Is it time to refreshyour reward strategy?

The thorny issue of how best to reward and incentivise staff has always been near thetop of the corporate agenda. Get it right and it can help you attract and keep hold ofthe best people and improve performance. Get it wrong and it can soon lead todemotivation, dissatisfaction, and in the worst case scenario, even dispute.

The economic climate may be improving but budgets are still under pressure and thedays of big pay rises (or even any pay rises in some sectors) have not returned.

A recent report from the CIPD on how the latest thinking from behavioural scienceaffects the way employees perceive their pay and benefits is therefore timely – andalso makes for fascinating reading.

‘Show me the money! The Behavioural Science of Reward’ suggests the time is ripe for anew look at how we design reward strategies and make them more effective. So whatare the key factors employers need to be aware of if they want to make sure theirpay strategies hit the right note?

The research tells us that people’s view of their own worth goes up and down overtime and is affected by a variety of factors. These include the state of the economicclimate at any given time or how they compare their own skills and competence withthose of the people they are working with.

What this suggests is that pay systems need to be more dynamic and flexible to keepin line with employees’ changing expectations. Flexibility does of course bring its ownchallenges, but it can also help to overcome a number of issues, such as how to keeppeople motivated when they have reached the top of their ‘official’ pay scale..

How people value reward

The evidence from behavioural science research suggests that people’s need forfairness is deeply ingrained and when it comes to pay, we want transparency abouthow compensation and career progression is decided. In some organisations, rewardand progression is open and highly structured; often it’s attached to a grading systemwith a set pay band so people know where they stand in relation to their peers. Inother organisations, or in certain sectors, it’s the exact opposite.

Finding the right balance can be a challenge, and transparency becomes more difficultif reward systems become more flexible and managers have more room for manoeuvrewhen it comes to making pay decisions.

The desire for fairness

The latest research show us that money has a powerful effect on behaviour. Peopleperceive money as a ‘tool’ – something they can use in the future to get the things theywant. It also acts a bit like a drug in terms of the effect it has on our brains, stimulatingthose areas of the brain that are associated with immediate gratification.

The CIPD report suggests that the problem with financial incentives is that they risk“crowding out” the other reasons employees have for performing well – the desire todo a good job for example. The impact of a financial incentive is also likely to wear offover time – by which time people have ‘forgotten’ the other things that motivatedthem in the first place.

Financial incentives

Team and individual reward

The CIPD research points out that team rewards can lead to dissatisfaction becausepeople tend to compare their contributions more favourably than that of others. It’seasy to see how this plays out in the workplace. How often have you felt, for example,that other team members aren’t pulling their weight or that the whole project wouldcollapse if it wasn’t for you? This doesn’t mean that team reward doesn’t have a placeas part of a reward strategy. What it does suggest, however, is that reward systemswhich also include an individual element may be more effective because they willsatisfy people’s need for personal recognition.

Benefits

At a time when budgets are tight and big pay rises are not on the agenda, employersoften make benefits a key part of their strategy for attracting and rewarding people.Flexible benefits schemes, which include everything from pensions and healthcare togym membership and discount vouchers are now common in most sectors. Theresearch highlighted some interesting findings about these kind of benefits, whichemployers might want to take into account when planning to introduce or refreshschemes:

The first is that offering pension contributions over and above the standard isgenerally under-valued by employees, with the exception of those in their late careers.The same goes for deferred incentives, such as shares, which are not valued becausethey are ‘in the future’.

The research also suggests that although flexible benefits schemes, where employeescan choose from a wide range of benefits, are great for meeting the needs of a diverseworkforce, there is also a downside in offering too much choice. People can regardhaving to make the choice as a ‘cost’. They may hang on to a benefit that is no longer ofvalue to them, for example, because they can’t be bothered to make a choice. Or if abenefit is taken away, they may suddenly value it higher than they would have donewhen it was there. The implication for employers is that they need to simplify therange of benefits on offer, refresh the offering regularly, and avoid offering benefitsthat may later have to be taken away.

Ask yourself these questions:

• Are you dealing with jobs that rely on high levels of autonomy, mastery, and purpose? If so, it may be less appropriate to link pay directly with individual performance.

• How important is collaborative behaviour in your organisation and department? This can be encouraged by team-based reward and backed up by individual reward and/or recognition.

• How much choice do you offer employees in their benefits packages? Too much can be treated as a cost, so restrict the number of options to a few meaningful ones if possible.

• When did you last refresh your organisation’s benefit offering? The value placed on a benefit by an employee can reduce over time.

• How aware are your employees of the value of their pension contributions? Raising understanding through financial education and communication increases the value people place on pensions