Podcast episode 41 – Creating a competitive reward approach
You're reading the transcript to the CIPD podcast series.
Philippa Lamb: Welcome to the CIPD podcast. This time we’re going to be looking at creative competitive approaches to reward. I’ll be talking to three people from three very different organisations about the approaches they use to attract, motivate and retain their employees. Colin Miller is Reward Manager at Kent County Council, Misty Reich is Vice President of HR at KFC UK and Robert Wigmore is Compensation and Benefits Specialist at Munich Re UK Shared Services.
First though, Charles Cotton, Performance and Reward Advisor at the CIPD talked to me about the findings from the CIPD’s Ninth Annual Reward Survey. Now the survey examined strategic reward, base pay, bonuses, incentives and recognition, pensions and benefits and total reward issues.
Charles Cotton: I think 2009 has shown how the recession has impacted on different parts of the economy, so the private sector, the majority of organisations in our survey didn’t award a pay rise in 2009 while by contrast in the public sector most organisations and most individuals did see their pay increase. Going forward to 2010 I think the picture could start to reverse. In the private sector I think many of our respondents, while perhaps didn’t necessarily think that the good times were about to come, they thought that things had stopped getting worse and they were looking towards what was going to happen in 2010 and that’s where organisations were perhaps looking at things like pay differentiation. So, trying to ensure that they keep their key talent - to stop them moving on, especially if other areas of the economy are doing better then they are or the firm, so saying well, actually we’ve got a small pot we’re just going to have to focus it on these individuals. In the public sector I think there was a recognition or an understanding that the storm clouds were on the horizon, they were going to have a lot less money and they were probably going to be looking at pay freezes and job losses.
PL: Well as you say, in easier economic times the whole reward conversation was highly sophisticated about how you engage and tie people in and move them forward. Now, I do wonder, in the current situation we’re in, is it much more about pay now, for people? Has actual pay become more of a factor than all the other things we’ve talked about over time in terms of reward?
CC: I don’t think pay was a factor so much in 2009, largely because inflation was negative so you could give people a pay freeze and hopefully their living standards would still go up because everything was falling. The problem is going to be for many public sector organisations in 2010, if they are going to be freezing pay, it’s going to be difficult because a lot of their workers will find that their living standards has fallen. As the economy starts to improve, the labour market starts to tighten, the fear and the concern is that people start moving from the public sector to the private sector.
PL: The possibility of employees becoming increasingly attracted to the private sector in the face of public sector cutbacks is a concern that’s been well documented but how likely is it to actually happen?
CC: I think part of the problem is that public sector pay is quite rigid, you’re following national agreements and so there’s not a great deal of variation between workers in the North compared with workers in the South, while in the private sector you do get more pay variation at a regional or a local level so perhaps that’s one thing that they may start to look at in the public sector.
PL: Kent County Council differs from most local authorities in its approach to pay and benefits. They moved away from the national pay scheme 20 years ago and recently they’ve been looking at better ways to pay people according to what they’ve achieved and how they’ve achieved it. Their reward scheme is called Total Contribution Pay and it works like this.
Colin Miller: We’ve brought in an approach that rewards people for their objectives and accountabilities which they deliver during the year and how they deliver to a behavioural competency framework, how they’ve moved on in terms of personal development and also what we call wider job contribution; the things which they do that aren’t part of the normal day job. All of those come together under an approach called Total Contribution Pay and that dictates how fast individuals move up the pay scale.
PL: There are more changes afoot, taking KCC even further away from the traditional public sector pay structure.
CM: What we’re looking to do now, as of April this year, is to remove the incremental based structure, which has been in place for many years, and replace that with one of percentage increases, dependent on an individual’s appraisal rating. We also want to ensure that for the large group of staff that we have at the top of their grades – and that’s about a third of our employee base – they’re rewarded in a consistent way with everyone else. So, what we’re looking to do is distribute our pay progression pot in a way which is fair and consistent and takes everybody into account rather than only the people that haven’t yet reached the top of their grade.
PL: So this doesn’t impact on your cost control, it’s about how you distribute your pay pot.
CM: Indeed and with the limited budgets which we have we need to be evermore aware of how we use the money that we have and we see that this is a way of trying to ensure that the people who are delivering higher levels of personal contribution are disproportionately awarded something which recognises that personal contribution.
PL: I mean it seems from what you’re saying this is largely a private sector approach to public sector pay and reward. How have the unions responded to some of your innovations?
CM: Everything which we’ve done with the development of the rewards strategy we’ve tried to do in a partnership basis with the trade unions. We have regular joint meetings. We know that in certain circumstances there may be difficulties, one of the areas that would be an example of that was the introduction of single status. Single status is a pay in terms and conditions harmonisation and we had 5,000 people who were on the old style national pay scales and what we did was bring them across to our local terms and conditions in a partnership basis with the unions and we set up a project that dealt with any issues that arose separate to the implementation, which meant that the speed of progress was so much quicker and simpler.
PL: We all know that 2010 and beyond is set to be tough for the public sector. Now against this backdrop I asked Charles Cotton about the balancing act between saving money and motivating employees.
CC: I think there are two dangers. One is to underplay the role of pay and benefits saying it’s just a hygiene factor, it doesn’t motivate people and a lot of the evidence actually shows that it does motivate people or change people’s behaviour it’s just not always in the way that people originally anticipated. So recently a few years ago there was a case of a manufacturing company in America that I read, in which they introduced a bonus to encourage their employees to stop smoking and did it change people’s behaviour? Yes it did. It encouraged some people who didn’t smoke to take up smoking so they could stop smoking and get the bonus and of course more recently with all the financial turmoil, again there’s concern that the bonuses may have encouraged risky behaviour from finance sector workers. The other danger is that you put too much emphasis on pay and think it’s the only thing that’s going to solve your problems. So, if you’ve got high turnover well obviously your salaries are below the market so you’ve got to increase pay. You’re not hitting the sales that you want well let’s look at the incentives see if we can increase those. You want top performance from your senior staff well let’s position ourselves in the upper quartile to get upper quartile performance. There are two dangers and I think what you need to do is look at actually balancing not only the elements around reward but also the non-financial elements around reward so that people are able to look at the employer proposition and choose those offerings within the reward package – and I’m looking at financial as well as non-financial – and actually working out which of those make most sense to them.
PL: So if we’re taking the norm that for most organisations, either in the public or the private sector, pay is going to be a tricky issue, what are the other aspects of reward that you think will come to the fore?
CC: Well I think there may attention given to work-life balance issues, flexible working arrangements, leave. I think organisations will perhaps also start looking at the environment or the culture of the organisation. So, are there opportunities for individuals to have learning and development? Are there opportunities for career development? Are the line managers supportive in giving them the appropriate amount of feedback that they require? Are people being involved in decisions about their work? I mean that’s one of the interesting things also we’ve seen over the last few years, organisations in the private sector have been a lot more open and transparent about their pay decisions with their employees saying ‘We haven’t got a great deal of money, let’s think about what we can do’.
PL: And this is exactly what’s happened at fast food chain KFC. Now clearly reward is not all about money, non-financial benefits have been playing a greater role in recent years and, of course, the recession has led to much more interest in this aspect of the bigger reward picture. Misty Reich is KFC UK’s Vice President of Human Resources. They have 800 restaurants and 22,000 employees most of whom are paid by the hour in the restaurants. They’ve worked hard to appeal to their workforce with a series of non-financial benefits.
Misty Reich: You can’t win every game that’s out there on comp and rewards. One of my key focuses across the HR is prioritisation; finding areas where we can differentiate against the competition. Cash compensation is not one of them in an industry where the margins are as tight as ours.
PL: Okay so how do you do it?
MR: We really focus on, for us, what is authentic to us, which is a culture largely. It’s what we call ‘My life at KFC’ and it’s made up of recognition, development and growth, well-being programmes and also the work environment and that forms the platform on which we believe that we can differentiate from a comp and rewards standpoint. Now that’s not to say we’re not competitive on base pay. We’re competitive, we benchmark, we definitely stay ahead of our high performers but as a whole we know we’re not going to win in this marketplace based on base pay alone or benefits for that matter. So, what we’ve done is we have invested incredible resources in what’s true to us, which is we have a great culture of recognition. We have incredible people development programmes, so when it comes down to a team member perspective what we offer them is flexibility, we offer them career development and growth so as an example they can get to frontline shift leader position with us much faster than they can with any of our competitors. It’s sort of permeates a lot of what we do which makes what it feels like to work for us quite different and differentiated from our competitors.
PL: At Kent County Council, Colin and his team are trying to offer their employees an innovative series of non-financial benefits too.
CM: Part of our approach is to develop a far reaching total reward strategy and many aspects of what we have within it go far beyond the elements that you could put a cost against. We have, in Kent, around about 44,000 employees. Something which we looked at and rolled out just over two years ago now is access to discounts, cash back and discounted vouchers and that’s something through Kent Rewards. Our employees have access to over 1,500 discounts and cash back so these are your high street stores. They can have discounts at ASDA and Sainsbury’s and Comet and B&Q. Since we rolled this out we’ve had in excess of 18,600 employees register, our expenditure is over £4m and the cash back savings is in excess of a third of a million and that doesn’t include the discounts that people receive so we’re really proud of that.
PL: As the world’s largest re-insurer, Munch Re has 350 UK employees and 15,000 in Munich at the HQ. The British employees were based at three locations run as three separate companies but all report into the MD in Germany. The three groups had different benefit and reward strategies and so to find some synergy the company set about harmonising them.
Robert Wigmore: The starting point was looking at what’s everyone got at the moment: Where are the differences and where do we go in terms of making sure everyone’s the same? The first difficulty you encounter is, well, if someone in one organisation’s got more than someone else what do you do? Do you scale everyone else up or do you scale other people down? Well you can’t scale other people down, especially from the contractual side of benefits because you just can’t do it. From the ethical side as well it’s not the way we operate so it’s not something we’re going to do.
PL: So what did you do?
RW: The way we really faced it. So the whole idea of flexible benefits really brought that long in terms of well if we get everyone on the same flexible benefits platform, so we will have to keep some nuances but we can really offer a whole different range of benefits to people, maybe slightly tweak a few things and there are still areas where people aren’t eligible for the same things and there’s still things we’re trying to iron out but it really is rather than having pockets here and pockets there was really putting everything together and trying to get some sort of agreement between cost and spend and what people are on and take it forward that way.
PL: So you’ve opted for an online flexible benefits scheme, it’s called Reflex, how exactly does it work? What are you offering people?
RW: Yeah so we moved from a pretty much, I would say standard financial services benefits package before – pension contribution, private medical cover, income protection, death in service…
PL: The classic stuff.
RW: Yeah the classic stuff really, staple stuff that you’d expect. The research we did led us to think that well this is not necessarily what everyone really wants. We offer people pension contributions but would people prefer salary rather than pension contributions? We offer people private medical cover but would people prefer to have the salary rather than private medical cover. What we did rather than just adding new benefits on – like we bought in the dental cover, critical illness, cycle to work scheme – the main thing we really did was offer flexibility to the current benefits. So, allowing people to sell life cover, allowing people to buy and sell holiday, allowing people to flex down their pension contributions.
PL: And how have people responded to it?
RW: Yeah it’s been very popular, mainly because people now have the choice to do exactly what they want, it’s really the employees are now empowered. We’ve got people of 18, actuarial students who stay for a couple of years then move on, they don’t want 13 x life cover, they don’t want 10% pension contributions, they want to spend their money elsewhere or we’ve got people who have worked there longer than you and I have been alive so they’ve got different outlooks as well. The real, positive feedback for us has been that people now get to choose exactly what they want to do and it’s a bit of an old clichéd expression from flexible benefits that you can choose benefits to select your lifestyle but I think we’ve gone a little bit further than that in saying the scheme is really driven by what the employee wants and they can either go as high as they want on benefits or as high as they want on salary, the mix it’s really up to them.
PL: When it comes to retention and engagement of course reward can have a big impact. I asked Misty about the effect that the ‘My life at KFC’ initiative has had on staff turnover there.
MR: In the two and a half years I’ve been in this business we’ve reduced our team member turnover by 30%.
PL: So how long do they tend to stay with you?
MR: We actually have about an 80% of our population that has long-term retention and so you have this core that’s incredibly stable, I’m talking years, you know? And then around that you’ve got your students who rotate, so about 20% of our population will be more of a 12 month time horizon.
PL: When it comes to the reward package one of the challenges, especially for large organisations, is to communicate the options that are actually available. Colin Miller told me how they’ve tackled this.
CM: It’s a continual challenge and with a large organisation that is distributed across the whole of the county, some individuals don’t have access to the normal electronic communication channels. Even if you do use the normal communication channels and global emails or whatever, it doesn’t actually mean that individuals understand and fully appreciate what’s in that message. It’s a bit like horses and water, you’ve got to try and ensure that the message is received and understood and from that point of view you’ve got to use all communication channels available. You can use paper-based format, you can use managers, cascading of information through manager briefings, you can use the communication channels which hopefully are already in place within the different parts of the organisation because it’s not just reward which needs to be communicated it’s everything and part of that is using the internal network and finding out how things operate in the different parts of the organisation and channelling into them.
PL: So it’s being flexible.
CM: Absolutely. We’ve got a term of flexible consistency. We want to try and ensure that what we role as part of the wider employment package is available to as many people as possible but it’s also got to work in each part of the organisation. The requirements for our directorates, for children, families and education may be different from our highways organisation or it may be different from our adult social services directorate and part of that is to have a degree of flexibility that means what we role out can work in a variety of circumstances.
PL: Well that brings us to the end of this podcast. We’ve heard a lot about the importance of knowing and really understanding what it is that attracts and motivates employees and the challenges of matching that appreciation to business needs. We’ve also heard about the importance of communicating effectively the steps you’ve taken with the package so that your efforts aren’t just consigned to the darker reaches of the employee handbook, but instead are put hard to work in delivering their objectives.
For more information about the issues we’ve discussed take a look at the show notes that accompany the programme, you’ll find them at http://www.cipd.co.uk/podcasts/.
Join us next time when we’ll be reporting from April’s HRD Conference on how learning and development professionals are pushing the boundaries to deliver the objectives of their organisations. In the meantime you can find out more about the conference at http://www.cipd.co.uk/HRD . For now though, until next time, goodbye.