For decades, organizations have sought to master the relationship between performance and reward. Many have believed that direct linkages between pay and performance lead to increased collective performance and accelerated business growth, despite substantial evidence to the contrary.
In most organizations, immense amounts of time and money are wasted annually on discussing and agreeing minor differentials in financial rewards, based on largely invalid and unreliable assessments of performance, when the overall pots of money have been mainly affected by aspects well beyond any individual’s control.
But, rewarding and recognizing performance is only one element out of seven in any robust performance management process. For any reward and recognition strategy to produce optimal results, all seven must be well designed with an holistic view of how they will apply in each organization.
Most importantly, the effectiveness of every one of the seven elements is dependent on the caliber of the immediate managers—far more than on the specific process.
What does this mean for our thinking around reward strategies?
Going forward, our reward strategies for those in people-management roles must focus on the quality of their people-management—how they apply these seven elements and how they manage their human resources, not merely their financial and material assets.
The relationship between an individual, their performance, and their financial rewards is complex. Any model must take many factors into account, including but not limited to:
- The clarity of the performance expectations;
- The validity and reliability with which performance can be measured;
- The ease with which the individual can meet expectations agreed or set;
- The extent to which factors beyond the individual’s control can affect their performance;
- The personality of the individual e.g., what enhances or reduces their personal motivation;
- The individual’s financial needs;
- The size of the financial reward on offer and at risk;
- The extent to which the reward can be reliably predicted by the individual;
- The time period before the reward can be realized;
- The individual’s normal financial horizon e.g., do they live financially from week to week;
- The individual’s typical disposable income as a percentage of gross income.
It is no wonder that over-simplified corporate performance related pay and incentive models have failed to produce demonstrable returns on investment. Indeed, many have produced negative impacts!
Most organizations’ attempts to undertake genuine job evaluation, to which base pay rates can then be tied, have suffered from similar issues because evaluation requires us to answer the question:
What do we want to pay for, i.e. what do we really value?
In the 1950s, it was easy. Success was measured simply by, “Results, period!” Linking pay to performance was relatively simple too—you placed most value on roles that contributed most to the generation of revenue and profit. You rewarded individuals purely for output. Piecework was common. So too was summarily dismissing people who did not produce the tangible results demanded.
By the late 70’s, we had discovered the folly of “Results at any cost” and many organizations did 180 degree turns, focusing largely on rewarding behavior or competence.
But into the 80’s, the view of good performance and reward became a blend. In many organizations executives were rewarded mainly for results against objectives and partly for behavior and competence (say 70:30); managers somewhat more for behavior (e.g., 60:40). More variety was evident for individual contributors depending on their roles (e.g. sales 90:10, and service or functional staff 20:80).
Financial pressures during the 00’s led to one notable exception—a move to reducing full-time contracts and paying “employees” only when needed or using gig-economy workers, both paid for delivering to a specific statement of work. But this has met with significant societal resistance.
During the 00’s, we also saw social pressure demanding that organizations take steps to protect the environment and arrest global warming. COVID-19 has dramatically accelerated this shift towards increased social responsibility. And the expectation is that this will be reflected, at least, in executive remuneration packages.
Most traditional job evaluation models place far too a high a value on pure revenue and profit generation and too little value on the wider contributions that the role makes to the success and sustainability of the organization
So, what should organizations be rewarding in the future? What should we value?
A number of factors are affecting what society considers valuable—COVID-19, the evidence appearing to substantiate the existence of global warming, and global social pressure for organizations of all types to address discrimination of all types.
Most notably, during the course of only a few months, we have all come to realize the value of front-line workers—those who keep us safe, protect us and our property, teach our children, provide our food, and treat us when we are sick. Most of those were, and still are, on low pay with little opportunity for personal reward for excellence. Suddenly, society now values far less many formerly prized roles such as politicians, corporate executives, investors, sports stars, so-called celebrities. Society now values those who make the world a better place for all of us, not those who pursue only their personal benefits and aggrandizement.
So too, organizations world-wide have been forced by COVID-19 to acknowledge that looking after the welfare of their staff is critically important; that their staff are human before they are resources.
Organizations are now realizing what data has shown for decades:
- The significant differentiator of sustainably successful organizations is the caliber of their management and leadership. High caliber people-managers have not waited for HR to sort out what to do during the crisis. They have managed the crisis, led the way, and looked after their staff.
- Poorly designed financial reward systems create more harm than good.
The challenge for every organization is, “Will you recognize those and act accordingly?” If not, you are probably paying the price now, and will do so even more in the future.
Organizations must cease using people-management responsibility as a reward for excellence at something else. This has been a critical failing for decades.
- Attract, select, and onboard into people-management roles only those who have the desire and potential to excel as people managers and leaders, not those who have excelled at something else;
- Continuously monitor and develop people-managers’ performance and skills;
- Reward non people managers who excel (but do not have both the desire and potential to excel as people managers) in ways other than giving them people-management responsibility. Human resources are not a generic reward currency!
Rewarding Individual Performance
Organizations must now rethink their reward strategies in terms of core pay and benefits, and performance related rewards.
Most traditional job evaluation models are probably outdated, placing far too a high a value on pure revenue and profit generation and too little value on (a) the wider contributions that the role makes to the success and sustainability of the organization, and (b) its contribution to society overall. We must move to multi-factor schemes which allow much greater recognition of those contributions in how we determine base pay.
In terms of individual rewards, we must ensure that our reward strategies maximize our use of:
- Complementary benefits such as working hours and location flexibility, vacation, insurances, healthcare, facilities e.g., gyms and cafeterias, work station equipment;
- The much more powerful non-financial rewards such as empowerment, timely personal recognition, development opportunities, team engagement, autonomy.
- These demand management excellence and will fail without it.
We must also recognize that COVID-19 has heightened our recognition and respect for each other. We have shifted markedly from a highly individualist form of capitalism to a more social and collective approach. Future reward schemes will have to recognize more collective achievements as well as individual achievements.
Performance Management and Reward
All performance management activity, including any reward strategy, must be focused on:
- Optimizing the performance of staff, given the prevailing capability and resources;
- Optimizing the development of staff to meet current and future demands.
Individual performance expectations must therefore include:
- What we expect the individual to produce as outputs/results;
- How we wish them to go about producing those results, such as the processes to follow, the competencies to demonstrate, and the interactions and relationships to maintain;
- The growth or development they need to meet current and future demands.
If we are to deliver individual rewards for excellence, any shortfall in their recognition of those three factors will undermine their credibility and effectiveness. I believe that successful organizations will aim to do four things that we know work:
- Reflect their values in the base pay that they pay for each role, clearly reflecting society’s current strong preferences, and using multi-factor job evaluation systems to bring rigor to pay rates;
- Create ways in which to reward individual contributors for excellence, other than giving them people to manage;
- Drive fast and hard to deliver management excellence—to optimize performance and development that way rather than attempting to do it through financial means;
- Move to ad hoc financial rewards for collective performance rather than for individual performance.
Read more such stories from the August issue of our e-magazine on 'Performance and Rewards in the New Normal’