1. Reward Management a Handbook of Remuneration Strategy A

REWARD MANAGEMENT

Hay Group is a global consulting firm that works with leaders totransform strategy to reality. We develop talent, organize peopleto be more effective, and motivate them to perform at their best.With 82 offices in 47 countries, we work with over 7,000 clients

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Michael Armstrong and Helen Murlis

REWARD MANAGEMENT

i n a s s o c i a t i o n w i t h

Revised 5th edition

A Handbook of Remuneration Strategy and Practice

London and Philadelphia

Publishers noteEvery possible effort has been made to ensure that the information contained in thisbook is accurate at the time of going to press, and the publisher and authors cannotaccept responsibility for any errors or omissions, however caused. No responsibilityfor loss or damage occasioned to any person acting, or refraining from action, as aresult of the material in this publication can be accepted by the editor, the publisheror either of the authors.

First published by Kogan Page in 1988Second edition 1991Third edition 1994Fourth edition 1998Fifth edition 2004Reprinted 2005, 2007Revised fifth edition 2007

Apart from any fair dealing for the purposes of research or private study, or criticismor review, as permitted under the Copyright, Designs and Patents Act 1988, thispublication may only be reproduced, stored or transmitted, in any form or by anymeans, with the prior permission in writing of the publishers, or in the case of repro-graphic reproduction in accordance with the terms and licences issued by the CLA.Enquiries concerning reproduction outside these terms should be sent to thepublishers at the undermentioned addresses:

Kogan Page Limited Kogan Page US120 Pentonville Road 525 South 4th Street, #241London N1 9JN Philadelphia PA 19147United Kingdom USAwww.kogan-page.co.uk

Michael Armstrong and Helen Murlis, 1988, 1991, 1994, 1998, 2004, 2007

The right of Michael Armstrong and Helen Murlis to be identified as the authors ofthis work has been asserted by them in accordance with the Copyright, Designs andPatents Act 1988.

ISBN 978 0 7494 4986 5

British Library Cataloguing in Publication Data

A CIP record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data

Armstrong, Michael, 1928-Reward management : a handbook of renumeration strategy and practice /

Michael Armstrong and Helen Murlis. -- Rev. 5th ed.p. cm.

Includes index.ISBN-13: 978-0-7494-4986-5ISBN-10: 0-7494-4986-1

1. Compensation management--Handbooks, manuals, etc. I. Murlis, Helen. II. Title.HF5549.5.C67A76 2007658.32--dc22

2007021833

Typeset by Jean Cussons Typesetting, Diss, NorfolkPrinted and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents

Foreword by Duncan Brown, Assistant Director General, CIPD viiiPreface to the Revised Fifth Edition xAcknowledgements xiii

Part 1 Fundamentals of Reward Management 1

1. Overview of Reward Management 32. Total Reward and Engaged Performance 113. Strategic Reward 304. Reward Policies 435. The Psychological Contract 506. Motivation and Financial and Non-financial Rewards 587. Factors Affecting Levels of Pay 748. Age Discrimination 81

Part 2 The Evaluation and Development of Reward 95Processes

9. Evaluation of Reward Processes 9710. Development of Reward Processes 110

Part 3 Assessing Job Size and Relativities 117

11. Job and Role Analysis 11912. Job Evaluation: Processes and Schemes 12913. Job Evaluation: Scheme Design and Operation 14914. Equal Pay for Work of Equal Value 16515. Market Rate Surveys and Reward Research 176

Part 4 Grade and Pay Structures 209

16. Types of Grade and Pay Structures 21117. Grade and Pay Structure Design 22618. Implementing New Grade and Pay Structures 241

Part 5 Performance Management 249

19. The Basis of Performance Management 25120. Performance Management in Practice 270

Part 6 Contingent Pay Pay Progression: Rewarding 295Performance, Competence and Contribution

21. Contingent Pay General Considerations 29722. Individual Contingent Pay 30223. Bonus Schemes 32524. Executive Annual Incentive Schemes 33325. Employee and Exective Share Schemes 34826. Team Rewards 36727. Gainsharing Sharing in Corporate Success 38228. Profit Sharing 39229. Recognition Schemes 39930. Shop-floor Incentive and Bonus Schemes 40731. Salesforce Incentive Schemes 42632. Other Cash Payments and Allowances 434

Part 7 Employee Benefits and Pensions 441

33. Employee Benefits 44334. Flexible Benefits 47135. Pensions 48636. Tax Considerations 513

Part 8 Special Aspects of Reward Management 525

37. Boardroom Pay 52738. International Remuneration 53739. Mergers and Acquisitions 55740. Reward Policies for New, Start-up and High-growth 565

Organizations

Part 9 Managing Reward Processes 571

41. Reward Management Procedures 57342. Communicating the Benefits 59543. Developing and Introducing Reward Management 605

Processes The Use of Consultants

vi Contents

Part 10 Questions and Trends 611

44. Reward Management Questions 61345. Trends in Reward Management 628

Appendices 635A Further Sources of Reading and Information 637B Using Employee Surveys to Inform Reward Decisions 648C Statistical Terms Used in Pay Surveys and Analyses 659D Examples of Role Profiles 666E Examples of Job Evaluation Schemes and Systems 669F Performance Management Documentation 683G An Example of a Long-term Incentive Programme 685

for the Main Board Directors of a Public CompanyH Using Excel for Managing Pay Reviews 687I Disclosure and Other Regulatory Requirements 698

Relating to RemunerationJ Examples of Incentive Schemes 701

Index 714

Contents vii

Foreword

I can still recall sitting in the CIPDs library reading the 1988 edition ofthis book from cover to cover. So being asked now to write a foreword tothe fifth edition of Reward Management is a bit like being invited roundfor a kick-about with Pele and George Best.

As the discipline has evolved from one of pay-focused administrationto a strategically oriented and impacting total rewards managementapproach, this book has managed to combine three features that make itevery bit as essential a read for reward and HR professionals, practi-tioners and students today as in the very first edition.

First it has profiled and promoted this shift towards strategic HR andreward management. This new edition rightly has a stronger emphasison using reward and performance management policies and processesnot just to align with business goals, but also in our more knowledge-and service-based economy, to involve and engage employees to volun-tarily commit to achieving and exceeding those goals. The CIPDs latestresearch on the links between people and performance highlights thatcommunication and implementation are the Achilles heels of modernHR and reward strategies.

Practice always seems to lead research in the reward field, and thesecond characteristic of Michael and Helens work is that it continues toreflect leading-edge and hot topics. Comparing it with the previousedition, even I am surprised at the level of change in the contents.

In the 1990s we all thought it was an inevitable progression to flexible,performance, market and cash-based rewards. Yet in this edition werightly get a renewed emphasis on job evaluation and base pay struc-turing, in the wake of the strengthening impact of diversity and equalpay issues, alongside the comprehensive coverage of the many forms of

contingent pay schemes, which the CIPDs latest survey shows aregrowing in popularity, as are flexible benefits schemes.

There would be some grounds for accusing the HR profession of beingprone to adopting reward scheme fads in the past. But no seriousreward professional today could manage without reflecting on contem-porary issues such as executive pay and the UKs pensions crisis, whichall receive up-to-date coverage in the book. And as the 1988 editionimplored, reward managers have to be entrepreneurs, not just adminis-trators, an admonishment some would do well to remember in ourcurrent risk-averse times.

But thirdly, it is easy for commentators to exaggerate the level ofchange in reward practices. Comprehensive coverage of the full andvaried range of technical tools and of some of the underlying funda-mentals of effective reward management and motivation still lies at theheart of this book. Thats why I have always had it to refer to, be that inwriting 150 job descriptions in a week at BMW early in my career, orinputting into the UNs reward strategy years later, and that is why itremains an essential reference text. Strategic vision and technical exper-tise, as Professor John Boudreau at Cornell University points out, are noteither/ors for the HR profession. They both form a double-barrelleddriver of the functions expanding influence and impact, and both areextensively covered in this book.

Professor Rosabeth Moss Kanter at Harvard defined reward manage-ment at its most essential core: when people have the opportunity to acton their own initiative, to shape their own work and feel they arerewarded for making a difference, they can do great things thats beentrue throughout the ages. Its easy to set out that reward nirvana, butfiendishly difficult to achieve and retain it. And it is precisely that mix ofhigh challenge but potentially high returns that makes reward manage-ment such a critical component of successful HR and business strategies.

One Manager of Rewards in the recent CIPDs annual reward surveydescribed his biggest challenge as controlling pensions costs, reducingthe car fleet, introducing a more flexible pay structure and moving toflexible benefits, all without increasing the pay bill. He wisely reportedthat he was responding to this multi-faceted agenda by proceedingslowly and carefully. And no doubt with a copy of Reward Managementon his bookshelf.

Duncan BrownAssistant Director General

CIPD

Foreword ix

Preface to the Revised FifthEdition

In this revised fifth edition of Reward Management we are incorporatingmuch new material based on our experience, research and bench-marking activities. We have also been helped by a number of Hay Groupcolleagues who have made invaluable contributions based on their ownextensive experience. To this we have added the considerable amount ofresearch that has been conducted into the practice of reward manage-ment in both the UK and the United States.

In particular the developments we have observed and write about inthis book include:

the concept of total reward; the concept of engaged performance; the continuing emphasis on strategic reward and integration; the need to take positive action to achieve equal pay; the impact of new legislation on age discrimination; the increased interest in job evaluation, partly in response to equal

pay imperatives; the focus on career and job family structures and the reduced enthu-

siasm for broad-banded grade and pay structures; the emergence of contribution-related pay as a major approach to

contingent pay; the increased interest in flexible benefits.

OUR PHILOSOPHYIn developing and, in some areas, rethinking ideas we have expressed inearlier editions, we have continued to evolve our own philosophy aboutreward management, the key points of which are:

It is neither possible nor desirable to be prescriptive in the sense ofproviding easy and superficial answers to subtle and far-reachingproblems of motivation and reward. We believe absolutely that acontingency approach has to be used when dealing with this subject;ie that the right reward processes are the ones which are right for aparticular organization. There is indeed such a thing as good prac-tice, but it is never universally best practice.

The importance of understanding the culture, climate, environmentand management practices of the organization before attempting anyinnovations cannot be overestimated.

Reward policies and practices can play a significant part in changeprogrammes, helping to achieve strategic goals and underpinningthe culture. But the lead has to come from top management, whichsets the direction and decides how reward management can bestprovide the help and support required.

We are not in the business of peddling panaceas. There are no quickfixes or sudden transformations available in this field no holygrails, only horses for courses.

We do believe, however, that there are guidelines available whendeciding what is the most appropriate practice. We have describedthe various approaches available from which a choice can be made,and their advantages and disadvantages, as they appear to us.

Our approach is empirical. It is based on the experience and observa-tions of colleagues, researchers and ourselves. It is, however, under-pinned by theories about motivation, incentives and reward. But wejoin with Douglas McGregor1 in the belief that there is nothing sopractical as a good theory; ie one which is based on practicalresearch, experimentation and analysis of experience.

We have come to the view that what we are writing about is a set ofprocesses relating to reward management, which include the designand maintenance of pay structures as well as the fundamentalprocesses of assessing job and role size (job evaluation) andmeasuring and rewarding performance (performance management,incentives and contingent pay). We have rejected the term rewardsystem because it conveys the idea of some sort of mechanism forconverting inputs into outputs, and there is little that is mechanicalabout reward management apart from payroll operation. Of coursereward management involves the application of schemes and proce-dures within pay structures. But what matters most is not the design,procedure or structure of the scheme, but the way it is applied, used

Preface to the revised fifth edition xi

and maintained, and these are the process issues which ultimatelydetermine the effectiveness of an organizations reward policies andpractices.

We attach particular importance to sustainability there is no pointin developing elaborate overengineered pay systems, howeverelegant they may be, if they do not carry on working well in practicewith the support of line managers and employees in general.

Planned and managed incremental change is easier to design, imple-ment and sustain than quantum leaps into unknown territory.

It is necessary to provide for tactical advances and retreats. We willnot get it right all the time. L-plates on new policies will be helpfulin the context of the learning organization.

Philosophy needs to precede strategy and implementation. We needto be clear about what we are paying for and why before we rush intodetailed design. Strategic integrity needs to underpin technical excel-lence.

In Voltaires words, The best is the enemy of the good sometimes asuccessful future lies in agreeing what, in the short term, we can onlyget nearly right. We follow Aristotles teaching in the Nicho macheanEthics that It is the mark of an educated mind to rest satisfied withthe degree of precision that the nature of the subject admits, and notto seek a degree of exactness when only an approximation ispossible. Practicality not perfection should be the aim. There willalways be time available in the future to make improvements basedon experience.

It is, however, still necessary to set clear short- and longer-term objec-tives about what is to be achieved by reward management innova-tions. Some attempt must also be made to define critical successfactors and performance measures and it is, of course, essential tomonitor and evaluate progress in the light of these success factorsand measures.

We do not expect our readers to go through this book from cover tocover. It is our experience from previous editions that users dip in prin-cipally to chapters they need to refer to. We have therefore cross-refer-enced chapters as far as possible, but also included an element ofrepetition where it is helpful to have everything in one place. That said,we hope that this text will prove useful to a wide range of specialists andnon-specialists tackling the challenges of reward management at thebeginning of the 21st century.

REFERENCE

1. McGregor, D (1960) The Human Side of Enterprise, McGraw-Hill, New York

xii Preface to the revised fifth edition

Acknowledgements

Thanks are due to many people who have contributed their thoughts,experience and insights to this edition.

First, we are grateful to Duncan Brown, Assistant Director General ofthe CIPD and leading reward thinker for our Foreword.

From Hay Group we would like to thank Lesley Wilkin, GrahamMartin and the UK Executive as well as Peter Christie, who leads thereward practice, for their continuing support for this book. Gratitude isalso due to Hay Group colleagues for contributing new chapters andupdates or improvements to existing chapters:

Simon Barron use of Excel spreadsheets; Steve Bee, Head of Pensions Strategy, Scottish Life the pensions

chapter; Peter Boreham executive incentives, profit sharing, flexible benefits

and pensions; Georgina Churchlow, Jane Phillipson and Tim Jones equal pay; Philip Cohen, Mark Thompson and Julie Alderdice job evaluation

and role analysis and many of the reward chapters; Chris Davey further sources of reading and information; Brad Hill gainsharing; Naomi Gill and Haydn Young salary market information; Simon Garrett boardroom pay, executive and all employee share

schemes and LTIPs; Iola Goulton age discrimination, recognition schemes and employee

benefits; Dilum Jirasinghe performance management; Ian Tinsley mergers and acquisitions and reward policies for new

and start-up organizations;

Doris Siedentopf, Cathy Marland and Phillip Wright internationalremuneration;

Peter Smith team rewards; Stephen Welch employee opinion surveys; Mary Skurzyuska for invaluable asssistance with production.

We are also very grateful to Barry Rodin of Employment ConditionsAbroad for his contribution to Chapter 38, to Jim Watts of the RewardWorkshop for his chapter on sales force incentives, to Antony Betts andNaz Karimbhai of RSM Robson Rhodes for Chapter 36 on tax andAngela Kristakis of GMAK for updating this, and to Pilat (UK) and LinkGroup for the summaries of their job evaluation methodology.

Finally we wish to record our gratitude to our partners PeggyArmstrong and John Murlis and our families for their continuing andunstinting support for the completion of this book.

xiv Acknowledgements

Fundamentals ofReward Management

Part 1

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Overview of RewardManagement

The aim of this chapter is to provide a general introduction to rewardmanagement. It starts by defining reward management and its aims,which leads into a summary of the views of the main contributors to thedevelopment of the reward management concept. This is followed bydescriptions of the processes and activities of reward management andthe chapter concludes with an assessment of the impact that rewardmanagement can make.

REWARD MANAGEMENT DEFINED

Reward management is concerned with the formulation and implemen-tation of strategies and policies that aim to reward people fairly, equi-tably and consistently in accordance with their value to the organization.It deals with the design, implementation and maintenance of rewardprocesses and practices that are geared to the improvement of organiza-tional, team and individual performance.

THE AIMS OF REWARD MANAGEMENT

The strategic aim of reward management is to develop and implementthe reward policies, processes and practices required to support theachievement of the organizations business goals. The specific aims areto:

1

create total reward processes that are based on beliefs about what theorganization values and wants to achieve;

reward people for the value they create; align reward practices with both business goals and employee

values; as Duncan Brown1 emphasizes, the alignment of yourreward practices with employee values and needs is every bit asimportant as alignment with business goals, and critical to the reali-sation of the latter;

reward the right things to convey the right message about what isimportant in terms of expected behaviours and outcomes;

facilitate the attraction and retention of the skilled and competentpeople the organization needs, thus winning the war for talent;

help in the process of motivating people and gaining their commit-ment and engagement;

support the development of a performance culture; develop a positive employment relationship and psychological

contract.

ACHIEVING THE AIMSTo achieve these aims, reward management must be strategic in thesense that it addresses longer-term issues relating to how people shouldbe valued for what they do and what they achieve. Reward strategiesand the processes that are required to implement them have to flow fromthe business strategy. They have to be integrated with other humanresource management (HRM) strategies, especially those concerninghuman resource development reward management is an integral partof an HRM approach to managing people.

Effective reward management is based on a well-articulated philos-ophy a set of beliefs and guiding principles that are consistent with thevalues of the organization and help to enact them. It recognizes that ifHRM is about investing in human capital from which a reasonablereturn is required, then it is proper to reward people differentiallyaccording to their contribution (ie the return on investment theygenerate).

Importantly, reward management adopts a total reward approach,which emphasizes the importance of considering all aspects of reward asa coherent whole that is integrated with other HR initiatives designed toachieve the motivation, commitment and engagement of employees.

CONTRIBUTORS TO THE CONCEPT OF REWARDMANAGEMENT

Much of the impetus for the development of the reward management

4 Fundamentals of reward management

concept has come from US writers, especially Lawler with strategicpay2 and, more recently, Treat people right,3 Schuster and Zingheim4

with the new pay and most recently Armstrong and Brown5 with thenew realism in reward strategy, as well as Flannery, Hofrichter andPlatten6 with dynamic pay and Jensen, McMullen and Stark,7 who havesought to improve reward literacy among line managers.

Strategic pay

Lawler emphasized that when developing reward policies it is necessaryto think and act strategically about reward. Reward policies should takeaccount of the organizations goals, value and culture and of the chal-lenges of a more competitive global economy. New pay helps to developthe individual and organizational behaviour that a company needs if itsbusiness goals are to be met. Pay policies and practices must flow fromthe overall strategy and they can help to emphasize important objectivessuch as customer satisfaction and retention and product or servicequality.

In Treat People Right3 Ed Lawler stresses the importance of creating avirtuous spiral in which both employers and employees win. Heidentifies a number of principles for achieving this, which look at thewhole HRM agenda from creating the right value proposition on recruit-ment, through to quality of leadership. He states that: It is entirelypossible to design a reward system that motivates people to work andsatisfies them while at the same time contributing to organizationaleffectiveness.

The new pay

Lawlers concept of the new pay was developed by Schuster andZingheim who described its fundamental principles as follows:

Total compensation programmes should be designed to rewardresults and behaviour consistent with the key goals of the organiza-tion.

Pay can be a positive force for organizational change. The major thrust of new pay is in introducing variable (at risk) pay. The new pay emphasis is on team as well as individual rewards, with

employees sharing financially in the organizations success. Pay is an employee relations issue employees have the right to

determine whether the values, culture and reward systems of theorganization match their own.

But Lawler8 later emphasized that the new pay ideology should beregarded as a conceptual approach to payment rather than a set of

Overview of reward management 5

prescriptions: The new pay is not a set of compensation practices atall, but rather a way of thinking about reward systems in a complexorganisation... The new pay does not necessarily mean implementingnew reward practices or abandoning traditional ones; it means identi-fying pay practices that enhance the organizations strategic effective-ness.

Dynamic pay

Flannery, Hofrichter and Platten expounded the concept of dynamicpay and suggested that the nine principles that support a successful paystrategy are:

1. Align compensation with the organizations culture, values andstrategic business goals.

2. Link compensation to the other changes.3. Time the compensation programme to best support other change

initiatives.4. Integrate pay with other people processes.5. Democratize the pay process.6. Demystify compensation.7. Measure results.8. Refine. Refine again. Refine some more.9. Be selective. Dont take to heart everything you hear or read about

pay.

The line management dimension

Jensen, McMullen and Starks work reflects the reality that the realsource of competitive advantage resides in the ability to actually imple-ment practices that other organizations find difficult. It tackles theissues of line management capability to work constructively to enablereward policies to achieve their potential

REWARD MANAGEMENT PROCESSES ANDACTIVITIES

The processes and activities of reward management are illustrated inFigure 1.1. The components are described below:

The business/HR strategy. This is the starting-point; all the reward poli-cies, processes and practices flow from here to achieve the overar-ching business goal of improved performance.


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The reward strategy. This determines the direction in which rewardmanagement innovations and developments should go to supportthe business strategy, how they should be integrated, the priority thatshould be given to initiatives and the pace at which they should beimplemented.

Grade and pay structure policy. This deals with the policy on the shapeof the grade structure and the elements of pay within that structure,ie: Base pay: the fixed rate of pay that represents the rate for the job

into which pay related to performance, competence, contributionor service may be consolidated. Policies on base pay levels will beaffected by the factors discussed at the end of this chapter but,importantly, they will express the intentions of the organization onthe degree to which it wants pay levels to be competitive andtherefore the relationship between those pay levels and marketrates (its market stance).

Contingent pay: pay for individuals that is related to performance,competence, contribution or service.

Variable pay: pay in the form of bonuses or cash payments that willbe contingent on individual, team or company performance.

Market analysis. The process of identifying rates of pay in the labourmarket to inform decisions on levels of pay within the organization,which will be influenced by its market stance.

Job evaluation. The systematic process of establishing the relative sizeof jobs and roles within the organization.

Grade structure. The sequence or hierarchy of grades, bands or levels,which may be divided into job or career families and into which, onthe basis of job evaluation, groups of jobs or roles that are broadlycomparable in size are placed.

Pay structure. The ranges of base pay that are attached to grades orlevels in job or career families and the scope for pay progressionrelated to performance, competence, contribution or service. Basepay levels will be influenced by equity and market rate considera-tions.

Employee benefits. The provision for employees of pensions, sick pay,various kinds of perks such as company cars and entitlement to holi-days and other leave.

Non-financial rewards. Rewards that do not involve any directpay ments and often arise from the work itself, for example achieve-ment, autonomy, recognition, scope to use and develop skills,training, career development opportunities and high-quality leader-ship.

Performance management. Processes involving managers, individualsand teams based on shared understanding, which define perfor-mance and contribution expectations, assess performance againstthose expectations, provide for regular constructive feedback and


inform agreed plans for performance improvement, learning andpersonal development. Performance management will also informcontingent pay decisions.

Total remuneration. The sum of base pay, contingent pay and the valueof employee benefits.

Total reward. The sum of total remuneration and non-financialrewards.

Building capability. Building the capability of both the reward functionand line management to understand, work with and communicatethe elements of reward policy and practice and changes as theyoccur.

THE IMPACT OF REWARD MANAGEMENT

US writers in the 1990s such as those mentioned earlier suggested thatwhat they call compensation policies can exert a major influence onorganizational cultures, processes and results. But this notion can betaken too far. The naive belief that devices such as performance-relatedpay can by themselves act as levers for change has been responsible formany of the failures in reward innovations over the last decade. Theimpact of reward management on performance is not clear cut.Simplistic solutions such as performance pay working in isolation andignoring the complexity of motivating factors wont work. As SandraONeal9 points out: It is simply no longer possible to create a set ofrewards that is universally appealing to all employees or to address aseries of complex business issues through a single set of solutions.

Of course, reward policies and practices must respond to change andthey can help to consolidate it. However, their role is to support changenot to drive it. And they can play an important part in managing thepsychological contract the beliefs held by an employee and anemployer of what they expect from one another. Duncan Brown1

suggests that: Pay and formal reward policies are one of the mosttangible symbols of a companys culture and employment offering andare inextricably interwoven with them. Therefore they are critical todemonstrating that the employer is delivering on its side of the employ-ment bargain.

REFERENCES

1. Brown, D (2001) Reward Strategies: From intent to impact, CIPD, London2. Lawler, E E (1990) Strategic Pay, Jossey-Bass, San Francisco3. Lawler, E E (2003) Treat People Right, Jossey-Bass, San Francisco4. Schuster, J R and Zingheim, P K (1992) The New Pay, Lexington Books, New

York

Overview of reward management 9

5. Armstrong, M and Brown, D (2006) Strategic Reward, Kogan Page, London6. Flannery, T P, Hofrichter, D A and Platten, P E (1996) People, Performance, and

Pay, Free Press, New York7. Jensen, D, McMullen, T and Sark, M (2006) The Managers Guide to Rewards,

Amacom, New York8. Lawler, E E (1995) The new pay: a strategic approach, Compensation &

Benefits Review, November9. ONeal, S (1998) The phenomenon of total rewards, ACA Journal, 7 (3)


Total Reward and EngagedPerformance

The growing emphasis on employee engagement as critical to organiza-tional performance means that the concept of total reward is exertingmore and more influence on reward strategy. Pressures we have identi-fied elsewhere in this book for organizations to recruit and keep talent inan environment where diverse and mobile employees are often moredemanding and assertive about what they want from an employer willincrease this influence. The messages are out there prominently andfrequently for general consumption. The annual Sunday Times BestCompanies to Work For or the Fortune Most Admired Companies spellout in articles and on websites why W L Gore, Microsoft and Asda forexample have come high in the listings. Being an employer of choicenow matters in the boardroom and it matters a lot for those who managereward. Employees and potential employees have become much moresophisticated customers of total reward offerings and more questioningof what they contain. As the rising tide of literature on both sides of theAtlantic makes clear, they want options and a measure of customizationto their life- and work-style decisions.

This chapter starts with a definition of the concept and explains itssignificance. It continues with an analysis of the constituent parts of totalreward and describes in more detail the key elements of total rewardusing a model, Engaged Performance, developed by Hay Group. Itconcludes with an assessment of the benefits of the total rewardapproach and a brief description of how total reward processes can bedeveloped.

2

TOTAL REWARD DEFINED

The total reward concept emphasizes the importance of considering allaspects of reward as an integrated and coherent whole. Each of theelements of total reward, namely base pay, pay contingent on perfor-mance, competence or contribution, employee benefits and non-finan-cial rewards, which include intrinsic rewards from the employmentenvironment and the work itself, are linked together. A total rewardapproach is holistic; reliance is not placed on one or two reward mecha-nisms or levers operating in isolation. Account is taken of all the ways inwhich people can be rewarded and obtain satisfaction through theirwork. The aim is to offer a value proposition and maximize thecombined impact of a wide range of reward initiatives on motivation,commitment and job engagement. As Sandra ONeal1 has explained:Total reward embraces everything that employees value in the employ-ment relationship.

An equally wide definition of total reward is offered byWorldatWork,2 who state that total rewards are all of the employersavailable tools that may be used to attract, retain, motivate and satisfyemployees. As Paul Thompson3 suggests: Definitions of total rewardtypically encompass not only traditional, quantifiable elements likesalary, variable pay and benefits, but also more intangible non-cashelements such as scope to achieve and exercise responsibility, careeropportunities, learning and development, the intrinsic motivation pro -vided by the work itself and the quality of working life provided by theorganization.

At its best, the total reward approach embodies the organizationaladoption of a more emotionally intelligent way of working. It requiresthe use of the key competency levers of self-management, self-aware-ness, social awareness and relationship management in an organiza-tional context as part of the approach needed to secure leadershipexcellence in the pursuit of significantly raised performance.

The conceptual basis of total rewards is that of grouping or bundling,so that different reward processes are interrelated, complementary andmutually reinforcing. This is the basis of the Hay Group Model ofEngaged Performance (see below) and models developed by otherconsulting firms and WorldatWork. Total reward strategies are verticallyintegrated with business strategies, but they are also horizontally inte-grated with other HR strategies to achieve internal consistency.

THE SIGNIFICANCE OF TOTAL REWARD

Essentially, the notion of total reward says that there is more torewarding people than throwing money at them, or, as Helen Murlis andSteve Watson4 put it: The monetary values in the reward package still


matter but they are not the only factors. They went on to say: Cash is aweak tactic in the overall reward strategy; it is too easily replicated.Intrinsic reward is far more difficult to emulate. But they also stress thattotal reward policies are based on building a much deeper under-standing of the employee agenda across all elements of reward.

For Sandra ONeal,1 a total reward strategy is critical to addressing theissues created by recruitment and retention as well as providing a meansof influencing behaviour: It can help create a work experience thatmeets the needs of employees and encourages them to contribute extraeffort, by developing a deal that addresses a broad range of issues andby spending reward dollars where they will be most effective inaddressing workers shifting values.

Perhaps the most powerful argument for a total rewards approachwas produced by Pfeffer:5

Creating a fun, challenging, and empowered work environment in whichindividuals are able to use their abilities to do meaningful jobs for which theyare shown appreciation is likely to be a more certain way to enhance motiva-tion and performance even though creating such an environment may bemore difficult and take more time than simply turning the reward lever.

COMPONENTS OF TOTAL REWARDS

The components of total rewards are illustrated in Figure 2.1.

Total reward and engaged performance 13

Financialrewards andbenefits

Base pay

Contingentpay (forperformance,competenceorcontribution)

Variable pay(cashbonuses)

Shareownership

Benefits

Totalremunera-tion

Non-financialrewards those arisingfrom thework itselfand the workenvironment

Recognition

Responsibility

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Quality ofworking life

Work/lifebalance

Total reward

Figure 2.1 Components of total rewards

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Transactional rewards Relational rewards

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Compensation the foundational rewards that are primarily financialin nature and satisfy financial needs for income.

Benefits these satisfy protection needs and are unlikely to be perfor-mance-based.

The work experience these are the relational needs that bind workersto the organization more strongly because they satisfy an indi-viduals needs such as personal development and fulfilment.

Most leading firms of HR and reward consultants have developed theirown model of or approach to total reward with similar kinds of headingsto reflect their interpretation of the idea and its links to building ahealthier psychological contract or a more appealing employer brand.

Duncan Brown and Michael Armstrong6 have produced a modelbased on one originally developed by Duncan Brown at Towers Perrin.This distinguishes between transactional rewards, which are financial innature and are essential to recruiting and retaining staff but can be easilycopied by competitors, and relational rewards, which are concerned withlearning and development and the work experience and are essential toenhancing the value of transactional rewards. The real power, asThompson3 states, comes when organizations combine relational andtransactional rewards.

THE HAY GROUP ENGAGED PERFORMANCEMODEL

In the late 1990s Hay Group developed a model from their employeeopinion and reward work, which looked not just at the transactional andrelational elements of reward but focused also on what employeesdefined as a compelling, high-performance workplace. As Figure 2.2shows, this model comprises six key elements.

Research by Hay Group among growing numbers of employers in theUK and elsewhere suggests that the Inspiration and values cluster,followed by the Future growth and opportunity cluster, is whatemployees value most, with tangible rewards coming third or fourth inpriority except in those organizations where a decline in salary marketcompetitiveness has raised the level of attention on pay and taken it backto the front of peoples minds.

A large part of this book inevitably focuses on the policies andprocesses associated with transactional or financial rewards thetangible rewards in the Engaged Performance Model. But this does notmean that the significance of the rewards in the other five relationalelements is underestimated, and the next section of this chapter


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RELATIONAL REWARDSInspiration and values

Quality of leadership

People join organizations and leave bosses. They have thats itmoments when they decide to stay or go either because their employerworks and carries out its activities in a way they care about or becausethe conflict with their personal values becomes too uncomfortable totolerate. As Goleman, Boyatzis and McKee put it:7 A cranky and ruth-less boss creates a toxic organization filled with negative under-achievers who ignore opportunities: an inspirational, inclusive leaderspawns acolytes for whom any challenge is surmountable. The leader-ship styles and behaviours fostered and used in an organization have amajor impact on the values of the organization and the way it behaves.Leaders play a vital role in total reward management. They exist to getthings done through people, ensuring that tasks are achieved and strate-gies delivered, but also building and maintaining supportive andconstructive relationships between themselves and the employees intheir team or group. They are there to motivate people and indeed tosecure engaged performance. Leaders are the sources of importantrewards such as recognition through effective feedback (see Chapter 20),providing the scope to carry out meaningful work, and providingopportunities for development and learning. They are crucial to thesuccess of performance management and to the values underpinningtangible rewards.

Organizational values and behaviours

The significance of the core values of an organization as a basis forcreating a rewarding work environment was clearly identified by theresearch conducted by John Purcell and his colleagues.8 The mostsuccessful companies had what the researchers call the big idea. Thesecompanies had a clear vision and a set of values, which were embedded,enduring, collective, measured and managed. They were concernedwith sustaining performance and flexibility. Clear evidence existedbetween positive attitudes towards HR policies and practices, levels ofsatisfaction, motivation and commitment, and operational performance.Strong public service values matter a great deal in the public sector. Thisfactor features in the model Hay Group developed for the public serviceTotal Reward Toolkit in 2006 along with promotion of diversity.


Reputation of the organization

People want to work for a high-reputation employer. It is good to seeyour organization move up the Best Companies to Work For leaguetable, or attract favourable press coverage for its contribution to nationallife. This is often part of an employers value proposition or employerbrand. Much of the public service has in the past benefited from therespect its various parts have in the community. Saying you work for auniversity or hospital or in overseas development places you as alignedwith worthwhile organizational activity. You might be quieter aboutwhom you worked for, however, if one of your directors had beeninvolved in a scandal, if the organization had been caught being lessthan socially responsible or if it had high employee turnover and pooremployment conditions.

Risk sharing

Employees have a strong sense of unfairness if they are asked toshoulder unacceptable levels of risk in an organization. On the pay frontthis might involve being on a highly geared incentive or commissionscheme where the fixed pay element was too close to their particularbread line (see also Security of income below). The risks mighthowever come rather in accountability and support for decision making are heroic failures tolerated as part of organizational learning or arethey punished in what turns out to be a blame culture? This issue isfundamental to the extent to which organizations succeed with innova-tion and creativity.

Recognition

As we illustrate in Chapter 29, recognition is one of the most powerfulmethods of rewarding people. They need to know not only how wellthey have achieved their objectives or carried out their work, but alsothat their achievements are appreciated. Recognition needs are linked tothe esteem needs in Maslows9 hierarchy of needs. These are defined byMaslow as the need to have a stable, firmly based, high evaluation ofoneself (self-esteem) and to have the respect of others (prestige). Theseneeds are classified into two subsidiary sets: first, the desire for achieve-ment, for adequacy, for confidence in the face of the world, and for inde-pendence and freedom and, second, the desire for reputation or statusdefined as respect or esteem from other people and manifested by atten-tion, importance or appreciation.

Recognition can be provided by positive and immediate feedback andpraise where it is well deserved. Financial awards closely linked tosuccessful delivery are, of course, financial recognition and can be animportant part of mutually reinforcing systems of recognition. And there


are other forms of recognition such as public applause status symbolssuch as representing the organization at prestigious conferences or inter-national meetings, sales events in exotic resorts, employee of the yearawards and long-service awards, which are much appreciated asrewards (see Chapter 29).

Recognition is also provided by managers who listen to and act uponthe suggestions of their team members and, importantly, acknowledgetheir contribution. Other actions that provide recognition includepromotion, allocation to a high-profile project, enlargement of the job toprovide scope for more interesting and rewarding work, and otherforms of status or esteem symbols. Caution, however, is needed in theuse of status symbols since they can be divisive. Virtually all informalrewards used without sensitivity can form a zero-sum game; onepersons recognition can imply an element of non-recognition to othersand the consequences of having winners and losers. Procedural justice isvery important here and needs thought and careful management.

Communication

This area is not just about the quality of organizational communication,transparency and honesty (see Chapter 42). An important part of therespect equation is something called employee voice. As defined byPeter Boxall and John Purcell,10 Employee voice is the term increasinglyused to cover a whole variety of processes and structures which enableand sometimes empower employees directly and indirectly to contributeto the decision making in the firm. Having a voice in the affairs of thefirm is rewarding because it recognizes the contribution people canmake to the success of the organization or their team.

Employees can have a voice as an aspect of the normal working rela-tionships between themselves and their managers and as such it islinked closely to other reward factors discussed here such as recognition,opportunities for achievement and risk sharing. But the organization,through its policies for involvement, can provide motivation andincrease commitment and engagement by putting people into situationswhere their views can be expressed, listened to and acted upon. This iscentral to Linda Grattons concept of the democratic enterprise11

where she focuses on the importance of an adultadult relationship thathas at its heart the quality of openness [that] is the communicationbetween the individual and his or her boss as well as the involvementthe individual feels in the everyday working of the organization.

Future growth and opportunity

Learning and development beyond current job

Most people want to get on. As Ed Lawler put it,12 People enjoy learning


theres no doubt about it and it touches on an important treat peopleright principle for both organizations and people: the value of contin-uous, ongoing training and development in creating a virtuous spiral.Learning is an intrinsically satisfying and rewarding experience.Alderfer too13 emphasized the importance of the chance to grow as ameans of rewarding people and therefore motivating them. He wrote:Satisfaction of growth needs depends on a person finding the opportu-nity to be what he or she is most fully and become what he or she can.Employers can offer this opportunity by providing people with asequence of experience and training that helps equip them for whateverlevel of responsibility they have the ability to reach. Talented individualscan be given the guidance and encouragement they need to fulfil theirpotential and achieve a successful career in tune with their abilities andaspirations. It helps to work within the context of a learning organiza-tion, and provisions can range from planned experience gathering toformal programmes. These can take the form of management and lead-ership programmes, team leadership development, further skillstraining, mentoring and one-to-one coaching. Coaching is now making asignificant contribution to fast-tracking learning at senior levels wherevery specific behavioural issues may need tackling and where the timeor inclination to go on broader leadership programmes is often lacking.

Career advancement opportunities

This element is clearly linked to the learning and development part ofthe talent management process. Will there be opportunities for me toprogress? is one of the commonest questions on recruitment. New grad-uates and MBAs very legitimately ask about how the organizationmanages and progresses talent, especially in an environment that islikely to have many fewer promotion opportunities than in the past.They want reassurance that processes are in place for identifying talent,for succession planning and for fair and reasonably transparent meansof making promotion decisions. To apply this element of reward well,organizations need to be clear what the career paths are and what thecriteria are for making lateral and diagonal moves as well as promo-tions. Competency frameworks can help a lot here since they shouldprovide additional and welcome clarity about what matters to theirorganization.

Performance improvement and feedback

Effective performance management is a powerful means of providingtotal reward. It is and should be the basis for developing a positive psy -cho logical contract by clarifying the mutual expectations of managersand their staff in an environment focused on success. Constructive feed-back can be highly motivational. People who are allowed to claim their


successes and review what they could do differently in an adultadultcontext are given the opportunity to extend their range. Performancereviews should inform personal development planning and encourageself-managed learning again support from a manager in delivering ondevelopment plans can be very motivational. Success should breedsuccess in the creation of a high-performance culture.

This is however an area where it is possible to be very demotivational(see Chapters 19 and 20). Poorly handled feedback, arbitrary perfor-mance rating and forced distributions, lack of follow-through on perfor-mance agreements and poorly communicated recognition are all pitfallsto be avoided.

Quality of work

Perception of the value of work

People channel their discretionary effort into their work if they believe ithas meaning and is worthwhile and appreciated. It can be a motivator tojoin a particular occupation or profession, eg fire-fighter, teacher,midwife, environmental scientist or lawyer. Or the reward can come as aconsequence of the way in which leaders treat their people and theircontribution. Asda, for example, have demonstrated that people work -ing at checkouts and in other relatively unskilled basic jobs can performwell in a high-morale environment because they feel valued by theirstore managers and are encouraged to reach out and contribute tocharity work and the life of their community.

Challenge/interest

Relatively few people in our increasingly knowledge-based economychoose to work in jobs that are repetitive and boring and where there islittle challenge or interest in the work. If they have to, they tend to createinterest by changing jobs more frequently than they might in a morechallenging environment unless the social environment suits them (seeWork/life balance below). For professionals, challenge and interest aretypically critical components of their intrinsic reward package and a realdemotivator if missing.

To get this area right, it is important to understand the contribution ofjob design and role development. Job design has two aims: first, to meetthe needs of the organization for operational efficiency, quality ofproduct or service and productivity and, second, to reward individualsby satisfying their needs for meaningful work that provides for interest,challenge and accomplishment. Job design is not a static process. Theroles people play at work usually develop as they respond to opportuni-ties and changing demands, acquiring new skills and developing theircompetencies. Jobs and roles are, or should be, shaped over time by


managers and team members to make the best of peoples skills andcapabilities and provide optimum levels of intrinsic reward. Ed Lawler14

identified intrinsically motivating jobs as those where individualsreceived meaningful feedback about their performance in roles wherethey had accountability for a complete process or product, or significantpart of it, and where there was scope for self-evaluation. Such roles mustbe perceived by individuals as requiring them to use abilities they valueto perform the roles effectively and they should feel they have a highdegree of autonomy over setting their own goals and defining paths tothese goals.

Robertson and Smith15 expanded on this to set out five principles forthe development of rewarding jobs and roles. They identified five kindsof influence in this area:

1. influence skill variety providing opportunities for people to doseveral tasks and to combine tasks;

2. influence task identity combining tasks to form natural work units;3. influence task significance forming natural work groups and

informing people of the importance of their work;4. influence autonomy giving people responsibility for determining

their own working systems and making their own decisions;5. influence feedback opening and using feedback channels.

Achievement

The need to achieve applies in varying degrees to all people in all jobs,although the level at which it operates will depend on the orientation ofthe individual and the scope provided by the work to fulfil a need forachievement. People feel rewarded and motivated if they have the scopeto achieve as well as being recognized for the achievement. Universityresearchers, for example, want to enhance their reputation as well asmaking a significant contribution to their institutions research rating.Being encouraged and supported with publications helps meet thisneed. In industry this need might be met by assignment to participate inor lead a strategic project, or agreement on a stretching but achievabledelivery target. Or it might be seeing the team succeed.

If achievement motivation is high it will result in behaviour such astak ing control of situations or relationships, directing the course of events,creating and seizing opportunities, enjoying challenge, reacting swiftlyand positively to new circumstances and relationships and gener allymaking things happen. People who are driven by the need to achieveare likely to be proactive, to seek opportunities and to insist on recog-nition. Those whose orientations are not so strongly defined can behelped to satisfy possibly latent achievement needs by being given thescope and encouragement to develop and use their abilities produc-tively.


Achievement motivation can be supported and developed by organi-zations by helping develop self-confidence and self-esteem, by soundjob design (see above) and by a constructive approach to performancemanagement.

Freedom and autonomy

Less and less do people in developed economies welcome a parentchild/command-and-control-based work environment. They expect tobe treated as sentient adults and accorded a measure of freedom andautonomy in the way they go about their work. This goes with the high-trust workplaces more likely to achieve a real performance culture.People who feel constrained or micromanaged are very unlikely to beengaged in their work, and this climate is unlikely to be one fosteringmuch discretionary effort. So organizations have much to gain bysupporting and enabling reasonable degrees of freedom and autonomyand testing regularly that employees perceive that they exist.

Workload

This area is essentially about pace of work and manageable workloads.People working on production lines where the pace of work is not undertheir control and not reasonable or manageable find this stressful, andwork quality as well as motivation suffers. Professionals working in along-hours culture where there is little recognition of the pressure andrelentless pressure to perform tend to feel the same. What we are talkingabout here is not the occasional periods of high-pressure working nor -mal to most 21st-century businesses, but a work culture that persistentlyrequires an excessive workload. Asked about this issue in focus groupswhere workload surfaces as an issue, employees often feed in commentssuch as you need to be a workaholic to work here or talk wistfullyabout the last time they saw daylight during the week. Inevitably thisissue links across to work/life balance and to some degree to freedomand autonomy. We see a marked trend for employees in high-pressurejobs who like the work, but not the constant pressure, to seek parallelrewards by restricting their time contract (to say 80 per cent) or to takesabbaticals or additional time off every so often to get a real break.

Quality of work relationships

Earlier in this chapter we talked about the importance of quality of lead-ership. But quality of colleagues matters too. Having congenial,supportive and reasonably like-minded fellow employees can make abig difference to engagement. A positive answer to Do I have a bestfriend at work? is one of the 12 key indicators identified by MarcusBuckingham and Curt Coffman as critical to a high-performance


environment.16 This is also an area where talent management policiesshould pay dividends especially if the organization has recruited forbehaviours such as effective teamworking and service orientation thatrequire collaboration and are typically essential to high performance.They help good relations at work.

Enabling environment

Physical environment

Well-designed and organized offices and work areas make a significantdifference to how people feel about their work. We live in a world whererising standards of interior decoration, TV shows illustrating housemake-overs and a proliferation of media coverage on design mean thatexpectations are rising. Organizations like British Airways and Micro -soft or St Lukes advertising agency, for example, have tailored the workenvironment to match evolving work styles and be more appealing as aplace to spend working hours. Research-based organizations such asthose in pharmaceuticals and IT often ensure that their research workersfeel well rewarded by providing excellent laboratory campus and otherfacilities that they can use to deliver exciting results. So a scruffy, down-at-heel working environment can give some pretty depressingmessages about how much the organization values employees and thestandards it expects of them.

Tools and equipment

Most employees enjoy and relish the opportunity to work with state-of-the-art tools and equipment, whether it is the latest lightweight laptop,network system or mobile phone or indeed a sewing machine or forklifttruck. Industrial archaeology is only appealing if you work in amuseum. Word about new developments often travels fast in this areaand creates demand. Employees talking to counterparts in other organi-zations, surfing the web and reading the trade press very quickly learnabout new developments that would make their work quicker or easier and they want them. When costs are constrained and a move to a tech-nology upgrade cannot be done in the short term, it is very important toexplain why and what the plans for eventual change are. It is notuncommon to lose good employees tempted by this years kit unlessthis happens.

Job training (current position)

Many people now regard access to training as a key element in theiroverall package. It can be particularly important in delayered organiza-tions where upward growth through promotion can be restricted but


people can still work on effectiveness in their current role or developlaterally. As jobs and roles evolve, organizations generally need toprovide training to help maintain and raise performance and learning.Such training might be skills training such as for a new piece of software,or it could be time management or team motivation, or it might be workon specific behaviours that help with effectiveness. A nice example ofthis is the training in emotional intelligence given by Slough Council tothe professionals in its Housing Department to help them deliver moreeffectively in this challenging area of the councils services to residents.Effective training helps maintain motivation and engagement and is aclear sign of organizational investment in its people. It also fostersemployability both within the organization and beyond, and enhancedemployability is itself perceived as a reward.

Information and processes

This area covers the information support provided as part of the workprocess and the nature and quality of the work processes themselves.There are links to communication and job design and similar impera-tives apply. Most employees want to work with open, transparent infor-mation flows on issues affecting their work and they generally expectbureaucracy to be minimized as far as possible. We live in an environ-ment where knowledge sharing is more respected than a knowledge ispower mindset, and people can be easily demotivated by secretivenessand the lack of trust that implies.

Safety/personal security

It is hard to expect people to be motivated if they feel their personalsafety and security are at risk. The only real exceptions to this are thearmed forces and related occupations where the risk is accepted as partof the contract and even so minimized as far as possible. Employerswho recognize this and, for example, provide transport for staff workinglate in hazardous inner-city areas, or CCTV surveillance for thoseworking at remote sites, can actively reduce concerns about safety andsecurity. Often this is a question of reviewing risk levels periodically andbeing proactive over safety all part of an effective health and safetypolicy.

Work/life balance

Supportive environment

People do not leave their lives behind when they come to work. Mostemployers now recognize this and the best of them openly recognizeneeds outside work in their working practices, in the leadership styles in


use and in an inclusive and supportive culture. The emphasis is onvaluing people rather than mobilizing workers, helping employeesbuild on their strengths and dealing swiftly with issues such as discrim-ination and bullying. Organizations, notably those in the public service,focused on fostering diversity and better reflecting the populations theyserve, know that a supportive environment is critical to achieving theirgoals.

Recognition of lifecycle needs/flexibility

Since the improvements in employment rights of the 1970s, there hasbeen a rising trend in the development of more flexible workingarrangements. Maternity and paternity leave provisions are importantin this, but also critical are employer attitudes to ongoing family respon-sibilities, notably childcare and eldercare issues. It is not uncommonnow for employers to support and enable part-time working, flexiblecontracts and working from home. The best of them see this as an invest-ment and talent management issue. Much depends on levels of trust andon raising these among managers who are initially sceptical. Work/lifebalance policies can therefore reward people by recognizing their needsoutside work by providing more flexible working arrangements andmaking it clear that people will not be rewarded simply because theystay on after normal finishing time. Its what they deliver that counts,not how long they work.

The UK public service has certainly widened its talent pool by havingfamily-friendly flexible working policies, tackling long-hours culturesand putting in resources to make this work. It has consequently oftenbenefited by gaining higher levels of motivation from those for whomflexibility makes the difference at their particular stage of life. Thisapproach is now being further extended with the removal of fixed retire-ment age and flexible retirement options.

Security of income

Highly variable income levels with a low base salary threshold, or thethreat of job loss or layoff can have a severe effect on employee feelingsof security and their ability to work effectively. It is hard to be committedto an employer whose levels of commitment in return are in doubt. Lackof security of income is a very real source of demotivation for employeeswho may feel trapped and who then try to cope by taking a second job,working evenings and weekends and destroying what work/lifebalance they had. The minimum wage makes some contribution to thisissue, but there are still problems to address of low pay in high-costareas and for migrant workers as well as poorly designed incentiveschemes that leave people below a decency threshold.


Social environment

This element recognizes the reality that work is a social institution andthat employees expect, at least to some degree, to have a workplace thatis some kind of community. Often this will be expressed by activitieswith colleagues but outside work. Or social activities may take place inworking time and they may be organized by the employer or otherwise.If they are largely missing and work is seen as an impersonal and unso-cial environment this will have an effect on levels of engagement. Teamlunches or outings, away days and fundraising activities for charity, forexample, help strengthen the social fabric of the workplace and helppeople feel they belong. And meeting colleagues in non-work situationscan often help improve relationships and relationship management atwork. Getting this element right may require some investment, if not infinancial terms then in time and leadership effort to improve the socialclimate.

IMPLICATIONS OF THIS APPROACH FOR TALENTMANAGEMENT

Talent management is about ensuring that the organization attracts,retains, motivates and develops the talented people it needs. It is associ-ated with a number of the other reward processes summarized abovesuch as designing jobs and developing roles that give people opportuni-ties to apply and grow their skills and provide them with autonomy,interest and challenge. It is also concerned with creating a working envi-ronment in which work processes and facilities enable rewarding (in thebroadest sense) jobs and roles to be designed and developed.

Talent management also means developing reward processes and aworking environment that ensure that the organization is one for whichpeople want to work an employer of choice. There is a desire to jointhe organization and, once there, to stay. Employees are committed tothe organization and engaged in the work they do. On the basis of theirlongitudinal research in 12 companies Purcell et al8 concluded that:

What seems to be happening is that successful firms are able to meet peoplesneeds both for a good job and to work in a great place. They create goodwork and a conducive working environment. In this way they become anemployer of choice. People will want to work there because their individualneeds are met for a good job with prospects linked to training, appraisal andworking with a good boss who listens and gives some autonomy but helpswith coaching and guidance.

Becoming an employer of choice starts with developing the image of theorganization so that it is recognized as one that achieves results, delivers


quality products and services, behaves ethically and provides goodconditions of employment. Organizations with a clear vision and a set ofintegrated and enacted values are likely to project themselves as beingrewarding to work for. As the Hay Group17 explains: To become anemployer of choice you have to think about the people you employthe same way as you think about customers. That means offering them arewarding environment to work in, not just financial rewards.

DEVELOPING A TOTAL REWARD APPROACH

Developing a total reward approach, as Manas and Graham empha-size,18 has much in common with reward strategy development (seeChapter 3).

The most important thing to do is start by taking stock of where youare. Diagnosis should precede action. The Engaged Performance frame-work can usefully be used as the basis for this process. It provides thekey headings for a bespoke opinion survey (see Appendix B), for inter-view-based research or for focus groups. It helps build a real under-standing of what is going well and where the organization needs toadjust policies better to meet employee needs and expectations. As withreward strategy development the next stages involve setting andagreeing priorities and scheduling and sustaining implementation.

Making change to the transactional and tangible elements of totalreward can be quite clear cut. It may not be easy to make them work wellbut, as explained in later chapters of this book, it is not too difficult todecide on what needs to be done. There are plenty of guidelines avail-able to help make the choice of approach and to indicate the meansavailable for the design and implementation of tangible rewardprocesses.

Changes to relational rewards are more difficult. By definition, theyare intangible. Their introduction or provision may depend on topmanagement providing the lead by developing what John Purcell andhis colleagues call the big idea a clear vision and a set of integratedvalues that they ensure are embedded and enacted. It is not a matter ofapplying well-defined techniques.

The organization can contribute by communicating the values, givingemployees a voice, setting up improved performance managementprocesses, instituting formal recognition schemes and taking steps toimprove work/life balance. It should make and focus change based onthe data it has collected. A conscious effort can be made to bundlereward and HR practices together, for example developing career familystructures where the emphasis is on mapping career paths rather thanproviding a pay structure.

Importantly, the organization can ensure that line managers appre-ciate the importance of using relational rewards exercising effective


leadership, giving feedback, recognizing achievement and providingmeaningful work. Ultimately, relational rewards are in the hands of linemanagers, and what the organization must do is to ensure as far aspossible that they understand the significance of this aspect of theirwork and are given the training, coaching and guidance needed toacquire the skills to do it well.

The rhetoric of the total reward concept is compelling. The reality oftotal reward making it work is much more difficult. It requires a lot ofeffort on the part of top management, and line managers with the deter-mined encouragement and guidance of HR.

BENEFITS OF A TOTAL REWARD APPROACH

Developing and implementing a total reward approach may be difficultbut the benefits are considerable. These are:

Greater impact the combined effect of transactional and relationalrewards will make a deeper and longer-lasting impact on the motiva-tion and commitment of people.

Enhancing the employment relationship the employment relationshipcreated by a total rewards approach, which makes the maximum useof relational as well as transactional rewards, will appeal more to andengage individuals.

Increased engagement as part of the process involving people in theirown reward package design gives them strong messages about theorganization and its values. At its best, it builds relationship capital.

Flexibility to meet individual needs relational rewards may bind indi-viduals more strongly to the organization because they recognize andcan answer special individual needs.

Winning the war for talent relational rewards help to deliver a posi-tive psychological contract and, as stated by Brown and Armstrong,6

this can serve as an effective brand and differentiator in the recruit-ment market which is much more difficult to replicate than indi-vidual pay practices. The organization can become an employer ofchoice and a great place to work, thus attracting and retaining thetalented people it needs.

REFERENCES

1. ONeal, S (1998) The phenomenon of total rewards, ACA Journal, 7 (3)2. WorldatWork (2000) Total Rewards: From strategy to implementation,

WorldatWork, Scottsdale, AZ3. Thompson, P (2002) Total Reward, CIPD, London


4. Murlis, H and Watson, S (2001) Creating employee engagement: trans-forming the employment deal, Benefits and Compensation International, 30 (8)

5. Pfeffer, J (1998) The Human Equation: Building profits by putting people first,Harvard Business School Press, Boston, MA

6. Brown, D and Armstrong, M (1999) Paying for Contribution, Kogan Page,London

7. Goleman, D, Boyatzis, R and McKee, A (2002) Primal Leadership: The hiddendriver of great performance, Harvard Business School Press, Boston,MA

8. Purcell, J et al (2003) Inside the Black Box: How people management impacts onorganisational performance, CIPD, London

9. Maslow, A (1954) Motivation and Personality, Harper & Row, New York10. Boxall, P and Purcell, J (2003) Strategic Human Resource Management,

Routledge, London11. Gratton, L (2004) The Democratic Enterprise: Liberating your business with

freedom, flexibility and commitment, FT Prentice Hall, London12. Lawler, E E (1969) Job design and employee motivation, Personnel

Psychology, 2213. Alderfer, C (1972) Existence, Relatedness and Growth, Free Press, New York14. Lawler, E E, III (2003) Treat People Right! How organizations and individuals

can propel each other into a virtuous spiral of success, Jossey-Bass, San Francisco15. Robertson, I T and Smith, M (1985) Motivation and Job Design, IPM, London16. Buckingham, M and Coffman, C (1999) First Break All the Rules: What the

worlds greatest managers do differently, Simon & Schuster, New York17. Hay Group (2002) Engage Employees and Boost Performance, Hay Group,

London18. Manas, T M and Graham, M D (2003) Creating a Total Reward Strategy: A

toolkit for designing business based plans, Amacom, New York


Strategic Reward

Strategic reward management is the process of looking ahead at what anorganization needs to do about its reward policies and practices in themiddle or relatively distant future. It is concerned with the broader busi-ness issues the organization is facing and the general directions in whichreward management must go to provide help in dealing with theseissues in order to achieve longer-term business goals.

Strategic reward management deals with both ends and means. As anend it describes a vision of what reward policies will look like in a fewyears time. As a means, it shows how it is expected that the vision willbe realized. Strategic reward management is therefore visionarymanagement, concerned with creating and conceptualizing ideas ofwhat the organization should be doing about valuing and rewarding itspeople. But it is also empirical management, which decides how in prac-tice it is going to get there.

The foundation of strategic reward management is an understandingof the needs of the organization and its employees and how they can bestbe satisfied. It is also very much concerned with developing the valuesof the organization on how people should be rewarded and formulatingguiding principles that will ensure that these values are enacted.

As described in this chapter, strategic reward management is aboutthe development and implementation of reward strategies and theguiding principles that underpin them. The chapter starts with a defini-tion of reward strategy, followed by a description of the purpose andfeatures of reward strategies. Approaches to the development of rewardstrategies are then considered and the chapter ends with notes oncriteria for effectiveness.

3

REWARD STRATEGY DEFINED

Reward strategy clarifies what the organization wants to do in thelonger term to develop and implement reward policies, practices andprocesses that will further the achievement of its business goals. It is adeclaration of intent, which establishes priorities for developing andacting on reward plans that can be aligned to business and HR strategiesand to the needs of people in the organization. Brown1 believes that:reward strategy is ultimately a way of thinking that you can apply toany reward issue arising in your organization, to see how you can createvalue from it.

THE PURPOSE OF REWARD STRATEGY

The aim of reward strategy is to support the corporate and HR strategiesand align reward policies and processes to organizational and indi-vidual needs. It provides a sense of purpose and direction and a frame-work for reward planning. In the words of Rosabeth Moss Kanter,2

business strategies exist to elicit the present actions for the future andto become action vehicles integrating and institutionalising mecha-nisms for change. This is also the case with reward strategies.

There are four powerful arguments for developing reward strategies:

1. You must have some idea where you are going, or how do you knowhow to get there and how do you know that you have arrived (if youever do)?

2. Pay costs in most organizations are by far the largest item of expense;so doesnt it make sense to think about how they should be managedand invested in the longer term?

3. There can be a positive relationship between rewards, in the broadestsense, and performance, so shouldnt we think about how we canstrengthen that link?

4. As Cox and Purcell3 write, the real benefit in reward strategies lies incomplex linkages with other human resource management policiesand practices. Isnt this a good reason for developing a rewardstrategic framework that clearly indicates how reward processes willbe linked to other HR strategies and processes so that they arecoherent and mutually supportive?

FEATURES OF REWARD STRATEGY

Reward strategy is an undertaking about what is going to be done in thefuture. It is concerned with the direction the organization should follow

Strategic reward 31

in developing the right mix and levels of financial and non-financialrewards to support the business strategy. It will set out 1) the underpin-ning guiding principles (the reward philosophy), 2) the intentions thisis what we propose to do, 3) a rationale this is why we intend to do it,and 4) a plan this is how we propose to do it.

However, Mintzberg, Quinn and James4 suggest that strategy canhave a number of meanings other than that of being a plan, or some-thing equivalent a direction, a guide, a course of action. Strategy canalso be:

a pattern, that is, consistency in behaviour over time; a perspective, an organizations fundamental way of doing things; a ploy, a specific manoeuvre intended to outwit an opponent or a

competitor.

The new realism

There is always a danger of reward strategy promising much butachieving little. The rhetoric contained in the guiding principles may notturn into reality. Espoused values may not become values-in-use. Thethings that are meant to happen may not happen.

Reward strategy can too easily be unrealistic. It may appear to offersomething worthwhile but the resources (money, people and time) andcapability to make it happen are not available. It may include processessuch as performance management that only work if line managers wantto make them work and are capable of making them work. It may be metby total opposition from the trade unions.

Armstrong and Brown5 have addressed this issue by developing theconcept of the new realism. This is an approach to reward strategy thatrecognizes that there are no facile solutions to reward issues, that contextis all-important, that the focus is on people, not just the business, andthat effective implementation is more important than elegant design.

The new realism means adopting the following approaches to thedevelopment and implementation of reward strategy:

Be absolutely clear about the objectives of the strategy and resoluteabout evaluating its effectiveness.

Appreciate that a good strategy is one that works and therefore focuson implementation programmes.

Plan with implementation in mind recognize during the designprocess that plans have to be converted into reality and take steps toanticipate the problems involved.

Align reward strategies with the business and HR strategies. Ensure that reward strategy fits the culture and characteristics of the

organization, meets business needs and takes account of individualneeds and preferences.


Be aware of good practice elsewhere but do not be seduced by thenotion that it is best practice, ie universally applicable and easilyreplicated best fit is more important than best practice.

Pay more attention to using strategic reward initiatives to supportthe engagement and commitment of people so that they are moti-vated and productive, rather than focusing on the mechanics of newreward fads.

Note the following perceptive comments of Tim Fevyer, SeniorManager, Compensation and Benefits, Lloyds TSB: Its vital that youget pay right otherwise much damage can be done. But once it is,dont treat it like a sophisticated lever to influence motivation andempowerment. Employees place a great deal more emphasis onintangible rewards when deciding where to work and the level ofcommitment to give their work.

Bear in mind that the development and implementation of rewardstrategy is an evolutionary process it is about doing things better ata manageable pace rather than extraordinary new developments.

Provide flexibility within a framework allow for flexibility butalways within a framework of guiding principles and clear policies.

Appreciate that any reward strategy implementation programmewill require a comprehensive change management programme.

Recognize the importance of the part played by line managers. Pay close and continuous attention to communicating with

employees and involving them in the development as well as theimplementation of reward strategy.

Be realistic about the place of reward strategy. It is helpful to define itfor the record and as a basis for planning and communication. Butthis should be regarded as no more than a piece of paper that can bemodified when needs change as they will not a tablet of stone.Reward strategy, like business strategy, will be formulated and refor-mulated as it is used.

Manage the balance a reward strategy ca

Documents

1. Reward Management a Handbook of Remuneration Strategy A