Article: 'A winning rewards strategy that fits all cases does not exist'

Benefits & Rewards

'A winning rewards strategy that fits all cases does not exist'

Many companies still base their compensation decisions on market practice, says Fermin Diez, HR Thought Leader, Board Director, Professional Speaker, and University Faculty, in an interaction with People Matters.
'A winning rewards strategy that fits all cases does not exist'

Dr. Fermin Diez is the Deputy CEO and Group Director, Human Capital and Organization Development Group of NCSS. Having rich experience in Human Resources, he held consulting, corporate and academic roles in organizations worldwide. He sits on the Board and chairs the Assessment Committee of the Institute for Human Resource Professionals and also on the HR Committee of National University Health Services Group (NUHSG). He co-authored three books on Strategic Human Resources, Remuneration and HR Analytics and serves as adjunct faculty at Singapore Management University and Nanyang Technological University.

From payroll generation, compensation & benefits to now total rewards, what are your views on the evolution of this vertical?

Compensation is on the verge of big changes. Of the HR Verticals, it has heretofore received little attention from HRTech and HRAnalytics tools, beyond ease of administration, 24/7 performance appraisals and online salary surveys. But this is due to change soon. For one, there are enough analytics out there to start looking into the question "do incentives work?" "And if so, which ones deliver more bang for the buck? STI? Higher pay mix? Team vs. Individual Incentives? Performance Shares vs. Stock Options?" These are questions for which everyone has an answer but on which analytics can provide an evidence-based answer. 

An area ripe for disruption is salary surveys: The day is not far where the likes of LinkedIn can supply data, both to individuals and organizations, on salaries worldwide. The Blockchain can also be used in this respect to ensure the data is accurate. 

One more aspect that is currently doable is Flex-Pay, much in the way we now have Flex-Benefits. For instance, some employees may prefer a lower pay mix (with lower upside) than others. This is "Pay for Retention", or "Pay for Development", rather than "Pay for Performance", and some companies may prefer to go this route for at least some employees.

One last aspect that already is causing some companies to rethink their compensation schemes is the preponderance of part-time employees and "gig" employees. How to create pay programs that maintain the notion of pay equity? 

Exciting times!

Wellness programs have been around for a while and have proven to be effective, and yet many companies are yet to implement them

What has been the most significant change in employee benefits over the last five years especially in APAC or SEA market? 

Wellness programs. They have been around for a while and have proven to be effective, and yet many companies are yet to implement them. More things are likely on the horizon, including the possibility of "Benefits for performance" (e.g, additional leave for high performers, or lower co-payments, for instance). But not soon. Benefits continue to look at cost-control as the primary objective. 

Perks, however, will continue to improve, in order to increase the employee experience and also improve attraction and retention, as well as net promoter scores. 

How does a winning Total Reward strategy look like?

Perhaps one of the biggest difficulties C&B professionals face is the changing expectations of employees, given the non-changing expectations of shareholders. How to balance these two certainly qualifies as the "horns of a dilemma"! However, the answer lies in applying analytics to employee preferences that, at the same time, either produce higher performance, or reduce overall cost at the same perceived value. 

Let me illustrate these two possibilities: On the one hand, assume employees prefer a lower-risk pay mix (say 90/10) over a higher-risk pay mix (say 75-25). If the company, through analytics, can demonstrate that this new pay package actually reduces turnover (and the cost associated with it), with no material loss of performance, then it can build a business case to make this change. The second example would be to use conjoint analysis to explore which combination of benefits has highest perceived value at a given cost point. Or conversely, which combination of benefits can provide the same current perceived value at the lowest cost. 

A winning rewards strategy that fits all cases does not exist: Which strategy a company can deploy will depend on a number of factors, including business strategy, the type of people the company wishes to attract, company culture, stage of business growth, strength of competitors, the company's employee value proposition, and the state of the labor market, among others. A well-designed strategy can positively affect results, whereas a poorly-designed strategy can actually cause the company to lose value, as we have seen in recently publicized cases where incentive systems led to improper behaviors.

Large organizations now realize that a personalized, agile, holistic rewards system is essential to attracting, motivating, and developing talent. So why are so many companies falling short, even as they realize their rewards programs are outdated?

This is a good question that deserves collective thought. My hypothesis is that we have been very dogmatic about the notions surrounding pay-for-performance as the only model. Shareholders expect Return on the Compensation Investment, Finance prefers costs to be variable and thus likes the idea of higher variable pay, Management pursues profitability as a KPI, and HR often aids and abets these arguments by managing the cost side of the equation more than the revenue side when it comes to looking at ways to enhance productivity. Also, many companies still base their compensation decisions on market practice ("if my competitor does it, we should too!"). And the theoretical constructs around agency theory and expectancy theory (that is to say extrinsic motivation) have yet to change to a different mode of thinking (e.g. Prospect theory) in the general HR community. Old loves die hard!  It will take time for a few insightful companies to start using their data to analyze compensation packages and outcomes, for the new models to debunk old paradigms, and for the rest of the world to notice and start changing. A case in point: Everyone knows companies like AB InBev and Netflix pay top of market, and everyone knows they are incredibly successful in their business results. Yet few companies are willing yet to emulate these two. This will change in due course. 

A winning rewards strategy that fits all cases does not exist. Which strategy a company can deploy will depend on a number of factors, including business strategy, the type of people the company wishes to attract, company culture, and the state of the labor market, among others

What are the top challenges that businesses face when it comes to framing the total rewards strategy and its implementation?

Perhaps the biggest challenge stems from aligning the diverse views that are always present in any compensation strategy discussion. The first is the shareholder view: They are less concerned with the amount paid then with the return received. In other words, they are less concerned with internal equity and external competitiveness, and more with the performance part of the pay-for-performance model. 

The second view is that of the market: There is a "price" for each type of employee and for the skills they bring. This is the external competitiveness model. Then there is the HR Function view: The function needs to balance attraction with retention and with motivation. Thus, market competitiveness serves to attract but immediately attention turns to internal competitiveness to retain and somewhere in the middle lies variable pay as a motivator, as long as it doesn't affect the other two; a difficult balancing act. The fourth view is that of the company: Overall KPIs are usually measured in a rather UN-balanced scorecard where revenue growth and profitability dominate. If the pay package aims to increase productivity by driving revenue and profitability, all is well and good. But if HR cannot prove (not just imply, but prove!) the link between higher pay and higher productivity, the company view will default to control of this cost as a means to seek productivity gains. Finally, is the view of the employees; to an employee, reaction to pay is often emotional, akin to thinking "the amount in my pay check is the exact amount my company loves me!", which quickly derives into "the love somebody else more!", or "that company loves their employees more than my company loves me!". 

This emotional reaction to pay makes it hard for C&B professionals to then discuss "facts" and "data" (e.g. how often has the argument: "we pay at the 50th percentile and build our salary grades around the market data from our consulting vendors; you are paid within the salary band", really worked when trying to convince an employee that they are competitively paid?). Balancing these differing views has, for years, been the most difficult part of the C&B job. 


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Topics: Benefits & Rewards

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