Article: Cautious optimism ensuring rewards optimization

Benefits & Rewards

Cautious optimism ensuring rewards optimization

Institutionalizing a process to evaluate the efficacy of the reward system through a set of robust Rewards Metrics is crucial in organizations today
Cautious optimism ensuring rewards optimization

Cautious Optimism” is a catchphrase the rewards professionals often use these days to describe the rewards outlook of the company. While there can be various contextual interpretations of the term, it essentially means that the reward budget is scarce and finite and we need to make judicious allocation of the kitty! 

As rewards professionals, we aim to design policies and practices to attract, motivate and retain the best talent, and thereby enhance organizational effectiveness and performance. However, it is easier said than done as there are diverse variables and complex scenarios that need to be managed. For example, the classic conflict between reward philosophy and business reality — how do we balance internal equity vis-a-vis external parity? Or, how do we respond to the ever-changing market and talent dynamics or regulatory and industry developments? Or how do we maintain Cost to Income and Return on Investment ratios across business life cycles? 

In order to deal with the above intricacies, we need to have a robust Reward Optimization strategy in place. While organizations may devise their own Rewards Optimization model, it should have three key fundamental elements: 

  1. Rewards Synchronization: Align rewards to business priorities and talent strategies

  2. Rewards Differentiation: Allocate rewards basis performance and role

  3. Rewards Communication:  Achieve objectivity and transparency in rewards process

Thus, it is important to institutionalize a process to evaluate the efficacy of the reward system through a set of robust Rewards Metrics to ensure that one stays on course during such turbulent times.  

Rewards Synchronization

Enough and more has been debated and documented on the alignment of rewards strategy to business strategy. Sales incentive design is a classic use case of how business dynamics can influence rewards plans.

Organizations may have unique business propositions and priorities — it can be top line or bottom line or it can be customer centricity, employee productivity or portfolio quality. It can also opt for acquisition, consolidation, diversification strategy or a combination of all of them. Whatever the focus area is, the incentive model should be in sync with the business dynamics. For example, the way a personal loan is sold is different from the way a home loan is sold. Personal loan is an unsecured product with small ticket size and high interest rate as compared to a home loan that is a secured product with large ticket size and moderate interest rate — business dynamics are different and need to be aligned to the incentive plan. 

While attraction and retention continue to be the key drivers of the reward strategy, talent segmentation and reward differentiation also play a critical role 

Once the business drivers are identified, payout metrics need to be defined in terms of the threshold achievement to qualify for payouts, the intervals and accelerators of payouts or if there is a need to have cap on payouts?  Again, the cost of acquisition and internal rate of return may be very different for personal loan as compared to home loan, hence the payout ratios may vary accordingly. 

Then there are business cycles and unforeseen circumstances, hence the efficacy of the incentive plan needs to be reviewed on a regular basis and fine-tuned to realign with the business objectives. There may be business cases where it is advisable not to have a sales incentive plan at all as incentive plans may prove counterproductive in situations of conflict of interest or when there are no measurable metrics.  

Start-ups and E-commerce industries have come up with innovative reward tools to drive business in unpredictable environments. While a major part of the reward is through stock option, it comes along with ‘accelerators’. Such options vest immediately in any liquidity event like sale of company or IPO that can enable an exit route for the employees to cash in.

At a macro level, the reward strategy should be in line with the stage in the organization lifecycle. As the illustration indicates, while at the introduction stage, organization may need to be aggressive on pay, as it matures, the staff expenses need to be managed with tight and consistent cost to revenue metrics. At times, rewards are determined not only by the standalone organization performance but are also linked to relative performance of the organization with respect to competition or overall industry.

Organizations are increasingly differentiating high performance and this is evident from the fact that almost 70% of the employees are typically rated at meets expectation and below category

Further, the pay mix i.e. ratio of the Fixed Pay to Variable Pay or Cash to Stock plan also may be influenced by the nature and type of the business or the short term and long term goals of the business. More and more companies are offering functional premiums to certain job roles and hot skills, which are key to the business.  

In addition, there may be regulatory and statutory guidelines that govern rewards practices. Like in banks, rewards are regulated by principles of sound compensation practices as recommended by RBI, where factors like time horizon and risk outcome have to be taken into consideration. Also, there are directives around pay mix, bonus deferral, incentive claw back and guaranteed payout which need to be adhered to. Moreover, with heightened stakeholder engagement there is an increased focus in rewards governance and rewards disclosure as well.

Rewards Differentiation

While attraction and retention continue to be the key drivers of the reward strategy, talent segmentation and reward differentiation also play a critical role. The idea is to reduce cost and increase return on compensation by disproportionately incentivizing key talents and high performers. 

Talent Segmentation and Reward Differentation

The Rewards budget is finite; hence, judicious allocation of reward basis segmentation of talent profile is the need of the hour. In the conceptual reward model, the performance profile is plotted along the X-axis and compensation profile is plotted along the Y-axis. The diagonal red arrow may be representative of the increment rate or bonus percentage. The reward strategies for each of these four quadrants need to be defined and differentiated. While there is a need to maximize reward allocation in the top right quadrant through aggressive rewards, moderating reward in the bottom left quadrant through levers like compa ratio, percentile position or range penetration to manage cost is crucial. Likewise, there is a need to devise appropriate strategies to manage reward across other talent segments.  

At the end of the day, it is all about perception and we need to communicate the value proposition to our stakeholders to reinforce the trust and confidence in the rewards system

Organizations are increasingly differentiating high performance and this is evident from the fact that almost 70% of the employees are typically rated at meets expectation and below category. Also, as per industry estimated, the top performers end up receiving as high as 1.8 times the increment as compared to the average performers and almost 70% of the overall bonus budget.

Rewards Communication

Once an employee has achieved a threshold level of compensation, it is not the quantum of rewards but equity and transparency of reward that matters. Ironically, several engagement surveys suggest that most of the employees do not understand the basis of rewards and that the managers are not as effective in rewards communication. Hence, rewards remain as a Black Box, which leads to apprehensions and dissatisfactions. Thus, it is of paramount importance to demystify the black box and explain some of the basic concept of rewards to the managers and employees.

While, sensitizing the employees and managers with the rewards philosophy and strategy may make a true difference, it will be worthwhile to equip and engage the stakeholders with key rewards metrics, such as revenue per employee, employee cost to operating cost and revenue ratio; and headcount pyramid viz a viz cost stack up or teeth to tail rewards distribution. 

Rewards Optimization Framework

At times, employees and managers alike tend to overlook the past reward endowments. Hence, it makes sense to share the Compounded Annual Increment Rate of the last few years, which may reflect the exceptional salary correction or promotional increase an employee would have received in the past. Further, percentile position or compa ratio of employees may also enable managers to have a meaningful conversation.  

One of the key strategies that has gained momentum these days is to communicate the Total Rewards Statement to the employees. It may be a combination of compensation, benefits and perquisites, work-life balance, learning opportunity, career development and recognition. At the end of the day, it is all about perception and we need to communicate the value proposition to our stakeholders to reinforce the trust and confidence in the rewards system.

Topics: Benefits & Rewards, Compensation & Benefits

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