Solving the rewards puzzle: Trends and measures

Jay Schuster and Patricia Zingheim’s 1992 book, The New Pay recognized that the traditional models of compensation do not serve the best interests of organizations and that there is a need to create pay programs and compensation strategies that support organizational success. To quote the flyleaf of this important book: “Traditional pay, although professing to reward performance is actually based on tenure, entitlement and internal equity. In contrast, the new pay practices help form a positive partnership linking employee and organizational performance and providing employees with rewards that correspond to their own success and that of the organization. Viewing pay from the total compensation perspective, new pay ensures the most effective use of each component-base pay, variable pay (incentives) and indirect pay (benefits).”

Clearly, the idea that compensation goes beyond a certain fixed monetary pay, and instead comprises of an array of offerings — ranging from performance-based incentives to career growth opportunities – aka Total Rewards — is not new and has been around for some time now. However, the way organizations are looking at their total rewards offering as a tool to attract and retain the best talent has been going through modifications over the years. Organizations, both big and small are making considerable efforts in designing and implementing total rewards strategies that strike a chord with their target audience — the current and potential employees.

Ernst and Young’s Total Rewards Survey of 2016 reveals that ‘Equitable fixed pay for work done re-mains the cornerstone of a successful rewards framework. And it is time for employers to recognize that compensation and benefits alone do not make up total rewards. Work-life effectiveness and talent development are becoming significant areas of focus for employees.’

But how does one create the right mix? The idea is to understand that as our workforce gets more diverse, the needs of employees will get increasingly diverse as well. For example, the dichotomy in how women and men perceive rewards programs presents an interesting trend. Men tend to pay more attention to the cash offering of their employment contract, while women tend to focus on the complete reward offering by employers. The purpose of highlighting this is not to reinforce stereotypes, but to drive home the point that any successful rewards program must have built-in flexibility so that individuals have the power to tweak the weightage of certain components of their rewards kitty, of course within reasonable limits. 

John E. Tropman, the author of The Compensation Solution offers an interesting framework in his book. Herein, he calls for Cafeteria C&B specialists to work alongside C&B managers and functional HR staff to create a compensation assay for each new employee and update it every year. Essentially, the index pins down a value to how much the offered rewards mix deviates from what the employee would ideally want. 

The significance of undertaking such an exercise, which may seem tedious at first, especially for large organizations is apparent from the EY survey as well. The survey results show that there is a distinct variation between the overall employer and employee view — 24 percent employees are clearly dissatisfied with the rewards program in their organizations, while 20 percent employees are unsure, whereas 65 percent employers are satisfied with their total rewards program.

Rohit Thakur, Head of Human Resources at Microsoft India says, “In today’s diverse, multi-generational workforce, there is an even greater need for personalization and customization of compensation and benefits. Different strokes work for different folks. Flexibility in total rewards is critical as it helps the organization and employees optimize investments. It is truly the need of the hour as organizations across sectors, especially those in the hi-tech space, are constantly challenged with the changing talent landscape, competitiveness of the external market and shortage of key talent. This has led to them developing defined programs targeting attraction, retention, and diversity and inclusion, with rewards being one of the most critical elements. Providing life-stage appropriate flexible rewards to employees is an endeavor in that direction. We believe that when people have the flexibility and convenience to select what works for them and what does not, they achieve more at work, every day.”

Another key element not to be missed here is the organizational culture. An interesting case study (Beer, Canon, Baron and Dailey, 2004, Human Resource Management) that explores the decision-making process that managers at Hewlett-Packard went through when deciding to abandon its pay-for-performance programs that they had previously used, offers much-needed insight into why a pay-for-performance strategy may not work for every organization. In this particular case, the managers at HP found that the costs of these programs turned out to be greater than the benefits. Employees in this high-commitment culture felt that pay-for-performance was like a bribe, and often caused bitter feelings and hurt relationships. Other managerial practices were found to be more beneficial, including effective leadership, clear objectives, coaching and training. When implementing a pay-for-performance program, managers must clearly set expectations and communicate the purpose of the program, while giving employees a chance to ask questions.

K Ramkumar, Ex-Executive Director at ICICI Bank Limited clearly has a point when he says, “The inability of boards to strictly execute performance linkage to pay even at the CEO and EDs level is the single biggest governance failure. The performance linkage is the harshest at the coalface and weakest at the top. This gives rise to serious issues of fairness and equity.” 

Given the multiple challenges and dilemmas, how will the best organizations and consultants tackle such issues in the future? 

Although compensation is bound to be a key attribute of a company’s Total Rewards package, the scope to innovate and define industry standards is fairly less within this space. Shanti Naresh, India Business Leader, Mercer, states that a “Given a year-on-year trend which has remained the same, it’s difficult to innovate within the compensation space”. On the same lines, Preeti Chandrashekhar, busi-ness leader for benefits, Mercer iterates that there is a growing need within companies to actually focus on their benefits program as it provides a unique way for companies to define their rewards program as something which is different from their competitors. A recent Mercer study reveals that the CEO’s top preferences when it comes to their workforce is to firstly have a capable workforce which can successfully contribute to business growth and then to have them highly engaged. “This demand,” Preeti states “is reflected in the top expectations of employees within India which, besides increasing compensation, are around good learning opportunities and provision of flexible work options. Both of these can be successfully integrated into a company’s work culture without touching the compensation aspect.”

Additionally, a whole new set of benchmarks will come up with regards to certain “hot skills”, especially in the area of cloud computing or mobile application design in the job market. Companies will look to benchmark how these hot-skills are to be compensated and rewarded, especially in view of their contribution to the top line and in comparison to other employee segments. This is of course linked to the larger trend of employee segmentation and pay differentiation. According to a Tower Watson study, with limited salary budgets, organizations will no longer be able to dole out the one-size-fits-all increases. Instead, they’ll need to invest money where they’ll get the most return — on high performers who have the skills and competencies the organization can’t afford to lose. That means having the courage to truly differentiate when it comes to salary increases and bonuses and to create customized rewards packages that incentivize these employees to stay for the long-term.

What is good news for the employees is that organizations are finally moving their wellness programs beyond offering gym subsidies. Organizations are now getting into a space where the definition of wellness itself is more holistic and inclusive of ideas such as preventive healthcare and mental resilience. 

Finally, there is also a trend towards greater transparency in pay. There is increasing demand from employees, who want to know how they are paid compared to their peers, and what is in store for them in the future. In the era of websites such as Glassdoor, where pay levels are of companies are up for all to view and share on social media, there is a feeling that lack of transparency is anyway not practical anymore.  In fact, research suggests that pay secrecy actually reduces employee performance, while transparency improves both output and effort. 

So the organization has invested considerable time, money and resources to develop a rewards strategy. But how does one measure the effectiveness of it? While commonly used metrics such as Market Index (which shows how your internal jobs are paid relative to market paid rates for external benchmark jobs), Compa Ratio (the employee’s salary relative to salary range midpoint.), or Salary Range Penetration (an individual’s pay compared to the total salary range) are useful indicators, they are themselves meaningless in the absence of business context.

What would really help answer the hard questions is getting the business leaders’ inputs on what is it that they are trying to achieve — both in the short and long terms. And then measure how the compensation plans feed into that. At the People Matters’ Total Rewards Conclave held on 19th January, Mahalakshmi R, Head HR India at Mondelz shared how her organization tackles this challenge. “As a rewards professional at Mondelz, my focus is on designing an incentive scheme that really fires up my sales force. For us, the key measure of success is whether they are able to penetrate the market when we need them to. This is especially true of situations where there is suddenly new competition that threatens to outdo us.” 

Likewise, if an organization is going through a major merger and acquisition process, a rewards professional plays a key role by ensuring that two distinct rewards systems, and indeed philosophies get merged seamlessly. As a next step, HR also needs to pin down meaningful metrics on how the reward programs are helping in achieving the objectives. These can range from the number of customer complaints received to employee engagement scores.   

Often, the aim of a compensation strategy could be as simple as addressing employee needs. But, if not taken care of, this factor itself can lead to severe business impact. While strikes are an extreme and rare reaction, high attrition is far more common. In this context, employee engagement or pulse surveys that measure employee satisfaction with their current pay and benefits would offer useful insights into where the gaps are, if any. Looking into exit interview transcripts often provides useful information as well, as many employees leave citing compensation related issues as the reason. 

Finally, it is also crucial to keep a tab on how inclusive the rewards distribution is, and whether everyone is getting what they deserves. In IT services companies, good performers are often “rewarded” with opportunities to work at client locations. This is seen as an exciting career enhancing opportunity. In companies where certain career opportunities are seen by large sections of employees as a reward for performance, it becomes imperative that such opportunities are provided equitably and fairly, otherwise the risk of disengagement runs high. This is especially true of organizations that are trying to promote diversity and inclusiveness, and simple measures like tracking pay parity, promotions and internal movements for men and women (if the focus is gender diversity) across levels and functions, would give business leaders important insights into whether their rewards strategy is working well enough.

Mahalakshmi also has a word of caution though. She states that “Rewards professionals are facilitators and not drivers. So instead of engaging in a tug-of-war, Rewards professionals need to look at creating a fluid process”. The role of rewards professionals boils down to making the right choices, playing within the boundaries as decided mutually with the board and using the allocated budgets in the most optimal manner. Rewards professionals have to do the best with what they have.

Given the multiple challenges that the ever dynamic global economy with a more digitized and diverse workforce throws up, it will be interesting to see how HR and rewards professionals lead the transformation in the months and years and come. And India, an economy where growth and disruption is the new norm, seems like the perfect place to start with.