CIPD Bloggers

Blog Post: New old values for corporate governance

Ksenia Zheltoukhova — Thu, 16 May 2013 10:31:00 GMT

Yesterday (15 May) Dominic Barton’s keynote speech at the Tomorrow’s Value lecture series addressed an important issue of short-termism in Western capitalism setup. In his article in the Harvard Business Review he considers the antecedents of this trend – which he assigns mainly to companies’ boards – and challenges our conception of ‘business as usual’. Several other trends were called out by Mr Barton as warning signs for organisational strategies:

Rising middle class consumers in Asia and Africa
Growth in technology that replaces jobs
Resource constraints
Ageing population
High unemployment rates

Whilst the implications of these broader societal changes on availability of talent and market competitiveness are well-recited, a curious observation made by several panellists in last night’s event, however, is the ownership of the strategic agenda by directors. Ownership was discussed to come in different forms, either traditionally as company shares, or in a manner emerging from family-owned businesses – by creating enduring moral values so that directors can put their money where their conscience is, to rephrase a popular adage.

Mr Barton argues that it is not capitalism that has failed, rather the directors swamped by the plethora of regulatory concerns they have to deal with. Without getting into the debate over the value of regulation to better business, a call for professionalization of directors is a welcome one.

The second challenge is continuity of organisational leadership. Various analyses place the average tenure of Chief Executives in FTSE-100 between 3 and 6 years. In this context the much needed stewardship – careful and responsible management with a view of handing it over to someone else’s care – may not be a priority for someone measured on the basis of quarterly profits.

Mark Preston, Group Chief Executive of Grosvenor (a family business) responds to this challenge by highlighting the role of non-executive directors on boards. They, he claims, are (or at least should be) empowered to ask tough questions, remind the board of the organisational purpose, and tackle the complacency of short-term focus.

Drawing on the insights from his Asia clients, Dominic Barton pledges to show the value of his governance as the Global Managing Director for McKinsey and Company in ‘a hundred years’ time’. Whilst some of us will not live to see the fruits of his labour, this long-term thinking is refreshing.

Blog: Ksenia Zheltoukhova

Ksenia Zheltoukhova — Fri, 10 May 2013 13:09:00 GMT

This is Ksenia Zheltoukhova's blog. Ksenia specialises in leadership studies and is interested in practical measures of value-led behaviours of managers and employees. She is currently working on identifying the effects of leaders’ sacrificial

Blog: CIPD Hackathon Blog

Hackathon Blog — Wed, 08 May 2013 14:22:00 GMT

The CIPD and the Management Innovation eXchange (MIX) are inviting HR and business leaders to crack the adaptability challenge through a hackathon—an online problem-solving event that will harness the collective intelligence of progressive HR and the manag

Forum Post: http://www.cipd.co.uk/comment-insight/opinion/intrepreneurs.aspx=what lessons can organisations learn from today�s successful entrepreneurs and is it a good idea to encourage and develop intrapreneurs

Anonymous — Tue, 07 May 2013 20:54:00 GMT

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Blog Post: London outperforms the UK as a location for job creation

Mark Beatson — Fri, 03 May 2013 15:23:00 GMT

Last week, I attended an interesting seminar, organised by Addleshaw Goddard LLP and the Centre for Cities as part of their Working London seminar series, looking at how labour market factors might help or inhibit London's future economic growth - and the role of public policy in addressing potential barriers.

London has outperformed the UK as a whole as a location for job creation. The chart below displays ONS data on workforce jobs from 1996 onwards, but with the London and UK time series benchmarked at a value of 100 for March 2008 - the top of the previous cycle.

We see from this that, after a surge of job creation in London in the late 1990s, job growth in London proceeded at a similar rate to the rest of the UK between 1999 and 2008. Since then, however, London has out-performed the UK. Employment in London did not even begin to fall until early 2009, nine months later than for the UK, and employment resumed an upwards path earlier. In the year to December 2012, employment in London grew by 2.4% compared to 1.3% for the UK.

Behind this are some interesting variations by industry. Since March 2008, the number of jobs in the UK in public administration, defence and social security - largely central government - has fallen by almost 10%. However, the fall in London has been less than 5% and the number of jobs actually increased marginally in the year to 2012. Clearly the impact of cuts on central government has been felt most keenly away from Whitehall. Similarly, there are now more jobs in London in finance and insurance related activities than there were in March 2008.

Professional, technical and scientific services have been a major area of jobs growth in the past year but growth in London (9.5%) is proportionately higher than for the UK (5.8%). In contrast, London has lost 30% of its manufacturing jobs since March 2008, compared to 9% across the UK. London's relative specialisation in knowledge-based services appears to have continued to intensify during the recession and its aftermath.

Note the data above are for workforce jobs - counts of jobs, primarily from business surveys. ONS recommend we use this data for analysis by industry. But there is also another reason for showing them. There is a big difference between the number of jobs in London and the number of people living in London with jobs. This is primarily explained by net commuting flows: there are many more people living outside London who travel into London to work than there are people living in London who travel to jobs outside London. So whereas the latest figures show over 5 million jobs in London, the number of people in London who are employed is just over 3.9 million.

Indeed, the picture is not so flattering if we look at London residents' labour market outcomes. The employment rate among those aged 16-64 is 70%, below the UK average of 71.4%. Similarly, the unemployment rate in London (9.1%) is higher than the UK average (8.1%). For 18-24 year olds, the unemployment rate is estimated to be 21.4% against 19.2% nationally. Within London, unemployment is concentrated in the Boroughs of inner London and some outer Boroughs in north and east London. This relative underperformance is long-standing. London's success in generating new jobs over the past twenty years has been accompanied by population growth and increased numbers commuting into London for work.

London has great strengths in knowledge based services and many of the factors behind that ought to give it a bright future - such as its concentration of highly rated Higher Education institutions, its expertise in finance and many of the other business and professional services required to trade and innovate, its creative strengths and its openness and cultural diversity.

Clearly there are potential clouds on the horizon that might threaten its position as a global business centre, such as limitations on transport infrastructure, housing affordability, restrictions on highly-skilled migration, or the intended or unintended consequences of regulation. But there is a good chance that, as and when the global economy recovers, London can continue to strengthen its position in knowledge based services.

The more difficult question is whether this can be achieved while improving the employment prospects of those living in London? A lack of skills and qualifications is often a barrier to accessing jobs in the knowledge economy. The seminar heard about Tech City Apprenticeships, an example of how local knowledge service employers, including SMEs, are working together with education and training providers to develop routes into technical and knowledge based jobs for young people.

In addition, CIPD's Steps Ahead mentoring programme will reach London this year, providing young people with experienced mentors to help them improve their employability skills. Localised, sector-specific collaboration is likely to be needed if London is going to be able to provide greater opportunities for residents and address the skills needs of local businesses.

For further comments on this topic you can also download a podcast of a post-seminar discussion I participated in.

Podcast Link: http://www.centreforcities.org/40/press/podcasts/2013/05/01/what-are-the-employment-challenges-for-london-up-to-2030/

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

Reward blog — Mon, 29 Apr 2013 13:33:00 GMT

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.

Forum Post: work ethic and skills are not the only reasons for employing migrant labour

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Blog Post: Power of 3 - Big Data's been watching you: your hired!

John McGurk — Thu, 18 Apr 2013 14:02:00 GMT

Big data can sound a bit Orwellian. Like a huge computer programme that makes decisions about human destiny and orders us about by numbers. In reality finding patterns in information characterised by data coming at dizzying velocity, volume and variety is changing our world. It finds solutions we may need and some we don't know we need. Big data is now being used in recruitment and selection in novel and slightly concerning ways. As always thought leadership on this comes from across the pond but use it as a starting point as it will be over here soon. A recent economist article shows.

About 60 per cent of the US workforce is hourly paid and half change jobs regularly. That churn means massive transaction costs and optimising how those people are selected could be a major gain to businesses which recruit a lot of basic skills.

Data mining allowed one company to select those who had downloaded a non standard browser as better employees for jobs in hotels and catering. This wasn't directly related to the service skills required. Their ability to download Linux showed initiative and skill and an ability to plough their own furrow it was assumed. That was borne out when they were seen to have higher productivity and lower turnover. This nugget came from drilling into million data points and 30,000 employees.

In an initiative which would have F.W Taylor tapping his clipboard in appreciation one firm promises to monitor the response times of call centre workers relating that to performance traits uncovered in the selection process. Maybe someone. Was thought high on chattiness and its only now seen as a problem. The article does not say that the computer can say "your fired" if your declared skills don't match up but it is heavily implied.

We should treat this technology with care. Human interviewing methods are flawed but when the computer say "hired" we need to be careful. These systems can be treated with the reverence of holy scrolls . Correlation is not causation and big data has its own statistical shortcoming. Since many of these tools aim at being predictive we should always be mindful of the thinking which informs the algorithms. That's why it's absolutely vital that as HR professionals we get our head around how big data works and what's behind this predictive approach to managing people.

Blog Post: Real time information: payroll compliance or a reward opportunity?

Reward blog — Wed, 17 Apr 2013 13:33:00 GMT

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

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

Reward blog — Thu, 11 Apr 2013 10:31:00 GMT

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.

Forum Post: the dawn of a new era for employee voice

Anonymous — Wed, 03 Apr 2013 14:29:00 GMT

We set up a social media website on a collaborative project across organisations and the results were remarkable on how people wanted to join in sub groups including ones they could set up themselves. The lesson for me is that you need to be on top of the IT platform to keep it stimulating and informative and drive as much traffic as you can in that direction. We even did an employee survey through it. The issue is how do you measure the success of social media platforms - is it the number of people signed up - or more importantly the topics raised aired?

Blog Post: Budget 2013 confirms that the economic recovery will be slow ... but what about jobs?

Mark Beatson — Wed, 20 Mar 2013 15:38:00 GMT

The economic forecast released by the independent Office for Budget Responsibility (OBR) today alongside the Budget confirmed that economic growth will recover more hesitantly than the OBR expected when it made its previous forecast three months ago. While the OBR expects the economy to avoid a “triple dip” recession – meaning that output growth in the first quarter of 2013 is expected to be positive – growth for the year is now anticipated to be just 0.6%. Growth does not pick up significantly until 2014, when it is expected to be 1.8%. Growth does not exceed its trend rate until 2016.

The reason why the OBR expects the recovery to take so long to take hold is near at hand. Like the IMF, the OBR forecast output in the Euro zone as a whole to fall during 2013 for the second year in a row. While economies such as Greece, Portugal, Spain and Italy have been in recession for some time, Germany and other stronger economies have not been able to avoid the impact of deteriorating trade and business confidence. The UK’s strong trading links with its European partners means it cannot avoid the fallout. The current crisis in Cyprus underlines the fragility of the situation and there is clearly a risk of further turmoil. It is difficult to see how UK growth can reach the rates forecast by the OBR towards the end of their time horizon unless greater stability takes hold in the Euro zone.

The OBR state that "the labour market performed more strongly in the fourth quarter than we expected [in December]". The latest labour market statistics, published earlier today, show that employment growth continued into 2013 with employment for the three months November 2012 to January 2013 up by 590,000 on the previous year. This was despite 2012 seeing virtually no economic growth. Looking ahead, the OBR forecast employment growth of 100,000 in 2013 and a further 100,000 in 2014. This does raise the question of whether the OBR’s employment forecast may prove to be unduly conservative if growth does indeed resume. If [at least some] of the past jobs growth has been the result of an improvement in the workings of the labour market, employment may increase more strongly than anticipated by the OBR. Likewise, the OBR expect unemployment to peak at 2.6 million, slightly above its current level of 2.52 million, but they do not forecast falling unemployment until 2015. Given that the labour supply is growing, it is likely to be the case that increases in employment may be accompanied by smaller reductions in unemployment. Nevertheless, it may well be less than another two years before we see unemployment starting to come down on a sustained basis.

One reason why employment growth has been so strong is because earnings growth has not kept pace with inflation. The latest OBR forecast suggests it will be 2014 before average earnings increase by more than inflation. This means we will have seen a four year period of falling real wages.

Putting this together, 2013 may well be another year when the labour market continues creating jobs despite the economic headwinds. But this may be accompanied by continued pressure on living standards, as the average earnings of those in work fall in real terms. Furthermore, today’s figures confirm that the rosy picture on job creation has not benefited everybody to the same extent. The latest ONS figures show that unemployment among 16-24 year olds increased sharply and the number of long-term unemployed 18-24 year olds exceeded a quarter of a million for the first time in nineteen years.

Forum Post: general mills have reaped both tactical and more strategic gains through their focus on building trust and commitment amongst their staff.

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Forum Post: ‘the business case’ for employee engagement

Anonymous — Tue, 19 Mar 2013 17:10:00 GMT

I have really enjoyed reading this comment trail. Thank you. It occurs to me that in order for us to feel engaged with our workplaces we seek to have some basic human needs met - those of dignity, respect, safety, connection and love. We might not overtly look to our organisations for love but we certainly seek to ensure that the employment relationship we engage in offers meets the other needs. (Who knows, statistically most of us, me included, find love there as well :) )

Blog Post: Regulate to Accumulate?

Reward blog — Mon, 18 Mar 2013 12:52:00 GMT

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”.

Forum Post: what’s the most difficult thing you’ve ever done in hr

waheed.qasimi — Tue, 12 Mar 2013 09:36:00 GMT

Running the payroll as well as maintaining the personal files of staff

Forum Post: high trust creates a climate of workplace well-being - with better job satisfaction and greater motivation as beneficial outcomes

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Blog Post: More pay regulation – Doh!

Reward blog — Mon, 04 Mar 2013 15:51:00 GMT

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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Blog Post: The way we do things here

Reward blog — Wed, 27 Feb 2013 08:49:00 GMT

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?

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Blog Post: Labour market statistics, February 2013: A tale of three generations

Mark Beatson — Wed, 20 Feb 2013 16:46:00 GMT

Today’s set of official labour market statistics continue the trend of recent months. The labour force is expanding due to falling inactivity and employment continues to defy expectations by increasing despite little or no economic growth. The consequence of falling inactivity is that unemployment has not been falling as rapidly as employment has grown – indeed the headline figure is very slightly higher than a month ago. But given current economic conditions, these will be seen by many as a healthy set of figures, even if they are accompanied by a continuing squeeze on earnings, which look set to continue to fall in real terms.

However, this overall picture masks important differences across age groups. The labour market prospects of the under 25s, those aged 25-49, and those aged 50 and over have been very different – and not just since the recession first took hold in 2008.

The chart presents the available data on employment and unemployment rates by age group since March-May 1992 (the earliest period for which comparable data exist).

We see here that the employment rates of those in the “prime” age groups (25-34 and 35-49) increased steadily over the fifteen year period between the end of the early 1990s recession and the onset of the current recession in 2008. This was accompanied by falling unemployment rates and (not shown here) a very gradual fall in inactivity. Employment rates for these groups fell in the early stages of the recession, and unemployment rose, but employment growth resumed in 2010 and employment rates are now within touching distance of their pre-recession peaks.

The employment rate for those aged 50-64 appears to have been on an upwards trend for twenty years with the recession making relatively little impact, adding about 2 percentage points to the unemployment rate. Employment rates for the over 65s have been increasing for over ten years, albeit from a low base because most over 65s have retired. Inactivity rates for the over 50s are now at their lowest levels since 1992 – they will have been much lower in earlier decades when many more people worked to 65 (or much later).

It is a very different story for the under 25s. The downward trend in the employment rate for those aged 16-24 started around 1999/2000 and the unemployment rate started to increase in 2004. The early stages of the recession were a major shock but – unlike older age groups – there has been less evidence of recovery in employment since 2009.

Part of the explanation is what appears to be a long-term trend towards greater educational participation. The proportion of 16-17 year olds in full-time education was 84 per cent at October-December 2012, up from 63 per cent in March-May 1992, while the comparable figure for 18-24 year olds was 31 per cent (up from 15 per cent in 1992). Young people in full-time education are more likely to be economically inactive and less likely to be employed than young people who are not in full-time education but this might not be seen as a problem – provided the long-term benefits of education (in terms of greater employability and earnings power) exceed the short-term opportunity cost.

Nevertheless, increased participation in full-time education is only part of the explanation. The chart above plots the labour market status of young people not in full-time education. We see here evidence of a structural shift – with declining employment and increasing inactivity – that predates the recession, especially for those aged 16-17. Nearly half of 16-17 year olds who are not in full-time education are now inactive, 112,000 young people in total. Two obvious questions spring to mind. What are these young people doing? And, given their very limited access to benefits, how do these young people feed and clothe themselves? Job prospects for 18-24 year olds outside the education system appear to have improved little since 2008/09, unlike older age groups.

The suggestion that these adverse trends for young people predate the current recession suggests that better economic conditions and increased demand for labour might not be enough on their own to reduce youth unemployment. We need to understand more about the characteristics and activities of young people outside the education system – and especially those outside the labour market completely.