Managing reward: Reward strategy
Section one of the Personnel Today Management Resources one stop guide on managing reward, covering reward strategy, including: the alignment of reward with business and HR strategy, definitions of total and segmented reward and the basics of developing a reward strategy. Other sections
Use this section to:
- Debate the contribution of effective reward management in your organisation
- Align reward to HR and organisational strategy
- Appreciate the critical steps in designing and implementing a reward strategy
Alignment with business and HR strategy
"The challenge is to develop pay programmes that support and reinforce the business objectives of the organisation and the kind of culture, climate and behaviour that are needed for the organisation to be effective" Ed Lawler
In this era of strategic human resource management, an ever growing number of organisations are recognising the value of adopting a more strategic approach to reward management. For many organisations, 'strategy' means little more than making connections between different elements of reward, for others a truly integrated approach has been adopted, which includes aligning the strategies for the whole business, the HR function and for reward.
Many organisations will exhibit features of both traditional pay practices and elements of strategic reward. This is inevitable in a world characterised by business mergers, acquisitions and divestments which create discontinuities or new connections between reward systems. Furthermore, there is no strong correlation between organisational size and the country in which the business is based or parented. At one extreme, many small or medium sized UK businesses (SMEs) have adopted a strategic approach to reward, aligned to business and HR strategy, while some of the largest US-parented corporations maintain some of the most conservative and traditional reward practices imaginable.
While generalisations are dangerous, it is probably safe to observe that public and voluntary sector organisations will tend to maintain more traditional salary and benefits administration systems, whereas private sector organisations are more likely to adopt a strategic approach to reward. For example, research regularly points to the continuing popularity of traditional job evaluation systems in the public and voluntary sectors compared to the private sector. However, the private sector contains a wide spectrum of reward philosophies and some of the best examples of strategic reward are found in consumer goods, technology, financial and professional services businesses rather than in the food, retail, leisure or engineering sectors.
Concepts and impact
The prevailing reward philosophy of an organisation is often underpinned by common misconceptions, tired mantras ('attract, retain and motivate') and a lack of clear understanding about the things which engage employees and 'unlock discretionary effort' - in plain English, those things which cause people to go the extra mile. Too often line, and even HR, managers quickly assess an organisational problem to be about pay, whereas the engagement of employees and their alignment behind the organisation's goals and priorities is never achieved by pay alone.
An organisation needs to use all elements of reward - in the broadest sense - to create effective engagement. Pay can help to engage, can facilitate or add momentum to change, and can be a critical support, an enabler and a powerful communication device. To take a motoring analogy, while pay can be the turbo charger under the accelerator pedal, a lubricant for changing gear, a means of highlighting milestones on the road map, a horn, a brake on certain behaviours, a GPS feedback tool when you take a wrong turning, rarely will it show up as the driver.
Effective engagement of people in an organisation requires complex interdependencies to work in harmony. The factors involved in that process include:
- The quality of the leadership - especially 'my boss'
- Organisational soul - values and beliefs, ie at one in word and deed
- Peer group experience - the 'best friend at work' (Gallup)
- Job design, freedom to act and respect for the individual
- Whether the business is perceived to have a compelling future
- Opportunities to learn, grow and be listened to
- Reward - both financial and non-financial recognition.
Reward management is an art, only loosely underpinned by scientific method. It requires the shaping, crafting, glueing, sanding and polishing of solutions. Despite widely held views, it is not mechanical engineering, whereby the pulling of a lever brings a predetermined result or the pushing of a certain button turns employees' lights on or off. Those who articulate these mistaken views should not be trusted with even a cameo role in reward management.
Total and Segmented Reward
Evidence of a strategic approach to reward includes the extent to which reward thinking and practice is integrated. At its furthest extremes each reward item sits in isolation. At the other end of the spectrum, the total value proposition achieved is greater than the sum of the parts. This latter approach is often described as 'total reward'.
Total reward (or 'total comp' as it is often referred to in the US) involves the design, planning and management of reward in a way which plaits together base pay, variable pay/bonus/commission, benefits and long-term incentives. The highest form of total reward thinking and behaviour will not only plait the strands of financial reward, but understand the organisational context. In other words, the business and cultural environment in which these factors operate and the broader critical issues which play such an important role in engaging employees.
Segmentation of reward strategy should be as much at the forefront of a reward practitioner's mind as customer segmentation is to a marketing director. A strategic approach rarely means applying the same offering to all. Many correctly note that 'one size fits all' approaches to human resource management are untenable in the light of social attitudes which expect customised choice. However, it is an eternal truth that employees of different ages have different priorities (compare the attitude of a sample of 25-year-olds to pensions compared to a group of 55-year-olds) and employees at different organisational levels or in different business functions will need to have different reward solutions crafted for them.
Reward strategy in an organisation will often be founded on consistent guiding principles but the expression of those principles (eg, mix between fixed and variable pay) may need to be expressed differently at different places in the organisation:
- By country to comply with local legislation
- By channel where sales strategy or business challenge differs
- By organisational level to reflect market practice
- By company, eg in a conglomerate working in different industrial sectors.
Developing a reward strategy
The ability to conceive and implement a reward strategy is, of course, partly dependent on the organisational context. For example, an HR director in a public sector undertaking will have much of the strategic framework prescribed by legislation and/or a national framework (eg, collective bargaining agreement or pay review body). It is equally true that reward practitioners will find themselves in an organisation where the business strategy, let alone the HR strategy is ill defined.
Regardless of the organisational context, the orthodox stages of reward strategy development are outlined below:
The most important aspect of developing and implementing an effective reward strategy is undoubtedly the two-way communication process (see above). A mediocre strategy that is well communicated is often superior to a prize-winning reward strategy that lacks management buy-in and is poorly communicated. For this reason, it is wise to spend more time and resource communicating a new reward strategy than designing it.
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Salary and benefits administration |
Strategic reward |
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Bureaucratic and hierarchical reward |
Flexible and adaptive |
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Fragmented pay items |
Integrated approach |
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Policing compliance |
Enabling organisational capability |
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Fixed guarantees |
Variable opportunities |
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Internally focused |
Market-based |
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Attract and retain |
Engage |
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Standardised |
Customised |
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Job-based |
Role/person-based |
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The Dos and Don'ts of Reward Strategy |
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Do |
Do not |
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Integrate the different elements of reward in decision-making |
Confuse pay with 'reward and engagement' |
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Gain employee insight and consult managers before forming strategy |
Rush the launch of a reward strategy |
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Understand what really causes your people to join, stay and perform |
Turn the art and craft of reward into engineering science |
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Spend more time communicating than designing your reward strategy |
Underestimate the critical importance of communication |
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Section one: Reward strategy Section two: Job evaluation and grading Section three: Base pay and salary structures Section eight: International assignments Section ten: Resources/ jargon buster
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