage and centrally control the diverse requirements in the various countries where he had worked. He was also of the opinion that the specific requirements in each country for such things as taxation, housing, health and social insurance and the way we do things here, meant that the international reward manager back in the parent country could not possibly deliver a universal global reward strategy and if he/she did, it would be too costly to run. At a minimum they could only deliver guidelines on financial control and that some independence in the host country was essential.

The picture I was left with following our chat was that the international reward manager is not like the strategist some commentators would like us to think. They are not analogous to the imperial Roman Emperor who dictated in Rome to his generals abroad ensuring that alignment and control is maintained through the conquest of 'corporate' culture over national culture. It is more like a Federal system that is adaptive to local values and cultural orientations and builds on a mutual understanding of reward practice in the host country. So when companies say in a survey response that they have a global reward strategy should we should we take this literally?

Take part in the 2013 Reward Management survey

Invest in your people and the CIPD’s reward management survey!

2013-02-18T11:34:00Z

The CIPD has recently launched its annual survey of UK reward management and the survey closes on the 4 March. While we have had a good response to date, we would still love to hear from you if you’ve not yet had the chance to respond.

In the CIPD's centenary year, your response will help us understand the key reward management issues in today’s workplace and the impact that they’re having on business performance. It’s also an opportunity for you to reflect on the success of your own strategies and help us set standards for good practice.

One reward management issue currently in the news is the decline in the value of earnings, especially acute for those on low and moderate earnings. On the 12 February, the PCS published a report Britain needs a pay rise. The report notes that since the onset of recession in 2008 the real value of wages has fallen by 7%. During the same period there has been a real terms drop in consumer demand of 5%. The PCS argues that this fall in the value of pay could be a major obstacle to the return of economic growth.

On the 13 February, research by the Resolution Foundation found that ten million people on low-to-middle incomes could have to wait another 10 years before their living standards return to their pre-recession level in 2008. The report, Squeezed Britain 2013, says that the squeezed middle face a permanent hit to their finances because it will be hard for them to recover the ground that they have lost in recent years as earnings have risen by less than inflation.

Also on the 13 February, the ONS published Regional Economic Analysis, Changes in real earnings in the UK and London, 2002 to 2012. It found that after three decades of strong economic growth, real wages peaked in 2009. Since then inflation has outstripped wage increases and in real terms, the average earnings of UK employees in 2012 are back to where they were in 2003.

Falling living standards are not just a UK concern. The Wall Street Journal reports on the 13 February that the Japanese Prime Minister is calling on Japan’s largest firms to increase employee wages in a bid to break the cycle of pessimism and falling expectations that have hampered economic growth. According to the National Tax Agency, the average annual compensation for part-and full-time employees, including bonuses, fell for eight of the 10 years between 2002 and 2011. Separate figures from the Ministry of Health, Labour and Welfare shows that average monthly salaries in 2012 at firms with five or more staff – including bonuses and overtime – are at their lowest level since 1990. However, the government’s advisers acknowledged the challenge of increasing wages when companies are inclined to offer one off bonus payments, which can be more flexible for business, than increase base pay. And in Pay, Kevin Hallock, charts how wages in the US have become progressively dispersed.

What can be done? Can we and should we increase base pay in the UK? Fortunately, your responses to the CIPD’s Winter 2012-13 Labour Market Outlook helps us explore this issue. We included a limited number of questions in this survey asking employers about their use of workers on the current National Minimum Wage rates as well as whether they had adopted the so called ‘living wage’. We will explore this issue in future reports, but this initial research indicates that the most common response among those employers that would be impacted by a hypothetical increase in the minimum wage to the living wage would be to absorb the costs (36%).

However, 17% of you said that they would make redundancies, 18% would restrain pay and 24% would review non-wage benefits. However, there were differences by sector, with the voluntary sector being more likely to make redundancies (29%) than other sectors. Within the private sector, we would expect those in hotels, catering and leisure and retail and wholesale would be particularly impacted given that employers in that sector are more likely to employ staff below the living wage.

When asked about the benefits of (hypothetically) introducing the living wage in their organisation, 55% of those employers whose organisation had not yet introduced a living wage (or were unsure) were unable to identify any benefits associated with introducing a living wage at their workplace.

However, among the 13% of respondents that had introduced the living wage as a conscious policy decision, only 16% of you had said that there had been no benefits. Among those that reported a benefit, the more common advantages of such a move included corporate social responsibility (26%), employee satisfaction (25) employee loyalty and motivation (24%) employee engagement (20%) and higher productivity (17%).

So, can we increase base pay rates? Yes, based on your feedback, our research indicates that there can be a case for increasing base pay to the level of the living wage, but it depends on the economic and business context faced by the organisation. It is unlikely that many employers in the catering or retail sector would be able to suddenly increase their pay rates. However, as our research shows, if the introduction of a living wage is associated with higher productivity, lower turnover/reduced hiring costs, better standard of work and reduced absenteeism then if wages were gradually increases then they could be self financing.

So, should we increase base pay rates? For employers in other sectors, especially those sitting on a healthy cash pile, the message should be to stop worrying about what to do with your money and invest it in your people, not only can your business benefit, but so can the economy as a whole as workers across the UK start feeling more confident regarding their own spending and saving decisions. Similarly, employers should also review their supply chain and examine whether they should revise their contracts so that suppliers can increase the pay of their employees.

It is also important that you invest time in completing CIPD research, such as the reward management survey, as your insights help us inform our responses to some of the most pressing pay and benefits issues of the day.

Executive labour markets – the emerging markets story

2013-02-12T11:44:00Z

By Ian Davidson, Compensation and Benefits Specialist

Many people will have been surprised by recent research that showed that executive pay in some areas of emerging markets are at or above the level of mature markets such as the USA and UK. A study by the global management consultancy Hay Group shows, for example, that in 2011 the average total cash level for senior management was $154,847 in the USA compared with just over $150,000 in South Africa and $204,421 in the UAE. While appreciating that emerging markets are not a homogenous group of countries; there is a clear trend of rapidly rising executive pay. The drivers for these increases have been identified as high growth, high inflation and high demand.

This high growth in cost is accompanied by very high levels of geopolitical uncertainty that both adds upward pressure on packages but also means that careful consideration needs to be given to the nature and quantum of investments in a number of emerging market areas. In more mature markets there are often unspoken assumptions about robust legal systems and continuing political legitimacy (although that is starting to be questionable). Those are assumptions that need to be examined in the light of current events in a number of emerging market territories.

It’s a humpty dumpty world
The changes in levels of reward in emerging markets turn traditional assumptions on pay on their heads. We are seeing increasingly that higher pay is required in some emerging market countries than say the USA or France. In addition to base pay many EM countries have a structure of large cash allowances for housing, cars, education and so on leading to a very rich cash package before LTIPS, options and the like are taken in to account.

In a phrase, the executive markets in emerging markets are hot. This is similar to the conditions seen in the mature markets a few years ago. As an example, senior executives moving jobs in China are likely to generate a salary premium of more than 30%.

New thinking is required. It is no longer enough to treat EM remuneration as a subsidiary consideration to the parent market. EM labour markets have their own dynamic which is much faster moving and fluid than we have seen in the west for many years.

The fuel on the executive race track
Most commentators such as Hay Group and CT Partners agree that there are three factors fuelling the explosion in remuneration:

High demand for executives in high growth countries and sectors
High inflation in some emerging markets together with stronger currencies
High growth in both sectors and countries in emerging markets

There is a high demand for senior executives in a number of emerging markets. Asia Pacific is a key example where for some time now demand has considerably outstripped supply. Given that economic growth rates continue to look very healthy (and certainly when compared with very weak growth in a number of western economies). It is likely that pay levels will outstrip mature markets if that has not already happened.

Inflation adds to the fuel. Emerging Markets quote pay inflation in Venezuela at 29% and in Argentina at 24.5%. Brazil and Mexico are likely to rises in excess of 5% - and that is just to stand still – not taking account of the high demand for experienced senior management in these areas.

Concentrate on tactics rather than strategy
The fast moving and fluid nature of a number of emerging market labour segments means that it may not be possible to have a prescriptive approach. Nimbleness is the order of the day; reacting slowly or inappropriately will simply mean losing talent to competitors, be they local start-ups seeking a piece of the pie or established national or international players.

CT Partners have suggested that it may be appropriate to treat some EM markets as start-ups and structure remuneration accordingly. This will mean some innovative thinking. Larger equity grants (perhaps using local equity market listings) or higher gearing than we are seeing in mature markets. Yes, this will create internal equity issues – but, to mix a metaphor, if you want flesh in the game you are going to have to gamble the pot.

Differentiated approach
My view is that to compete in the hot markets a highly differentiated approach is required. The focus must be on individual country and sector labour markets both in terms of the quantum of reward and in terms of the total reward framework reflecting the innovations and retention products of that particular market.

Retention is very important and, given “transfer” premium costs, much more economic than recruitment. I return once again to the concept of treating some emerging market countries as “start-up” territories. This may mean offering equity or equity like vehicles with a mixture of time and performance vesting; weighted towards time vesting with steep steps at each annual anniversary.

Affordability
A cost benefit analysis should show that the potential revenue from emerging markets, with their relatively rapid growth in GDP and the expansion of a consumer orientated middle class should provide the revenue to fund the higher levels of executive remuneration that emerging markets are now demanding. However, there is a fly in the ointment – the risks.

Risks
As Doctor Robert Davis the leading global strategy advisor notes, “We are on the edge of a major revolution in how the world is organised.” This applies very much to the world of emerging markets. The Arab spring, it may be argued, it just the start of fundamental change in the region. (Pun intended) Also of note is the continuing rise of nationalism in certain EM countries that will also lead to a new understanding of geopolitics not just in Asia but across the globe. Dr Davis goes on to note some major geopolitical risks:

Social cohesion in Europe
Rising nationalism in Asia
Conflict (1), not in military terms, but in terms of the emergence of economic imperialism
Conflict (2), in military terms, as the hypothesis that the world is becoming a safer place needs to be tested. The South China Sea and Iran head up the list
The impact of NATO’s scheduled withdrawal from Afghanistan
Emerging indications of a rejection of consumerism
Unfolding events in the Middle East particularly pathways to or away from democracy, the robustness of current geographic borders and the emergence of theocracy.

Executive labour markets are going to be impacted strongly by these issues so we have to contend not only with high demand but high uncertainty. This means HR and reward in particular are going to have to develop a competency in the analysis of geopolitical structures, risks and themes if we are to protect our organizations from unexpected shocks and Black Swans. This will mean a different approach to termination clauses as well as considerations within EM packages of security and evacuation – as recent events in Mali have demonstrated. This uncertainty and current events can only lead to further upwards pressures on packages as well as the factors identified above.

Conclusion
The rapidly increasing costs of employing senior executives in emerging markets are a vital consideration when undertaking business in these areas. It is important to be both nimble and innovative to stand a chance of competing. Competitive advantage is possible but difficult. The changes in these labour markets must lead to a challenge on existing assumptions of what is “fair” and appropriate in a rapid changing and fluid environment. Taking account of what is happening in each country and sector; both in terms of quantum and design is essential; albeit leading to the possibility of highly contextualised and fragmented approaches rather than a centrally driven strategy.

The other side of the coin for executive employment in emerging markets is the very high level of risk and uncertainty. The interaction and correlation between the factors noted by Dr Davis above are likely to bring many downside surprises over the next twelve months. This reinforces the need for nimbleness as well as having appropriate exit strategies (both in a physical and organisational sense) as well as robust business continuity arrangements.

One could use the simile of the old Wild West frontier; there are many risks and dangers but the potential for high rewards means that not being in this game is, in itself, a major business risk. You pays your money (mostly to senior executives) and you takes your choice.

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Reward metrics based on business outcomes - an opportunity for HR

2013-01-22T13:43:00Z

By Tony Hatton-Gore, Reward and Human Resources Consulting

When times are tough we can expect more focus on the money. We see this in the news, whether exemplified by high profile individual cases such as those of former Governor General of the BBC George Entwistle and C4 racing pundit John McCririck; or by more esoteric issues as the implications of Basel III for relating financial sector reward to risk.

Organisations are looking for value from reward programmes generally, as well as in relation to the headline cases. For individuals reward may be seen as the hard edge of HR, as a job offer may help distil life decisions about career and employment aspirations.

Focus on reward spend at an organisation level is often about two aspects: communication and return on investment.

As mentioned in the recent blog by Sylvia Doyle, the CIPD’s reward risks survey highlighted the importance of the role of reward communication in promoting employee appreciation of the value of the package and employee engagement.

However, organisations must be able to analyse the potential and actual impact of their reward policies to inform employee communication.

A recent Mercer report* included these findings:

HR is falling behind other functions in the use of more sophisticated analytics; and among the apparent reasons is a (rather distressing) belief that HR is not sufficiently skilled to use such techniques
The two top potential uses of HR analytics among respondents are:

“Which elements of our rewards strategy effectively motivate our best-performing employees”
“Whether our rewards strategy effectively motivates and engages our best-performing employees”

There is a great opportunity for HR to invest in improving the return on investment for total reward and the reward management capability of the organisation by:

Better reward communication that both articulates reward strategy and what it means for the individual for a positive impact on employee engagement
Analysing the impact of reward in terms of outcomes such as attraction, retention and motivation

Both would themselves help refine reward strategy and improve the organisation’s reward management capability.

We need to demonstrate the business case and the outcomes associated with reward policies to make a real difference to the business. Let’s not waste the opportunity!

It is important to ensure that reward/HR has robust analytical skills; that we can interrogate our systems effectively for detailed management information; and that we can deliver both corporate messages and individual reward information consistently and with impact.

*Usage of metrics and analytics in EMEA moving up the maturity curve

See more details of Reward Forum events on 8 February

Does reward feature on your new year’s resolution list?

2013-01-10T09:07:00Z

By Sylvia Doyle, Managing Consultant - Reward First ® People Consulting

New Year is often marked by those great resolutions for the year ahead or at least for the early part of January... However this is also the time when we evaluate our careers, reflecting on what we’ve done and what we plan to do over the year ahead. This raises the wider question on how we, as HR and reward professionals, can use our influence to make 2013 a better year.

Yes, 2012 was an amazing year for the Olympics. However the negative press on executive pay awards and bonuses, even those which were later rescinded. Understandably this has raised questions on the role of HR and Reward professionals, as many staff received little or no pay award during this time.

If we are to play a proactive role in helping organisations make better reward decisions then we need to work towards aligning reward practices to organisational goals that take account of all employee groups. Looking at recent annual remuneration reports, while the narrative of ‘transparency’ and ‘sustainability’ can beguile the rhetoric gap between what is said and what is done persists in some quarters.

One of the major reward management changes over the past decade is the devolution of reward decisions to managers. When this works well, it can be hugely effective however the reality ‘on the ground’ can be quite different. With this in mind, let’s consider some key questions:

Have we got the right reward frameworks in place? This continues to be a major stumbling block and need regular review to ensure that reward frameworks are ‘fit for purpose’ especially as the organisation evolves.
Do managers have access to good quality tools and support? Credibility relies on managers being seen as fair and consistent and offering the right support (beyond HR shared service centre) helps managers make informed reward judgements aligned to business goals and culture. Needless to say managers need access to training and regular updates which needs to be part of the deal.
To what extent do reward decisions reflect business and wider outcomes? A skewed curve towards high performance raises alarm bells for an under-performing unit. However are other areas incl. diversity being addressed?
Is reward communications up to the job? Good communications may be the single most important factor in the successful implementation of reward change. It’s also critical to ensure that staff appreciate the value of their reward offering as this was the top risk issue in the CIPD 2012 Reward risks survey
How can we influence strategic reward outcomes? While we need to continue evaluating outcomes and other metrics, let’s not forget the on-going need for dialogue at the top as well as visibility across the organisation to influence reward decisions that move us in the right direction.

What do you believe will help organisations to make reward decisions that we can be proud of this year?

See more details of Reward Forum events on 8 February