Economic downturn has forced many organisations to think sharply about who and what they are paying for and to reassess their cost structure
Levers like variable pay, differentiated rewards and performance metrics play a key role in the rewards strategy of an organisation
The focus of rewards is changing from being transactional to strategic. Rewards today are a strong tool for organizations to ensure performance excellence by addressing the unique and customized needs of high and critical performers.
In the aftermath of the global recession, across all sectors and regions, organizations are struggling to rebuild profitability. In order to attain this goal, it is axiomatic to balance three, often conflicting, challenges - cost containment, performance improvement and talent engagement. While compensation specialists need to continuously develop and improve unique and innovative methods to help retain and engage key talent, equally important are the compensation systems that must support the overall strategic intent of the organization.
In many ways recession has been a wake up call for rewards. Economic downturn has forced many organizations to think sharply about who and what they are paying for and to reassess their cost structure.
Return on investment (ROI) on reward programs are being keenly observed by the management. Measurement and metrics will play a key role in rewards and business strategy alignment. This would entail that the right performance metrics are in place, rewards programs are closely tied to the metrics, and leaders have the capability and maturity to implement reward decisions effectively.
During this time, organizations have seized the chance to clarify their rewards strategy and seal any cracks in the foundation, improving and strengthening their performance management and rewards system. Panic and need to cut down on the cost may have been significant drivers but the lasting legacy is a concentration on optimization of pay.
Rewards under the spotlight
At present, rewards are under the microscope with senior management asking very pertinent questions:
• What is the performance increment in return for what we pay?
• What is the effectiveness of all costs allocated to rewards?
• What is the return on investment?
From being very transactional in nature when companies focused only on annual remuneration, rewards have evolved to become a strategic enabler, ensuring organizational needs are met. Today’s notion of rewards includes helping the organization to understand how to motivate and retain employees at different levels and throughout the year by focusing on differentiated rewards.
A uniform blanket approach to rewards is no longer a viable strategy. A focus on total rewards that is closely tied to performance will play a crucial role in allowing organizations to compete in this new environment. The challenges of an organization are manifold, one of the most critical being meeting different demands of younger employees. Generation Y expects a career, is mobile, may not demonstrate loyalty to a single organization, and is extremely difficult to retain. Attrition is highest amongst this set of employees. More and more employees want an environment where they feel they are contributing in a positive way to something larger than themselves.
Levers like variable pay, differentiated rewards and performance metrics, all play a key role in the rewards strategy of an organization. Organizations are left with the challenge of coaxing better performance from their employees, often without the resources to fund a generous compensation strategy. With extreme pressure to contain wage bills and ensure retention of top talent, certain key rewards themes have emerged. As an example, Schneider Electric over the years has evolved its compensation strategy to a Total Rewards strategy. Besides offering pay and benefits, there is tremendous focus to provide both career advancement and skill development opportunities to employees. A high performance culture exists with a clearly outlined strategy to differentiate performance, and reward key talent. KRAs and expectation setting is well communicated in the beginning of the year. The variable pay plan further drives high performance and helps the company achieve its targets.
Some of the principles that helped Schneider Electric in its journey towards total rewards and which may be emulated by the other organizations are:
Create a performance culture: Use your rewards programs to help you move from an ‘entitlement’ culture to a ‘performance’ culture. The limited budget should be judiciously used towards rewarding key performers, critical roles, and scarce skills, in the organization. The key mantra is to differentiate performance and reward appropriately.
Think total rewards: Monetary benefits alone cannot help engage the workforce. Research has consistently shown the importance of non-monetary benefits, be it career development or training, in overall retention. A total rewards approach to talent retention could serve as a unique differentiator from your competitors.
Consider total costs: Traditionally, the only cost considered as spend within the organization was the budget for the merit increases. Benefits, allowances, long-term incentives, all form a major part of the total rewards cost in the organization and must be accounted for appropriately to understand the total implications of the rewards programs in the organization.
Restructure compensation: Bring in more variability in the total employee package by increasing the role of variable pay. This would also provide for cost buffer in times of economic slowdown. For employees to see value in this tool there has to be a clear linkage between their performance and the organizations performance and the subsequent reward.
Market benchmarking: Continue to benchmark your reward practices. This helps ensure that the top talent is paid competitively against the market and that the organization is not overpaying in other areas.
Nurture innovation: To cater to the new urban working population, it is imperative that reward programs are innovative, suit the profile of employees, in order to achieve the desired outcome and support business needs.
While we concentrate on key talent, there is a word of caution about over-reliance on the high performers. Majority of the people in the organizations fall neither under the poor performance category or the star performers but are average performers or the solid citizens. Organizations should never take their eyes off this critical mass and ensure that they are engaged, motivated and adequately rewarded for their contribution. The other side of the coin is an increasing need to address the low performers. While low performers are guided, and given every opportunity to improve, organizations must look at other options if they still fail to perform. There is a much sharper adherence to the bell curve and organizations are equipping their line managers to hold such difficult conversations and to take these difficult decisions.
Role of communication
The new trend in total rewards cannot succeed without a good communication system. Many organizations are investing a lot of time to communicate the total value of the rewards package to their employees. With the drive towards variable pay, a closer link between performance and rewards, differentiation between high and low performance, there is a risk that the ROI will be lost if the leaders and the managers have not communicated the organization’s strategy and intent to the line. Skills of the line management in setting goals, coaching performance and recognizing performance should be appropriately built. Managers must be held accountable and responsible for rewards decisions.
Technology as an enabler
The role of technology is worth mentioning here. Technology is an enabler at the present and will continue to play a pivotal role in the future. Budgets will only see a plateau going forward and hence for reward professionals it will become extremely important to think out-of-the-box.
Future of rewards
The future would entail making judicious use of rewards tools across the targeted population. There has to be a mix of long-term as well as short-term incentive schemes which will help the organization in meeting its overall strategy. Compensation experts will have to be more creative and flexible in their approach to managing rewards. Benefits offered to the employees will receive appreciation if they are designed to meet the ever-changing needs of the employees. The crux of the matter therefore lies in giving employees benefits that they value most by allowing the employee to choose benefits within a predefined allocated cost. The implementation of this plan will require greater level of communication with the employees resulting in better return on investment and also emerge as a proactive step towards employee engagement.
Dr. Shalini Sarin, Director HR, Schneider Electric, adds that compensation and benefits was, till a decade ago, a black box and to run that function, competencies required were mastery in excel and number churning ability. The focus has now shifted towards the ability to educate the line managers, empower them to make better compensation decisions, effective communication, keen market intelligence, and using innovation to enhance perceived value of brand and enhancing differentiation without building on the costs.
Real time and relevant communication about actions taken is at the core of positive perceptions about compensation and benefits within the organization.
Core Principles for Implemenatation of Rewards
• Create a performance culture: Use your rewards program to help you move from an ‘entitlement’ culture to a ‘performance’ culture.
• Think total rewards: Research shows the importance of non-monetary benefits, be it career development or training, in overall retention.
• Consider total costs: Benefits, allowances, long-term incentives, all form a major part of the total rewards cost in the organization and must be accounted for.
• Restructure compensation: Bring in more variability in the total employee package by increasing the role of variable pay.
• Market benchmarking: Benchmark your reward practices to ensure that the top talent is paid competitively against the market and the organization is not overpaying in other areas.
• Nurture innovation: To cater to the new urban working population, it is imperative that reward programs are innovative.
Niharika Mohan Uppal, Head Rewards - Schneider Electric India