Time for a reward rethink

Pay and reward are increasingly in the public and political spotlight, which is hardly surprising given the growing issues of income inequality and concerns about executive pay. As with many practices at work, trends evolve and, from time to time, need serious reconsideration – pay and reward is now surely one of those areas.

We often conflate pay and reward, but there are two distinct points – first, what’s a fair exchange for the job done and responsibilities taken (which is, itself, a much wider debate)? Second, how do we recognise and incentivise performance? Individual financial bonuses have become the norm, with ONS figures showing British firms paid out a record £44bn in bonuses in the last year alone. However, we know from many sources of research that additional individualised financial reward, particularly when deferred, shows little evidence of improving performance outcomes. Indeed, bonuses can just as likely encourage unwanted behaviours such as poor collaboration, gaming the system or too great a focus on short-term results.

So do bonuses still serve a purpose? A report by The Work Foundation for the Office of Manpower Economics in 2015 found scant evidence that bonuses improved performance, yet many examples of links to other unintended outcomes. Perhaps bonus systems have been driven by a desire to show lower payroll costs against, say, an accumulated bonus pool, but otherwise it’s just become another example of common business practice that lacks proper evidence of effect.

There does, however, appear to be a growing challenge to bonus culture. Recently, a respected fund manager announced he was scrapping bonuses, instead putting his staff on a flat wage, stating that bonuses don’t correlate with performance, and “can lead to short-term decision-making and wrong behaviours”. If an investment firm, with traditional heavy links between performance and pay, can be brave enough to challenge this, others should follow.

Of course good performance should be recognised, but we must look harder at what we really mean by good performance, how we assess it in simple and clear ways, and how we recognise it. Recognition is the first step, taking place at the time good performance is observed, but it can take many forms, starting with the simple act of appreciation. We also need to recognise the behaviours as much as the outcomes – the ‘how’ as well as the ‘what’. These are the fundamental drivers of the re-evaluation of traditional performance management approaches that are becoming more widespread.

The area where bonus schemes have become most contentious – and that most needs re-evaluating – is senior executive pay. Last December, CIPD research explored employee attitudes to executive reward, finding excessive CEO pay is actually a demotivator, with a clear message from employees: ‘The more you take, the less we’ll give.’

Businesses need much greater accountability about how they pay people, or we should expect more external intervention. Greater transparency on pay, accepting shareholder intervention in top pay awards, or even employee representation on boards are all mechanisms being discussed in many countries. We need to reconsider the underlying basis for bonuses and what place they have in recognising and incentivising performance. As HR, we must play our part in encouraging this understanding, and challenging current practice. We need to lead the way rather than wait for others to legislate.

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