Date: 06/03/07 Duration: 00:20:03
Pay strategy and its link to performance is discussed by specialists and practitioners: Charles Cotton, Reward Adviser at the CIPD, Pat Zingheim and Jay Schuster, partners in the American pay and reward consultancy Schuster-Zingheim and joint authors of many well-known books on remuneration, John Purcell, Professor of HRM at the University of Bath’s Management School , Professor Lord John Layard, Director of the Well-Being Programme at the London School of Economics, Richard Higginson, Head of Reward at financial services firm Towry Law, Helen Wright, Head of People at iris nation ltd, an independent marketing agency and John Philpott, Chief Economist at the CIPD. They address issues such as what matters in reward management, how important non-financial benefits are and what role performance related pay and line managers play.
Rajan Datar: Hello, you're listening to the CIPD podcast on reward...
Hello and welcome to the fifth podcast from the Chartered Institute of Personnel and Development. I'm Rajan Datar and on this podcast we'll be taking a look at reward. Remember though that podcasts are just one of the ways we offer you the latest information. To find out more, check out our website. The notes accompanying this podcast are atwww.cipd.co.uk/podcasts
CIPD research show that over 55% of employers claim to measure the effectiveness of their reward strategies. And in this podcast we focus on what's working and what's not working for reward specialists. Is cash king or are non-cash benefits the best way to keep people motivated? Or perhaps people would be more confident if there wasn't a direct link between their performance and their pay? There's no doubt that reward strategy is complex, yet recent evidence suggests that if it were communicated better, performance would improve. It's common knowledge that line managers do not always tell it as it is, or adhere to the reward strategy rules. But do reward specialists share in the blame. Charles Cotton, CIPD Adviser on reward starts us off with an overview of the latest CIPD Annual Reward Survey.
Charles Cotton: Our research still shows that most organisations are kind of adopting a tactical approach to reward. It tends to be knee-jerk, short-term, reactive, rather than actually going out there and saying, well, actually, what as an organisation do we need or want to achieve to be successful. What do we need from our employees in terms of values, behaviours, and attitudes to be successful and actually, how are we then going to reward and recognise them for when they actually show and exhibit those values. And from the other end, what do we need to do to actually attract people into our organisation, so, what rewards are we going to give them. But increasingly organisations are looking at non-financial rewards as well, such as opportunities for career development, opportunities for flexible working, having a supportive and good, physically good, work environment, having supportive line managers who are prepared to take the time to coach, mentor, to manage your performance and to appraise it as well.
Philippa Lamb: Now, obviously those sort of things that you've been talking about, the things that make a place a great place to work, I can see how that would work in terms of recruiting people and retaining people. Is there now evidence that - I know there's a debate about this - whether that actually impacts on the bottom line. Do people perform better?
CC: Yes, I've got a host of information out there that shows how all these elements work together to actually encourage people to perform, er. We call it, kind of, exhibiting discretionary behaviour. The thing is it's very complicated, it's very difficult to, kind of, disentangle any particular reward from the other ones, to say, well actually, this is the silver bullet. The previous research that we carried out, we've asked if you just put all your eggs in the financial basket, then you'll have people staying for perhaps one, two or three years and they'll leave because they feel they're not part of a wider organisation, or there maybe problems with their career development. Organisations that perhaps put all their eggs in the non-financial basket tend to have people staying for about four or five years, because people actually say this is the mission, I believe in what the organisation's doing, it's really supportive, it's really creative in helping me. But eventually people are going to leave as well because they haven't got the money that they need for buying a home, or educating their kids, or buying a car. So it's a case of organisations trying to say, well, actually, all those elements, financial and non-financial, how can we, kind of, mix it. People often talk of reward as being quite scientific, but actually it's more of an art, actually trying to blend the ingredients to create your own kind of unique cake.
Rajan: We sent Philippa Lamb to talk to with leading American reward specialists, Pat Zingheim and Jay Schuster, to find out what they think is the right reward mix.
PL: I think one of the big worries that people have who are new to this idea is how to strike the balance between paying people and offering them benefits, How do you suggest they tackle that?
PZ: You're going to get much more of a performance emphasis through rewarding with cash. Benefits: you don't want to put your dollars there because then you've got fewer dollars to reward high performance.
PL: I'm really interested to hear you say that because we see endless column inches in the HR press over here about the importance of offering a range of creative benefits. You know, all the lifestyle benefits, you know, clearly healthcare, and all the more traditional benefits, but there's a big preoccupation with it over here, offering things like sabbaticals, huge amounts of flexibility - you don't feel those really pay dividends for the organisation.
JS: Well, there's a global trend towards trying to become a best place to work - those aren't the kinds of things that drive performance. What drives performance is prospective rewards based upon preset goals, so what we're trying to do is not trying to create a best place to work, but a best high-performance place to work.
PL: Don't you find that having a really defined benefits system helps the organisation keep the good staff once they've got them, or is it really just about money in pay packet.
PZ: Both are important, but you're going to get more leverage with the pay part of the packet.
Rajan: So cash is clearly king for Pat Zingheim and Jay Schusterbut what does John Purcell, Professor of HRM at the University of Bath's School of Management think?
PL: Talking to Jay Schuster and Pat Zingheim earlier, I was very much left with the impression that from their point of view, they argue that the way to reward people is with cash, and that benefits of whatever kind are really just the icing on the cake, and that possibly, don't really affect on performance. You don't agree with that?
JP: No I don't agree upon that at all, because the evidence that we have and I don't just mean from my own research, but research from around the world, is very, very clear that it is non-financial rewards are more motivating than financial rewards. Financial rewards are to do with labour markets, with recruiting people, with retaining people and to a degree motivating people, but essentially the motivation for performance comes from a lot of other social factors. In particular, the most effective organisations were using social, non-financial rewards. The trivial rewards, like for example, the John Lewis Partnership 'goody box' or in the case of the Ministry of Defence, £250 for a team to have an evening out. Or in the case of another organisation, a small cash sum that could be given instantaneously. Now it's small, though it's symbolic - it's out of the tax system and so on and so forth - but effectively, it's the use of a whole range of different mechanisms that has the motivational performance inducing characteristics.
Rajan: Well so far we've heard evidence for financial, non-financial and even social non-financial rewards. But is there another way still?Professor Lord Layard, is Director of the Well-Being Programme at the London School of Economics and author of Happiness: Lessons from a New Science. Philippa asked him for his take on what motivates people.
LL: I think you need a very different approach to this where people are not thinking all the time about how much they're paid, or how they're ranked, but they're thinking about the job and what they can contribute.
PL: But in order for individuals to feel as you've described, engaged making a contribution for contribution's sake, because it's a good thing to do, but they do need to feel some sense of being rewarded for it, I think, it's human nature, so they are bound to be preoccupied with issues such as pay and benefits.
LL: One of the problems of trying to motivate people more and more by fine-tuning the financial reward is that it might displace some of the existing motivation that the person has. The more you pay people for doing things they previously thought they ought to do, they may feel less clear about the fact that they ought to be doing them in the first place. The example that I gave was the long-standing controversy about whether people should be paid to give blood and where it was shown very clearly that in Britain where you're not paid to give blood, more blood is given than in America where you are paid to give blood.
PL: So perhaps managers need to have more confidence in their people in the sense that people get a sense of satisfaction out of doing something they feel they should rather than because they're paid to do so.
LL: That's the last word.
Rajan: An interesting example there of pay displacing existing motivation. Although other people argue that if the right behaviours are rewarded motivation will increase. Richard Higginson of Towry Law shares his thoughts on why rewarding how people perform is as important as looking at what they achieve.
RH: At Towry Law we have a bonus scheme for our front of house people who are going out and getting the business that is not just financial performance by each individual. It's then regulated by a series of key performance indicators that are behaviour and quality oriented
PL: They're immeasurable things this, very difficult and intangible, but they're important aren't they?
RH: They are important and they are measurable. I don't have an issue with it being subjective because I think a lot of performance management processes are subjective. We have company values, certain company values that we want everybody to follow. Everybody knows how someone's been behaving, so it's not under dispute if a manager turns round and says I'm marking you down on that.
Interlude: 'You're listening to the CIPD podcast series'
Rajan: Whatever you consider to be the motivator be it hard cash, non-financial benefits, or a sense of duty, most appear to support a reward mix, and it seems, one that is measurable and linked to organisational values. But it doesn't end there. Once you've got the reward mix that works for you, Charles Cotton, CIPD Adviser, explains that how you tell people about it is equally important.
CC: I think that all organisations are realising the importance of not just the design but actually the implementation as well. Bonus schemes or pension schemes, may be very brilliantly designed but if they actually aren't communicated very well, or people don't understand what the scheme's actually about, and why it's important to them and what the organisation wants to get out of it, then it's not going to work and that's why a lot of our research recently has been focusing around the communication and the education aspect, and especially around the role of front-line managers, the people who are delivering on these reward programmes.
Rajan: One organisation that has really involved line-managers is Iris Nation Ltd, an independent marketing agency. Their Head of People,Helen Wright chatted with us about the impact on retention of their inclusive bonus scheme.
HW: We have a bonus system that is a self-evaluative system where we ask people to evaluate their own performance on a quarterly basis.
PL: Now this is fascinating - how does it work?
HW: Every quarter, every person is sent an email telling them to log on to the bonus system. Once in the system they see a number of criteria that are specific to their role in the agency. These criteria are again around the areas of product, reward, and culture. They score themselves on a scale of 1 to 8. After they've evaluated themselves, their line-manager also evaluates and scores them against the same criteria. The line manager then meets with the team on a one-to-one basis to discuss the performance of the individual over that quarter. At the end of every four quarters, yearly, we give back up to 50% of our profit in the form of this bonus. And that obviously depends on the score they have given themselves and their line manager has agreed with over the full year.
PL: Looking at the CIPD's latest research, I see this amazing figure that 50% of workers are thinking about moving jobs or are in the process of doing so. Do you think that getting the reward right really has an impact on that and that you retain motivated people, not just retain dead wood, but retain your good people for longer.
HW: Yes, absolutely. The only product we have is our people and 100% of that walks out of the door every night, so we have to make damn sure it comes back the next day.
PL: That's a nice way of looking at it.
HW: A reward as part of retention is absolutely paramount. We've been very fortunate that our churn rate over the last couple of years, since we started in 1999 has averaged just 15% which is roughly 10% lower than the average for our industry.
Rajan: So we can see that by including line managers in reward does support retention. But are reward specialists doing enough to ensure that they are actively involving line mangers in the design of reward systems? Philippa asked John Purcell.
PL: John, one interesting point that's cropped up with a lot of the people we've spoken to for this podcast is that it doesn't matter how great your reward strategy is, line managers can be the real fly in the ointment when it comes to how effective it is.
JP: Well that's certainly true. There was a CIPD research published last year of reward specialists which said that line managers were their biggest problem. The implication was that the reward specialists were right and the line managers were wrong. But the research we've been doing would actually put it the other way round. Actually, reward specialists don't spend enough time talking with line managers, about how they can design reward systems that can be properly implemented by line managers.
PL: What sort of problems are line managers encountering?
JP: The first is that they sometimes find that the reward system that they're asked to implement overly complex. The second is that they, line mangers, often want to reward people in different ways. There are many more things that can be used to reward people than are necessarily found in a rewards strategy. Many line managers don't like having what we call the 'difficult conversation,' that is to say, dealing with low performers. They'd much rather give an award and blame the system.
PL: As you say having the difficult conversation, where you sit across from a member of staff and say 'I'm sorry, your performance isn't up to scratch' is tricky. Presumably, this is the reason why so many line managers tend to put all their staff in the middle of the rankings when it comes to rating their performance because it kind of solves their problems, doesn't it.
JP: Of course. And the very fact you said 'I'm sorry' implied also that, you know, that was a difficult conversation for you, you say 'I'm sorry.' However, they do tend go for the middle of rankings and line managers hate and don't understand forced distributions in rankings where the organisation says you can only have 5% top performers, 5% bottom performers, and you end up with people in the middle who get the average award which surprisingly looks just like the rate of inflation.
Rajan: While middle rankings may be a problem, this is not the case for Richard Higginson. In his previous role as Director of International Benefits at GlaxoSmithKline, he took a simple but effective approach to stopping middle ratings.
RH: At GlaxoSmithKline last year, we tried an experiment with one particular unit, where we, in effect, banned the middle range of ratings and said you've got to go very high or very low; you can't take that middle ground. Line management wasn't overjoyed about this but they said 'yeah, we'll do this as a pilot, if you like' and it actually worked very successfully. Successful for two reasons. One, it forced them to have those difficult conversations with people who weren't performing as well as others, and so it forced them to have those conversations, and they saw, looking back, that this was a good thing, because the outcome of a conversation like that is something good. They also saw, at the end of it, all the people in their team happy because there had been that differentiation that hadn't been there before.
PL: So is that a solution that you would recommend to other people, that they literally strip the middle ground out and say 'I'm sorry, they're either ok or they're very good' but they're not in a middle 'pretty good range'?
RH: I think that if you've got an instance like that, where you've got a problem with a particular business unit, or a particular line manager, it's a classic answer.
Rajan: So an interesting solution there to a common problem. But what about the things outside of our control. We've looked at pay versus benefits and how best to involve and tell people about them yet some factors are out of our hands. Or are they? The economic climate has changed and those changes bring uncertainty for reward specialists. CIPD Economist John Philpott, offers advice on how to stay on track.
JP: I think that we've been used to a long period of economic stability so the uncertainties over inflation that we've seen in the last year or so have come as a bit of a shock. And the reward environment at this particular annual pay round is probably more uncertain than we've seen for some time.
PL: So given that your feeling is that we are entering, or evidently are entering this period of economic uncertainty to a greater or lesser extent, would your advice be to practitioners that they need to be having that conversation with their people now, so that it's not in six months or a year's time, when they're saying 'actually, things aren't looking great.' Do they need to be preparing the ground?
JP: I think the key in reward strategy, as indeed with any other change management, is to make sure that when you are confronted with change, and need to restructure or make adjustments, that you communicate that to staff effectively. I think this is, at this particular time, in this particular year is one where reward managers have to talk tough, but also in a way that makes sense to employees. I think if you can do that then you can chart your way through any uncertain waters.
Rajan: Hope for us all there that things needn't get unduly tough if we plan ahead, especially if we involve the right people in the right way. While there's no easy answer to getting reward right, it's clear that design and communications are of equal importance. That's why our next podcast will be all about employee engagement. We'll look at what influences employee engagement, as well how and why it pays to improve engagement levels. But for now, whether you're a reward specialist, or a line manager you'll find lots of useful information to accompany this programme at www.cipd.co.uk/podcasts There's also plenty more about reward at www.cipd.co.uk/reward
Until next time then, goodbye.