Transparency in Reward by Glen Jenkins

There has been a lot of discussion lately about transparency in reward from public and private sector executive pay to the attack on pay secrecy clauses in equal pay legislation.  The result has been increasing pressure for more openness and the sharing of financial information with employees and other stakeholders and this is becoming a growing feature of the reward architecture.  Transparency in reward, however, must not be seen in isolation, for it forms part of a wider approach by organisations to transparency of financial information. Of course, those few companies that have an ‘open book’ policy, that advocates both the ethical and business case for sharing information on pay, benefits and financial performance as a way of increasing employee commitment, competitive advantage and corporate performance, will find this debate rather old hat.  However, most employers still shy away from transparency.

To emphasise this, you only have to look at Mercer’s recent research report which pointed to a ‘reward perception gap’ between employees and employers. They found that in major UK multinationals, employers and employees perception of the value of their organisation’s reward and benefit programmes differed significantly. A major contribution to this confusion was a general lack of understanding by employees regarding their reward packages and the communications they receive.

Transparency in financial information is important because employees need to know how their work contributes to the organisation as a whole. However to be fully transparent, organisations need to train their employees to understand financial information and in the case of rewards, how their own rewards and benefits are derived. Mercer’s report is consistent with other research that has found that the majority of employees do not understand these issues. Yet it is generally agreed that employees need to know how pay and grading decisions are made and how reward policies affect them. Without some financial know-how, employees will be left in the dark and misunderstandings will result that could affect motivation and engagement. In short, employees need to be convinced that their contribution is recognised and that the distribution of rewards is fair.

Take, for example, a recent focus on transparency - the case of executive bonus schemes. Research in 2003 by Fattorusso et al (2004) showed that only 31 per cent of executive bonus schemes could be verified by shareholders but in 64 per cent of firms executive bonus schemes used elements that “outsiders would be unable to make a straightforward judgement on whether bonuses were earned or not”. And, in 3 per cent of firms “there was no disclosure whatsoever of the nature of their bonus performance”. Without transparency how can organisations ensure that the pay for performance link is working?

If stakeholders like shareholders are unable to verify because of a lack of transparency the bonuses of their own executives, how can financial control be maintained. It is not surprising therefore that many have called for the reform of Remuneration Committees, but does this fall short of what is really needed?

For transparency in reward, linked as it is to greater disclosure of financial information means giving stakeholders a voice in the determination of rewards and how they can contribute to organisational performance. It means a change in organisational culture that embraces openness and two way communication with all stakeholders. Without this, rewards are not transparent.