15 June 2017

Getting Pay and Rewards Right

There are many things you can do to ensure you have a motivated workforce but one of the most difficult to get right is the thorny issue of pay and reward. In theory, it should be a relatively simple exercise. The business world is awash with experienced managers, consultants and other experts ready to help. There are many precedents for every industry, yet what we pay and reward people seems to be more contentious than ever.

It’s hard to understand why this should be and what the drivers are. On one hand, we have zero hours’ contracts which have attracted a lot of adverse publicity. The upside for the company is you only pay staff when you need them, a useful variable cost geared to demand. The downside for the worker is they never know what they’ll earn that week, not helpful for planning outgoings and paying the bills.

At the other end of the scale the average pay package of a FTSE 100 CEO runs into millions. It appears that too often there is only a tenuous link to performance. Profits and share price slide in the wrong direction but the reward in the C suite has been part of a growing reward cost base.

Exploited workers at one end and the clichéd fat cats at the other. Millions of words have been written on the subject and it’s not my intention to add further to the volumes of criticism. But I would like to look at a few common issues and offer some advice, which in my experience has a chance of working.

First, be honest about what sort of company you’re running. Are you the type of company where people say “trouble is they don’t pay very well”?  If attracting great people is part of your plan then that’s a reputation you can do without. If you’re a company that’s known for paying well, in my view that’s attractive. Particularly in a competitive recruitment market.

Base salary is the driver for other discretionary benefits, the most important of which is a pension, followed by incentive schemes and bonuses. If you don’t keep up with market rates you fall into the trap of paying new hires at better rates than your loyal incumbents. Who, if you’re not careful, will soon work out that the only way to get a pay rise is to leave. Recognising that good people are hard to find, don’t lose the ones you have already.

Avoid blanket pay rises because you’ll inevitably be rewarding people as if they all perform at the same level of productivity. And they most certainly don’t. Use the underperformers’ allocation to hit the market benchmark for the key achievers. In virtually every company pay increases are discretionary. Yet too often someone on the wrong end of a difficult appraisal still benefits from the company increase.

The much trickier areas to get right are bonuses, incentives and discretionary rewards. If you’re not careful these can be counterproductive and, in the worst instances, divisive. On the other hand performance related pay can improve productivity. Some time ago I was a director of a business where we scrapped annual discretionary bonuses for PRP. It made a really positive difference.

With discretionary bonuses, no one really knew what they had to do to get paid. At the end of the year (far too long) they’d be given their number which mostly disappointed. Their expectations hadn’t been managed and had got out of hand. Furthermore, they suspected that others had done better than them. My experience has taught me these pooled bonus schemes are mostly useless and not fit for purpose.

Much better to incentivise people or small teams on a quarterly basis, against a measurable set of objectives. The key question is – how do we want these people to behave?

Agree the measurements of success and reward according to performance and results. Everybody knows where they stand and there are no unpleasant shocks or surprises. Importantly, the money you’re paying out is for increased productivity. Not a post-Christmas gift that mostly disappoints.

To attract the right talent, earn a reputation for competitive pay and reward. Incentivise people to perform through simple transparent schemes. And above all be seen to treat people fairly.

 

 

David Mansfield, founder of The Drive Partnership and visiting professor at Cass Business School