Are Current Mindsets About Rewards Management Obsolete?
In order for rewards strategies to be effective they must fit the organizational context, contribute to achieving organizational objectives and support the human resource strategy. Rewards are a critical component of the value proposition offered by the organization and can contribute to branding the organization as an employer of choice. Keeping the rewards strategy aligned with the context has become increasingly challenging. The environment continues to become more complex and dynamic, making it necessary to ensure that the rewards strategy and the programs that enable its execution co-evolve with the environment. Although some organizations may use the same principles that guide their rewards strategies over long periods of time strategies and programs must be agile, to ensure they remain isomorphic with the context within which they must operate.
Coping With Complex Contexts
A long time ago in a galaxy far far away the scientist Newton promised us an orderly, rule-based world.?For many applications that science still works.?Apples fall from trees to the ground at a predictable rate.?But organizations exist in a different context.?Organizations themselves are adaptive complex systems (ACS). Managing these systems requires the application of principles borrowed from Quantum physics, rather than Newtonian physics. In the second edition of the ACA Journal (Winter, 1992) I published an article entitled “Chaos Systems: A Human Resource Paradigm For The 1990s?” that encouraged those responsible for managing rewards to adopt a new model for thinking about the nature of the contexts within which organizations operate. Research conducted by the Santa Fe Institute (sfi.org) has provided insight into how social systems differ from other systems.?Their work has evaluated what makes ant colonies, beehives and bird flocks behave the way they do.?Readers might think that is irrelevant to organizational management, but it is not. Human behavior exhibit many of the same characteristics.
The extreme sensitivity within social systems has frustrated planners when they try to develop models that predict outcomes, such as determining whether putting a group of diverse people into a team will produce the desired results.?People are agents with intent and personalities are unique. A member who does not like and/or respect some of the other members might exhibit a lack of cooperative behavior and this might reduce team effectiveness.?Even though the members were selected to ensure the talent pool was appropriate there still must be a willingness on the part of members to work together.??
Rewards strategies and programs are evaluated by all parties having a stake in the outcomes. When designing rewards programs there must be an assessment of the likely reactions by participants… specifically, will they be viewed as equitable, competitive and appropriate??All three must be positive. If eligible employees don’t view a plan positively the desired impact on motivation and satisfaction is unlikely to materialize. And a dynamic environment can cause plan objectives to be revised suddenly and significantly. Perhaps profitability was the chief concern when an incentive plan was agreed upon, but growth might have gone to the top of the list of objectives by the time performance is measured and rewards are determined.?Each time there are changes a determination must be made as to whether a strategy or program is still a good fit to the context.
The design of rewards plans involves specifying how they will work. If an incentive plan is only for management personnel, where is the eligibility cutoff??Creating borders creates border disputes. And participants will be inclined to believe that someone else’s targets are easier to hit. They may be right… managers tend to have differing perceptions of what constitutes adequate performance. Another challenge is to accurately read the cultural orientation of participants. Assuming everyone has the same values and priorities may destine a plan to abject failure.?Many U.S. firms have acted as if members of their culturally diverse global workforce all have the same views about how employees should be rewarded.?Lincoln Electric found that its pay strategy (individual productivity driving base pay and gainsharing driving group incentive earnings) was culturally unacceptable in many countries where people had a more collectivist cultural orientation.?Faced with the choice of changing a rewards strategy that fit its management philosophy or leaving the places where it was not accepted, they chose exiting. That decision recognized that changing the views of people is hard.?
Dealing With Uncertainty
There has been an outbreak of “be agile” advice in the literature today.?It is sound advice. Flexibility and adaptability are necessary when dealing with complex systems, so “assess and adapt” mindsets will increase the chances of success.?SEAL teams prepare for any likely outcome. Even though they develop strategies for what is most likely, they are prepared to modify them when the reality on the ground mandates a different approach. Planners using continuous environmental scanning that provides information for scenario-based planning are more likely to succeed. Scenario-based plans define an optimistic, a pessimistic and a most likely future and then ensure the strategy that is employed will work reasonably well whichever future manifests.?Consequently, reward strategists should recognize that zeroing in on a single prediction of what the future will be is ill-advised.
Some organizations implement annual management or sales incentive plans that utilize objectives and adhere to the original performance standards no matter what happens during the performance period.?The underlying assumption is that things will not change or that change will not alter the effectiveness of the plan. But who believes that is reasonable in today’s environment? Sticking with the original plan is defended by using the assumption that if circumstances change and exceeding the plan targets becomes more difficult then participants will argue for lowering standards… but if events make exceeding standards a certainty without significant effort the participants will fail to mention that.?That belief is sometimes warranted, given the propensity of people to attribute success to their efforts and to attribute failure to unexpected and uncontrollable conditions.?But setting precise standards at the start of the year and adhering to them no matter what is a questionable approach in a dynamic context, which social systems are.?
Dynamic Performance Management
Measuring performance is a pre-requisite for paying for performance effectively.?People must know what is expected for them to be motivated to focus their efforts on the right things. Effective performance management is a necessary but not sufficient pre-requisite for gaining acceptance that the system for rewarding performance is fair.?In a dynamic environment it is delusional to believe that setting expectations at the start of the year and then appraising performance at the end of the year without intermediate investments in recalibrating them will turn out well.?There has been recent discussion in the literature about the need to continuously measure performance and provide feedback, as if that was a new, leading edge practice.?But that has always been a requirement for effectively managing performance.?There are claims that annual appraisals of performance become unnecessary if frequent check-ins happen. But there is a need to attach administrative consequences to the level of contribution with formal appraisals and to defend them when the outcomes are challenged. Recent research studies have shown that eliminating performance appraisal ratings results in lower levels of performance. It is therefore necessary to do both continuous measurement and appraisals well, rather than one or the other (again… a “both – and” rather than an “either – or” mindset).?
Designing and Administering Rewards Programs
When formulating the organization’s direct cash compensation mix (between base pay increases and variable compensation awards) it is prudent to consider the volatility of the environment.?Every base pay increase is in effect a career annuity… refunds are difficult to get.?For that reason, variable pay options might be considered.?Reserving 1% of the salary increase budget for performance cash awards enables the organization to provide 4% cash awards to those rated Outstanding and 2% to those rated Significantly Exceeds Expectations (assuming 10% of employees are rated O and 30% SEE).?This is a way to better differentiate based on performance without escalating the payroll in an unsustainable manner. It also differentiates based on current performance and encourages employees to perform well in the future.??
Variable pay (incentive) programs can be designed to augment base pay programs. There are organizations that cannot afford competitive salaries and benefits in the early stages of their lifetimes and during times of economic uncertainty.?Many of the now successful start ups initially used variable compensation as a significant part of their direct compensation package and were able to attract and retain the talent they required. People will demand consideration of the amount of risk they face economically.?Those who are confident of their ability and who are willing to “roll the dice” with an emerging organization facing great uncertainty are likely to accept a more uncertain income level. Yet people expect to be rewarded with a greater potential for rewards as their risk level rises. If the going market rate for a Compensation Analyst is $ 100,000 an organization might offer a salary in that amount.?Another might offer a salary of $ 90,000 and offer an incentive potential of $20,000.?And the high-risk firm might offer a salary of $ 80,000 and an incentive potential of $ 50,000.?
Different base/variable mix patterns might be suitable for different occupations.?This is common practice, especially for executive and direct sales roles. A client recently suggested including the Internal Auditor in a plan that paid out based on profit would provide a strong incentive to find a profit even where one did not exist when using Generally Accepted Accounting Principles. That may turn the CFO into a felon.
In some cases, an emerging or distressed organization cannot promise total direct compensation that is at or near market levels. Another tool is the use of equity, either in the form of actual stock or simulated (phantom) stock. Equity programs can also promote a focus on organizational effectiveness and can provide a "shared destiny" that encourages cooperative rather than competitive behavior.
Recognizing that each organization is to some degree different from others is important, as is recognizing that the same organization will be different over time. Assuming that the highly successful plan used by Google will be equally successful in another organization is risky at best. But it may be equally risky to assume the plan used by Google three years ago will be equally successful today. Because organizations are complex social systems factors like culture can have a profound impact on how a strategy or program works across organizations.??
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Selecting A Rewards Strategy
The fact that complex social systems are dynamic does not preclude forecasting, planning and strategizing. Given the dynamic nature of these systems it is prudent to avoid taking paths that result in locking the organization into plans that may become untenable over time.?As already discussed, rewarding performance solely with base pay adjustments can result in higher levels of fixed costs, which is unwise in a variable revenue environment.?Another example is the use of defined-benefit pension plans as a retirement income source.?The disappearance of pension plans in the private sector is understandable, given that they do not fit a dynamic environment or a time when talent is highly mobile. And once adopted pension plans are very difficult to terminate.
Given the diversity of occupations that exist in organizations attempting to use the same rewards strategies and programs for all employees may not be optimal. Although some organizations function with a single salary structure and classify employees into pay grades based on relative internal value, they are less plentiful than in the past.?Competitive market rates vary dramatically across occupations and specific skills. Data Scientists are in great demand because the dramatic increase in the use of workforce analytics has outrun the supply of competent people.?Refusal to match prevailing market rates because they do not align with perceptions of relative internal value can almost certainly hinder an organization’s attempts to attract and retain qualified personnel.
Strategists must straddle the edge between chaos and rigid order.?Using quantitative job evaluation systems can produce internally equitable assignments of jobs to grades.?But if the market value of some occupations is increasing at a 7% rate and others at a 1% rate adjusting pay ranges by 4% for everyone is not going to keep the pay ranges aligned with the market. And raising pay levels dramatically when a skill shortage causes a sharp increase in market value for an occupation can result in rates that exceed market value when the supply – demand imbalance is rectified.?So, each organization must develop a rationale for both responding to market swings and for retaining the appropriate amount of internal equity.?
Conclusion
Making it up as you go, without a strategy, does not work well in a dynamic environment. Things move too fast to make catching up feasible. Unique situations and unanticipated conditions will occur. If the strategist does not have a contingency plan that facilitates fast response, then there may be no viable actions left to take.?Since unique occurrences cannot all be anticipated there will be surprises for which there are no prepared responses.?By minimizing the amount of lock-in associated with past decisions the strategist can better control the negative impact of events.?Having all employee costs in a fixed cost form (base pay and benefits) makes it difficult for an organization to cope with variable revenues, except by using staff reductions. And becoming a serial downsizer can destroy an employer’s brand. Failing to teach employees the realities of the organization’s business may make it difficult to justify pay freezes (and even cuts) in the eyes of employees.?
Workforce analytics have become a valuable tool for rewards strategists.?Knowing what is (and what is not) happening is intelligence that enables the practitioner to adjust course if the winds of change mandate course correction. Accumulating massive amounts of relevant data, using AI and machine learning software to make sense out of the data and applying what has been learned to chart the right course forward can be a high payback investment.?But if the past (when data was accumulated) does not look like the present and/or if the future will be different the relevance of those analytical results comes into question. The best way to keep analytical results relevant is to do continuous environmental scanning.?Monitoring the behavior of the factors that influence what the outcomes will be makes constant updates possible. Just as the organization uses environmental scanning to determine if business strategy resets are necessary the rewards strategist can identify whether design modifications or administrative adjustments are required.
Chaotic contexts are challenging.?They make it necessary for strategists to adopt the principle
“what works is what fits… now and into the future.”
And rewards strategists must accept that what works is going to change as the context does.
About the Author:
Robert Greene, PhD, is CEO at Reward $ystems, Inc., a Consulting Principal at Pontifex and a faculty member for DePaul University in their MSHR and MBA programs. Greene?speaks and teaches globally? on human resource management. His consulting practice is focused on helping organizations succeed through people. Greene has written 4 books and hundreds of articles about human resource management throughout his career.