in partnership with

REWARDMANAGEMENT

2012Annual survey report supplement 2012Aligning strategy and pay

REW

AR

D M

AN

AG

EM

EN

T 2012

1

2012

CONTENTS

Foreword 2

Summary of key findings 5

1 Introduction and theoretical background 9

2 Business strategy and pay management 11

3 Workforce characteristics and pay management 16

4 HR outcomes 23

Conclusions and implications 30

Background to the report 33

References and further reading 35

cipd.co.uk/rewardm

anagementsurvey

2

REWARD MANAGEMENT

FOREWORD

Welcome to the supplementary report based

on the data from the CIPD 2012 annual Reward

Management survey. While the 2012 Reward

Management survey report was based on

descriptive analysis of the figures, this report is

based on an inferential analysis of the numbers.

This report allows us to examine pay policies,

organisational strategy, workforce characteristics

and HR outcomes and to explore whether a

certain pay practice is associated with a certain

business strategy or HR outcome.

For instance, one of the findings from the report

concerns the use of performance-related reward,

incentives and recognition schemes. The analysis

reveals positive associations between increased

usage of such schemes and better employee

relations and reduced levels of employee

discontent with pay.

However, while the research identifies an

association between performance-based reward

practices and employee relations and employee

pay discontent, it does not show that performance-

based pay will drive these outcomes. It could

be that employers that have better employee

relations are more likely to be able to successfully

introduce and operate performance-related pay.

Or, it could be that both performance-related pay

and good employee relations are interdependent

and you cannot have one without the other.

While one aim of the analysis is to identify some

of the positive and negative associations between

pay policy, business practice, HR outcomes and

workforce characteristics, the other is to help

practitioners to consider why the associations may

exist and what it means for their organisation and

its varied contexts.

This analysis is not a one-off. We will examine

these associations over time to see if they change.

We will also explore other aspects as well, to see

what other relationships we can uncover. This,

taken together with other CIPD research, will help

indicate what works and, over time, why.

Once again, I would like to thank all those

reward and HR professionals who helped develop

the questionnaire, those that filled in our

questionnaire, those that have reviewed this report,

the team at the University of Bedfordshire, London

Metropolitan University, the University of Sydney

and the University of Melbourne that helped create

the report, and our sponsors Benefex.

Charles Cotton

CIPD Performance and Reward Adviser

REW

AR

D M

AN

AG

EM

EN

T 2012

3

2012

Benefex is pleased to be working alongside the

CIPD on the supplementary report which is based

on the data from the CIPD 2012 Annual Reward

Management survey.

The survey results have enabled the CIPD to

explore the question of strategic alignment by

identifying the variety of factors that appear to be

influencing managerial practice in 2012.

The results show links between particular HR

outcomes and certain reward management

practices, for example, there appears to be a link

between transparent pay arrangements and a

positive employee relations environment.

One of the survey findings shows that careful

reward management appears to make a difference

by creating positive relationships between

employers and employees, reducing reward-

related disquiet, and retaining talent.

The definition of careful reward management

will vary from company to company, but in

addition to having a clearly articulated and

robust reward strategy, it is likely to include the

successful execution and on-going management

and administration of reward programmes.

This includes continuous communication on

how reward programmes work, effective

communication in respect of changes to

employees reward packages such as base-pay

increases, bonus awards and so on.

Therefore, line managers need to be equipped

to have open, honest and meaningful discussions

with employees on how reward is managed within

their organisation. Increasingly, technology is

playing a key role in the successful execution of

reward policies and programmes as a means of

communicating and engaging with employees.

We look forward to working with the CIPD to

examine the various associations between pay

and HR outcomes over time to see if they change

and what the impact of these changes are.

Matt Waller

CEO, Benefex

cipd.co.uk/rewardm

anagementsurvey

4

REWARD MANAGEMENT

ABOUT US

CIPD

The CIPD is the worlds largest Chartered HR

and development professional body. Were a

globally recognised body with more than 135,000

members across 120 countries including 84,000

professional members.

Our members include the next generation of

HR professionals, and many of the worlds most

influential senior HR leaders from world-class

organisations.

We set global standards for best practice in HR and

its specialisms. Its our aim to support and develop

professional capability: shaping thinking, leading

best practice and building HRs profile in business.

cipd.co.uk

Benefex

Benefex are one of the most successful online

reward and benefits providers based in the UK.

We specialise in the creation, delivery and support

of strategic employee benefit solutions, providing

everything you need under one roof.

We deliver fully integrated reward and benefit

portals including total reward, flexible benefits,

savings, education, broking and our new

auto-enrolment solution Enroller, which

provides an outsourced, complete end-to-end

auto-enrolment service.

The Benefex service proposition is unique in the

market, seamlessly combining the design and

implementation of employee benefit solutions

with the provision of fully integrated reward

and benefit portals, delivering and administering

client-tailored schemes online via the companys

own RewardHub technology platform.

Every aspect of Benefexs solutions, from consulting

to communications and employee support, are

delivered in-house. As a consequence, the company

enjoys an unrivalled reputation for exceptional

service and delivery, and breadth of capability.

Whatever your strategy, Benefex will help

you design, execute, support and evolve your

employee benefits.

benefex.co.uk

REW

AR

D M

AN

AG

EM

EN

T 2012

5

2012

SUMMARY OF KEY FINDINGS

The focus of this report is the extent of strategic alignment of pay management practices and the resulting human resources outcomes. Intended as a companion piece to, and using data from, the CIPD 2012 Reward Management survey, this study explores aspects of the proposition that alignment of reward practices vertically, with business strategy, and horizontally, with workforce characteristics, leads to positive organisational outcomes.

Results from the 2012 Reward Management survey have provided us with a clear picture of organisations aligning certain reward practices with business strategies and workforce characteristics. We have also found compelling relationships between pay practices and specific human resources outcomes.

cipd.co.uk/rewardm

anagementsurvey

6

REWARD MANAGEMENT

Table 1: Business strategies, reward practices and HR outcomes

In organisations with a Prospector strategy (that is continuous product/service diversification in pursuit of high returns)

In organisations with a Defender strategy (that is cost- and/or quality-based competitive defence in a preferred core product/service market)

Reward practices

Market positioning of reward

Reward levels are likely to be positioned in the top 10% of the market versus competitors.

Base pay structures

Pay structures are likely to be used for managing base pay rather than individualised pay systems.

Broadbanding is likely to be used for management/professional employees (includes senior managers, middle and front-line managers, professional, technical and scientific employees).

Base pay level determination

Ability to pay is not likely to be considered as the most important factor in determining pay levels.

Ability to pay is likely to be considered the most important factor in determining pay levels.

Market rates (with job evaluation) are likely to be considered the most important factor in determining pay levels.

Base pay progression

Competencies and skills are likely to be used as pay progression criteria.

Length of service is not likely to be used as pay progression criteria for non-management employees (includes administrative support, trades and production workers as well as customer service and sales staff).

Length of service is likely to be used as pay progression criteria for management/professional employees.

Base pay review factors

Movement in market rates was likely to have been considered an important factor in general pay award decisions in 2011.

Shareholder views were likely to have been considered an important factor in general pay award decisions in 2011.

Ability to pay was not likely to have been considered an important factor in general pay award decisions in 2011.

Performance-related reward, incentive and recognition

Performance-related reward, incentive and recognition schemes are likely to be in operation.

Performance-related reward, incentive and recognition schemes are likely to be in operation.

HR outcomes

Employee relations climate

There is likely to be a very good employee relations climate.

Labour productivity

There is likely to be far better labour productivity in comparison with competitors.

It is likely that labour productivity has increased considerably in the past three years.

It is likely that labour productivity has decreased in the past three years.

Pay discontent It is not likely that discontent related to pay has been raised by employees in the past 12 months.

Business strategyOur results have shown that private sector firms

using different business strategies in their chosen

product/service sectors, have adopted markedly

different reward management practices.

REW

AR

D M

AN

AG

EM

EN

T 2012

7

2012

Table 2: Workforce characteristics and reward practices

In organisations with high proportions of female employees (in one or more employee category)

In organisations with high proportions of employees under 30 years of age (in one or more employee category)

In organisations with high proportions of graduates (in one or more employee category)

Reward practices

Pay levels (base pay plus performance pay)

The pay of the highest paid individuals is lower.*

The median pay is higher.*

The median pay is higher.*

The pay of the lowest paid individuals is higher.*

Base pay structures Pay spines or other service-related structures are likely to be used to manage base pay.*

Base pay progression Length of service is likely to be used as pay progression criteria.*

Individual performance, skills and employee potential/value/retention are likely to be used as pay progression criteria.*

Employee potential/value/retention is likely to be used as pay progression criteria rather than market rates.*

Base pay level determination

Collective bargaining is not likely to be used to determine base pay levels, rates, ranges and mid-levels.*

* in associated employee categories

Workforce characteristics and reward practicesIn organisations from all sectors there are

relationships between the composition of the

workforce and the reward practices employed.

cipd.co.uk/rewardm

anagementsurvey

8

REWARD MANAGEMENT

HR outcomesResults have also shown particular HR outcomes

are associated with certain reward management

practices.

Table 3: HR outcomes and reward practices

In organisations with a positive employee relations climate

In organisations with better labour productivity than competitors

In organisations that have seen labour productivity increase in the past three years

In organisations that have experienced difficulties retaining employees in the past 12 months

In organisations that have experienced discontent relating to pay in the past 12 months

Reward practices

Pay secrecy Pay arrangements are more transparent.

Pay levels (base pay plus performance pay)

The median pay for non-management employees is lower.

The median pay for non-management employees is lower.

The pay of the highest paid individuals in non-management grades is higher.

Base pay structures

Pay spines, narrow grades and job family pay structures are likely to be used.

Individualised and pay spine structures are likely to be used.

Base pay progression criteria

Competencies and skills are likely to be used as criteria for non-management grades.

Competencies are likely to be used as criteria for managers and professionals.

Employee potential/value/retention are likely to be used as criteria for managers and professionals.

Competencies are not likely to be used as criteria.

Performance-related reward, incentive and recognition

Performance-related reward, incentive and recognition schemes are likely to be operated.

Performance-related reward, incentive and recognition schemes are not likely to be operated.

REW

AR

D M

AN

AG

EM

EN

T 2012

9

2012

1 INTRODUCTION AND THEORETICAL BACKGROUND

HRM theory has identified two distinct approaches

to designing HR strategies and practices in

organisations. A best practice approach, which

suggests that there is one set of superior HR

practices that can be applied in virtually any

context to achieve competitive advantage and

deliver win-win for all parties. Researchers are yet

to agree on a list of best practices (Pfeffer, 1998).

The alternative approach, known as alignment

or best fit, proposes an alignment between an

organisations practices and its strategic purpose,

its external environment and its internal structure,

culture and resource capabilities (Shields, 2007). In

the reward management literature this alignment

model is reflected in the new pay and strategic

reward approaches that have held currency since

the 1990s. Following the logic of best-fit principles,

these approaches propose that by aligning reward

strategy and practice vertically with overall

organisational strategy and horizontally with

internal characteristics, organisations will benefit in

the shape of enhanced individual performance and

ultimately in positive organisational performance

outcomes whether they are quality and customer

service or productivity and profitability. In this report

we examine the relationship between business

strategy and a range of pay management practices.

To operationalise business strategy, this

report draws on Miles and Snows (1984)

market competition typologies: Defender and

Prospector (see Table 1). Defenders operate in

relatively stable markets for their products and/

or services; they offer a narrow range of products

and/or services and invest in maximising efficiency

in existing operations. Process engineering, cost

control and functional structures are characteristic

in Defender-oriented organisations. Prospectors

on the other hand are market leaders, continually

looking for product and market opportunities,

often in completely unrelated fields. The

emphasis on experimentation and innovation

means Prospectors may not always be efficient.

Prospector characteristics include a divisionalised

structure and attention to market research,

research and development.

cipd.co.uk/rewardm

anagementsurvey

10

REWARD MANAGEMENT

Table 4: Defender/Prospector descriptors (based on Miles and Snow, 1984)

Defender Prospector

Maintains a safe niche in a relatively stable product service domain.

Leads in innovations in its industry.

Offers a narrower set of products/services than its competitors.

Periodically redefines its products and services.

Achieves the best performance in a relatively narrow product/service market domain.

Believes in being the first-in the industry in development of new products.

Maintains a limited line of products/services. Accepts that not all efforts invested in developing new products will be profitable.

Responds rapidly to early signs of opportunities in the environment.

The prescriptive reward management literature

suggests that enhanced organisational performance

will result from achieving a good fit between

the business strategy and reward management

practices. If organisations were responding to

this prescription we would expect to see different

reward practices being operated by Defenders

and Prospectors. A Defender-type organisation

might operate clear grading structures, transparent

pay systems and hierarchy-based compensation

while a Prospector-type organisation would

take a more market-based approach to pay and

operate performance-based reward systems (Delery

and Doty, 1996, adapted by Marchington and

Wilkinson, 2008).

In terms of the horizontal alignment of reward

practices with the organisations internal

environment, the alignment or fit model

is predicated on the resource-based view of

human resources and the competitive potential

in an organisation aligning its practices with its

internal workforce capabilities and culture (Wright,

McMahan and McWilliams, 1994).

The strategic reward alignment proposition predicts

that aligning reward strategies and practices with

business strategies and workforce characteristics

will generate better HR outcomes. This report will

examine this proposition by testing the following

questions:

To what extent do private sector firms with

different business strategies adopt different

pay management practices?

To what extent do organisations (from all

sectors) with different workforce characteristics

adopt different pay management practices?

To what extent are different HR outcomes

associated with different pay management

practices?

The statistical analysis undertaken for this report provides a probability value, that is, the likelihood that the result was due to chance rather than a specific effect or phenomenon. For more information, please see the Background to the report section.

REW

AR

D M

AN

AG

EM

EN

T 2012

11

2012

2 BUSINESS STRATEGY AND PAY MANAGEMENT

In order to establish the business strategies of

private sector respondent organisations, we asked

respondents to indicate how their organisations

prefer to operate in their chosen product/service

markets using a list of descriptors including those in

Table 4. From this we developed two scales for the

extent of Defender or Prospector orientation, with 1

indicating a low orientation and 5 indicating a high

orientation. Combining the figures for individual

organisations gave us an average (mean) score for

our sample. Overall the mean scores for private

sector organisations in our survey were 2.93 (

0.72) for the Defender orientation and 3.57 ( 0.82)

for the Prospector orientation, indicating that the

Prospector strategic approach is more common in

our sample.

We analysed the responses to our survey questions

on reward management practices to establish if

there was a difference in the practices implemented

by Defenders and Prospectors. This is what we

would expect to find if organisations were applying

an alignment or best fit approach.

Overall, statistical analysis indicated that there

were specific areas of difference in reward practice

between Defenders and Prospectors.

Market positioning of reward All organisations have a choice, albeit a constrained

one, regarding where they position their reward

levels (base pay, performance pay and benefits with

a monetary value, for example a company car) in

the labour market compared with their competitors.

Some organisations may choose to position reward

lower than the median, in order to minimise labour

costs but with the potential cost of higher attrition

rates. Other organisations may choose to pay above

the median to attract and retain employees.

Figure 1 shows that organisations with a Prospector

business strategy are more likely than not to

position their pay in the top 10% of the market

(p

cipd.co.uk/rewardm

anagementsurvey

12

REWARD MANAGEMENT

Prospectors will be more likely to take decisions

relating to pay based on market information. It

would also suggest that Prospectors are choosing to

pay at the very top of the market to secure the best

talent in order to pursue innovation a decision

that may outweigh concern for cost control.

Base pay structuresOur Defender/Prospector data for the private

sector only show that organisations with different

business strategies take differing approaches to

the management of base pay. Figures 2 and 3

show the mean Prospector and Defender scores for

organisations using different base pay structures.

Prospectors are less likely to use an individualised

approach to base pay for management (p

REW

AR

D M

AN

AG

EM

EN

T 2012

13

2012Base pay progressionIn deciding how to progress employees along a

pay scale or through a pay grade, the 2012 Reward

Management survey found that 78.6% of all

organisations use individual performance as a basis

for pay progression while 56.8% use market rates.

Defenders are more likely to use length of service

as a criterion to progress pay for management and

professional staff (p

cipd.co.uk/rewardm

anagementsurvey

14

REWARD MANAGEMENT

These results are consistent with what we

would expect to find based on the Defender/

Prospector model. Defenders seem to be taking

a more cautious approach to progressing pay

favouring traditional but clear methods of moving

employees along pay scales with predictable costs

whereas Prospectors seem to be incentivising

employees to gain skills and/or competencies;

presumably those which suit their business needs.

Base pay review factorsWe now look at the factors private sector firms

considered most important in determining the

size of the organisations base pay award/review

in 2011. Our results showed that Defender

organisations were less likely to have considered

ability to pay one of the most important factors

(p

REW

AR

D M

AN

AG

EM

EN

T 2012

15

2012This very clear result is consistent with the

alignment model. The model anticipates

that different business strategies will lead to

distinct reward practices such as the linking of

performance (individual, team or organisational)

with pay that is variable and contingent upon

certain criteria.

Figure 7: Mean Defender scores and types of individual performance-related reward scheme for non-management employees

Individual performance-related reward schemes

3.11

2.85

3.16

2.95

2.88

3.00

3.07

2.93

Ad-hoc

Def

end

er s

core

s

Combination Piecerates

Salescomission

Meritpay

Individualbonuses

Othermonetary

Non-monetary

2.70

2.75

2.65

2.85

2.80

3.05

3.00

2.95

2.90

3.20

3.15

3.10

Figure 8: Mean Prospector scores and types of individual performance-related reward scheme for non-management employees

Individual performance-related reward schemes

3.60

3.68

3.33

3.67 3.68

3.53

3.49

3.73

Ad-hoc

Pro

spec

tor

sco

res

Combination Piecerates

Salescomission

Meritpay

Individualbonuses

Othermonetary

Non-monetary

3.20

3.10

3.30

3.60

3.50

3.40

3.80

3.11

cipd.co.uk/rewardm

anagementsurvey

16

REWARD MANAGEMENT

3 WORKFORCE CHARACTERISTICS AND PAY MANAGEMENT

The 2012 Reward Management survey asked respondents to indicate the proportions of women, employees under 30 years of age and graduates in management/professional and other grades. We used this data to examine the extent of horizontal alignment between workforce characteristics and reward practices.

Pay levelsWe asked respondents to provide the total

annual earnings (base pay plus performance pay)

for the lowest paid, highest paid and median

paid individual for each employee category

(management/professional employees and other

employees). Analysing the responses against each

of our three workforce characteristics (women,

young people and graduates) revealed a number

of interesting results.

We found a significant negative correlation

(p

REW

AR

D M

AN

AG

EM

EN

T 2012

17

2012Regardless of the specific reasons, we can deduce

that levels of total earnings in organisations are

related to workforce characteristics; horizontal

alignment is, to some extent, evident here.

Base pay structuresThe analysis of base pay structures and alignment

with workforce characteristics shows that there

is an association between how organisations

structure their pay grades and the proportion of

female managers they employ and also between

pay structures and the proportion of graduate

managers employed (p

cipd.co.uk/rewardm

anagementsurvey

18

REWARD MANAGEMENT

Figure 11: Pay level determination factors and proportion of female employees (non-management grades)

18.918.9

28.4

54.1

22.224.4

26.7

30.1

19.2

23.3

34.2

40.0

16.7

23.3

35.0

12.0

44.0

4.0

48.0

35.6

120%

% o

f re

spo

nd

ents

2140 4160

Proportion of female employees in non-management grades

6180 81100

Market rates (with JE) Market rates (without JE) Collective bargaining Ability to pay

0

20

10

40

30

60

50

Figure 10: Base pay structures and proportion of graduates (management/professional grades)

14.014.015.8

8.8

57.9

16.016.0

28.0

48.0

33.3

22.2

18.518.5

37.0

29.426.5 26.5 26.5

14.7

21.8

18.218.2

25.5

45.5

32.0

120%

% o

f re

spo

nd

ents

2140 4160

Proportion of graduates in management/professional grades

6180 81100

Pay spines/service related

Broadbanded Job family

Individual salaries

0

20

10

40

30

70

50

60

Narrow-graded

REW

AR

D M

AN

AG

EM

EN

T 2012

19

2012Pay level determinationThe analysis of factors used to determine

base pay levels and alignment with workforce

characteristics shows that there is a statistical

relationship between factors used to determine

levels of base pay and the proportion of women

employed (p

cipd.co.uk/rewardm

anagementsurvey

20

REWARD MANAGEMENT

Figure 13: Pay progression criteria and proportion of female employees (non-management grades)

also in frequent use. Conversely, market rates are

also commonly used as a pay progression criterion

in organisations with very low (120%) numbers

of women in non-management grades. Why

organisations with workforces skewed towards

one gender are more likely to use market rates is

not immediately obvious but may be due to their

operation in specific, competitive industries/sectors

(which are also gender segregated) leading them

to pay close attention to market rates in their

particular segment of the industry.

The use of length of service to progress pay is less

frequent amongst organisations with very low, and

low proportions of female managers/professionals,

than those with higher proportions, in line with

the findings for pay spine use in Figure 9. For non-

management grades, skills are a more common pay

progression criterion in organisations with low, and

very low numbers of women than competencies,

which are more frequently used than skills in

organisations with 41100% of female employees.

This result perhaps indicates that skills-based pay

may be more traditionally associated with male-

dominated trade/technical occupations, while

competencies (so-called soft skills) are perhaps

more associated with occupations which are more

gender balanced.

Figure 14 shows that use of individual performance

as pay progression criteria increases as the

proportion of those aged under 30 years in non-

management grades increases. Every organisation

in our sample with very high (81100%) numbers

of under 30s in non-management grades uses

individual performance to progress pay. Skills,

considerations of employee value/retention,

competencies and market rates are all more

common forms of pay progression criteria in

organisations with very high numbers of under

30s than those with fewer under 30s. Length of

service, although low across the board, is lowest in

this category. Here we have an indication that in

organisations where younger people dominate the

35.7

50.0

61.4

20.0

62.9

27.1

39.541.9

65.1

20.9

53.5

37.2

47.1

39.7

61.8

26.5

41.2

32.4

51.7

35.0

41.7

73.3

25.0

36.734.8

30.4

52.2

21.7

13.0

47.8

120%

% o

f re

spo

nd

ents

2140 4160

Proportion of female employees in non-management grades

6180 81100

Individual performance

Competencies Length of service

Market rates

Employee retention

0

40

20

10

30

60

50

90

70

80

Skills

REW

AR

D M

AN

AG

EM

EN

T 2012

21

2012

workforce, traditional service-related progression is

being replaced by pay contingent on performance,

skills and the value the individual employee brings

to the organisation.

Figure 15 similarly shows that in organisations with

very few graduates as a proportion of the non-

management workforce, individual performance is

less likely to be used as pay progression criterion.

In these organisations the market rates approach

is used just as much as individual performance.

Interestingly, the use of market rates is not as

great in organisations with high (6180%) and very

high (81100%) proportions of graduates where

assessment of employee potential/value/retention is

more likely to be used. The results overall indicate

that where non-management employees have

been university educated, individual performance,

potential and value are likely to outweigh market

rate considerations in decisions relating to

progressing base pay.

Figure 14: Pay progression criteria and proportion of employees under 30 (non-management grades)

37.840.0

60.0

26.7

53.3

28.9

46.244.6

66.2

16.9

52.3

27.7

54.3

45.7

65.7

22.9

45.7

40.0

50.0

22.2 22.2

33.333.3

77.8

60.0

80.0

100.0

10.0

70.0

60.0

120%

% o

f re

spo

nd

ents

2140 4160

Proportion of employees under 30 in non-management grades

6180 81100

Individual performance

Competencies Length of service

Market rates

Employee retention

0

40

20

10

30

60

50

90

100

70

80

Skills

cipd.co.uk/rewardm

anagementsurvey

22

REWARD MANAGEMENT

Figure 15: Pay progression criteria and proportion of graduates (non-management grades)

39.341.0

54.1

19.7

54.1

26.2

59.1

50.0

81.8

31.8

50.045.5

51.9 51.9

85.2

14.8

51.9

25.9

45.0

25.0

30.0

75.0

15.0

40.042.9

35.7

71.4

14.3

50.0

35.7

120%

% o

f re

spo

nd

ents

2140 4160

Proportion of graduates in non-management grades

6180 81100

Individual performance

Competencies Length of service

Market rates

Employee retention

0

40

20

10

30

60

50

90

70

80

Skills

REW

AR

D M

AN

AG

EM

EN

T 2012

23

2012

Employee relations climate Respondents were asked to rate their

organisations general employee relations (ER)

climate as: very good, good, somewhat strained

or very strained. Over half reported that employee

relations in their organisation were good, over

a quarter said relations were somewhat strained

while one in eight said the employee relations

climate was very good and roughly one in twenty

admitted it was very strained.

Our results show a direct relationship between

the extent of pay transparency and the quality of

the employee relations climate (p

cipd.co.uk/rewardm

anagementsurvey

24

REWARD MANAGEMENT

Figure 17: Employee relations climate and operation of performance-related reward

Figure 17 shows a clear association between

employee relations climate and operation of

performance-related reward, incentive and

recognition schemes (p

REW

AR

D M

AN

AG

EM

EN

T 2012

25

2012

70.066.766.7

23.3

43.3

36.740.4 40.4

70.6

12.8

61.5

40.4 41.0

45.0

66.0

12.0

60.0

38.0

13.3

26.7

46.7

26.7

13.3

46.7

Far better%

% o

f re

spo

nd

ents

Somewhat better Average

Labour productivity (compared with competitors)

Below average

Individual performance

Competencies

Skills Market rates

Employee retention

0

40

20

10

30

60

50

70

80

Length of service

Figure 18: Labour productivity (compared with competitors) and pay progression criteria for non-management grades

Figure 19: Labour productivity (compared with three years ago) and pay progression criteria for management/professional grades

54.5

83.1

64.9

14.3

53.2

70.1

43.4

37.4

85.9

13.1

57.6

50.5

42.2

32.8

84.4

12.5

56.3

50.0

41.7

54.2

83.3

16.7

75.0

66.7

Increased considerably

% o

f re

spo

nd

ents

Increased slightly Remained same

Labour productivity (compared with 3 years ago)

Decreased

Individual performance

Competencies

Market rates

Employee retention

0

40

20

10

30

60

50

70

80

90

100

Length of service

Skills

cipd.co.uk/rewardm

anagementsurvey

26

REWARD MANAGEMENT

Figure 20: Difficulties retaining employees in past 12 months and base pay structures (management/professional employees)

26.1

39.1

26.1

17.4

47.8

16.8

28.8

16.8

49.6

17.921.2

15.9

3.3

55.0

5.6

To a great extent

% o

f re

spo

nd

ents

To some extent Not at all

Retention difficulties in past 12 months

Narrow graded

Broad-bands

Job family

Pay spines

Individual salaries

0

20

10

40

30

50

60

Results also show that decreased labour productivity

is correlated with higher median total earnings for

non-management grades (p

REW

AR

D M

AN

AG

EM

EN

T 2012

27

2012Results show an association between employee

retention difficulties and base pay structure for

management/professional employees (p

cipd.co.uk/rewardm

anagementsurvey

28

REWARD MANAGEMENT

discontent more commonly use competencies

as base pay progression for both employee

groups, and skills as pay progression criteria for

managers. This group is also less likely to use

employee potential/value/retention as criteria for

progressing pay.

Extent of pay discontent is also associated

with whether or not organisations operate

performance-related reward, incentive and

recognition schemes (p

REW

AR

D M

AN

AG

EM

EN

T 2012

29

2012HR outcomes and business strategyResults show that Prospector firms (Figure 25) are

more likely than Defenders to have better labour

productivity than their competitors (p

cipd.co.uk/rewardm

anagementsurvey

30

REWARD MANAGEMENT

CONCLUSIONS AND IMPLICATIONS

A number of years ago we asked a sample

of UK-based multinational employers about

the influences they perceived on their reward

management strategy (Perkins, 2006). We were

intrigued to discover that while claiming that

respondent businesses prioritised shareholder

value creation and customer satisfaction, these

factors did not universally correlate with how they

set reward strategy: instead uncontrollable factors

such as economic climate and what competitors

were doing came to the fore (Brown and Perkins,

2007). So there were some strategic choices

being made in simple terms, to accommodate

environmental factors although not the ones

prescriptive reward management commentary

would have predicted.

The design of the present study has enabled us

to pursue the question of strategic alignment in

more granulated detail, teasing out the variety of

factors that appear to be influencing managerial

practice in 2012. The study has also illuminated

the likely consequences of competitive strategy,

workforce composition and reward practice in

terms of HR outcomes. What we have discovered

is that many UK-based organisations are choosing

actively to manage rewards, using base and

incentive pay in ways their corporate focus would

imply, influenced not only by sectoral big picture

factors, but also by the characteristics of the

workforces particular employers may assemble.

And there is clear evidence from what survey

respondents have told us suggesting that careful

reward management does make a difference

in some respects surprisingly so in terms

of creating a positive climate of relationships

between employer and employees, reducing

reward related disquiet, and retaining talent.

These findings offer HR practitioners an evidence

base from which to engage their corporate

managerial colleagues in a dialogue for the

purpose of systematically weighing choices of

how best to apply scarce resources matched to

an understanding not only of what the business

wishes to achieve, but also the circumstances

within which to organise proactively.

We structure our concluding comments around

the three questions posed in the introduction:

To what extent do private sector firms with

different business strategies adopt different

pay management practices?

To what extent do organisations (from all

sectors) with different workforce characteristics

adopt different pay management practices?

To what extent are different HR outcomes

associated with different pay management

practices?

Business strategyOur results have shown that private sector

firms using different business strategies in their

chosen product/service sectors have also adopted

markedly different reward management practices.

Firms pursuing Prospector-oriented business

REW

AR

D M

AN

AG

EM

EN

T 2012

31

2012strategies are taking a more competitive approach

to positioning reward levels in the market versus

competitors; they are more likely to approach

pay decisions prioritising market information as

opposed to affordability, and are more likely to

operate performance-related reward, incentive

and recognition schemes. Prospectors are also

using broadbanded pay structures for managers

and to progress base pay through pay structures,

and they favour using competencies and skills as

criteria rather than length of service.

In contrast, private sector firms pursuing a

Defender-oriented business strategy are taking

a more cautious approach to pay choices

based on the organisations ability to pay, and

shareholder views. Defenders are less likely to use

performance-related reward and are more likely

to use length of service as pay progression criteria

for management/professional grades.

Findings for Prospectors and Defenders in relation

to human resources outcomes would suggest that

their differing approaches to reward management

do lead to different HR outcomes. Prospector

firms are more likely to have a very good

employee relations climate; have far better labour

productivity in comparison with competitors; have

seen labour productivity increase considerably

in the past three years. Defender firms have

seen labour productivity decrease in this period.

Prospectors are also less likely to have experienced

discontent related to pay raised by employees in

the past 12 months.

Implications of these findingsFrom an academic perspective, our findings lend

support to the strategic alignment proposition.

We have found organisations choosing reward

management practices that fit with their business

strategies and, for Prospector-orientated firms at

least, there are indications that these choices may

have positive consequences for HR outcomes.

Implications for HR and reward management

practitioners centre on developing business

awareness, something the CIPD has long

advocated through its thinking performer

model. Our findings beg the question: how can

HR professionals make sound choices about

reward practices and their intended consequences

without fully understanding the strategic business

imperatives their organisation is pursuing?

Workforce characteristicsOur results indicate that organisations (from all

sectors including public and voluntary) differ in

their approach to reward management according

to different workforce characteristics.

Our results showed organisations with high

proportions of female employees have lower

highest total earnings (base pay plus performance

pay). Base pay is more likely to be structured in

organisations with more women managers, and

individualised salaries used less where there are

very low numbers of women. Pay spines are more

common where there are more female managers

and length of service is used more commonly

as a criterion to progress base pay. While we

have speculated that this may be due to large

numbers of women working in public services

where these pay practices are also common, it

was also interesting to see that organisations with

high proportions of women in non-management

grades were less likely to use collective bargaining

to determine base pay levels.

In organisations where the greater proportion

of employees are under 30 in non-management

grades, the higher the median salary is for these

employees. Organisations with high numbers of

younger workers in non-management grades

were more likely to use individual performance,

skills and employee potential/value/retention

to progress base pay and were less likely to use

length of service suggesting a shift away from

traditional forms of pay progression in the

younger workforce.

In organisations with high proportions of

graduates we found higher lowest and median

cipd.co.uk/rewardm

anagementsurvey

32

REWARD MANAGEMENT

total earnings virtually across the board. We

also found an approach to pay progression that

considered employee potential/value/retention as

key criteria rather than market rates.

So what do these results tell us? We find some

support for the alignment model it is clear that

the organisations in our sample were approaching

reward differently according to the different

characteristics of their workforce whether

they were related to gender, age or education

level. And once again there are implications for

practitioners here too. Some of these differing

reward approaches may not always be ethical or

indeed legally compliant. So, while practitioners

might be sensitive to the different reward needs

of different sections of the workforce, they also

need to be mindful of the legal implications of

their pay practices.

HR outcomes Our results imply that transparency of pay

arrangements in respondent organisations was

associated with more positive employee relations

climates. Organisations with good ER climates

were also more likely to operate performance-

related reward schemes but have lower median

total earnings for non-management grades.

For labour productivity, our findings show that

organisations with better productivity than

competitors are more likely to use competencies

and skills as pay progression criteria for non-

management grades. Organisations that have seen

labour productivity increase in the past three years

are also more likely to use competencies as pay

progression criteria for managers. However they

were also more likely to have lower median total

earnings for non-management grades.

Organisations that have experienced difficulties

retaining employees in the past 12 months are more

likely to use pay spines, narrow-grades and job

family base pay structures and have higher highest

total earnings (for non-management grades).

Organisations that have experienced discontent

relating to pay levels or pay systems in the past

12 months are more likely to use individualised

and pay spine base pay structures; more likely to

use employee potential/value/retention as pay

progression criteria for management/professional

employees; less likely to use competencies as pay

progression criteria for both employee categories

and less likely to operate performance-related

reward schemes.

In brief, our findings for the associations between

reward management practices and HR outcomes

very clearly indicate that the choices organisations

make about rewarding employees and the systems

and techniques they use to do so, are likely to

have significant consequences for organisational

HR outcomes. By way of conclusion, we now

highlight one key choice.

Our findings carry clear implications regarding the

use of performance-related reward, incentive and

recognition schemes. The results for HR outcomes

showed associations between increased usage of

such schemes and a) better employee relations

and b) reduced levels of expressed discontent

with pay. The debates around performance-

related reward have been deep and long running

and we do not intend to reiterate them here.

However, our results may offer some contribution,

suggesting that the use of performance-related

reward practices can have positive associations.

There must be some caveats about the wide

divergence of performance-related schemes being

operated, and statistical correlation between

factors should not be read as indicating causality.

But, despite these qualifications, our results do

point towards the likelihood of performance-

related reward practices having positive outcomes

in UK organisations.

REW

AR

D M

AN

AG

EM

EN

T 2012

33

2012

BACKGROUND TO THE REPORT

The data for this report were gathered as part of

the CIPD Reward Management survey in February

and March 2012. The survey was sent out to senior

reward/HR practitioners in the public, private and

voluntary sectors. The number of respondents was

455 in total.

The following tables provide a breakdown

of percentage of respondents by sector, by

ownership and by size of organisation (number of

employees).

Table 5 shows that 43.7% of respondents were

from private sector services; 15.8% from the public

sector; 20.7% from private sector manufacturing

and production and 12.3% from voluntary,

community and not-for-profit organisations.

This year, respondents were able to indicate

if their organisations operated in more than

one of the four traditional sectors; 6.6% of

respondents did so 63.3% of these operated

in both manufacturing/production and private

sector services; 13.3% operated in public services

and voluntary/community/not-for-profit; 10%

indicated they were representing an organisation

operating in public services and private sector

services; 6.7% were from manufacturing/

production and public services; and 6.7% said their

organisations operated in all four sectors.

In terms of ownership (Table 6), 58.9% provided

responses relating to mainly UK-owned

organisations; 5.9% to divisions of mainly UK-

owned organisations and 31.2% to divisions of

internationally-owned organisations.

Table 5: Survey respondents by sector (%)

Manufacturing and production

Private sector services

Public services Voluntary, community and not-for-profit

Multiple sectors

20.7 43.7 15.8 12.3 6.6

Table 6: Survey respondents by ownership (%)

Mainly UK-owned organisation

Division of mainly UK-owned organisation

Division of internationally-owned organisation

Did not respond

58.9 5.9 31.2 4.0

cipd.co.uk/rewardm

anagementsurvey

34

REWARD MANAGEMENT

Table 7 shows that 44.2% of respondents were

responding on behalf of small and medium

sized organisations (less than 250 employees);

47.9% for large organisations (between 250 and

9,999 employees); and 5.3% from very large

organisations (more than 10,000 employees).

The survey asked respondents about the

demographic breakdown of the employee groups

in their organisations. Table 8 shows the results

from those who provided responses.

Note on statistical analysis The analysis undertaken for this report involved

various statistical tests from which were derived

probability values, that is, the likelihood that a

result is merely due to chance. In these tests the

lower the probability, the more likely it is that the

result is due to a specific effect or phenomenon.

It is conventional to consider results statistically

significant if the probability of the result being

due to chance is less than 5%. If the test shows

that it is 95% certain that a result is not down to

chance, the probability is less than 5% (expressed

in the text as p

REW

AR

D M

AN

AG

EM

EN

T 2012

35

2012

REFERENCES AND FURTHER READING

BROWN, D. and PERKINS, S. J. (2007) Reward

strategy: making it happen. World at Work

Journal. Vol 16, No 2. pp 8293.

DELERY, J. E. and DOTY, D. H. (1996) Modes

of theorizing in strategic human resource

management: tests of universalistic, contingency,

and configurational performance predictions.

Academy of Management Journal. Vol 39, No 4.

pp 802835.

MARCHINGTON, M. and WILKINSON, A.

(2008) Human resource management at work.

London: Chartered Institute of Personnel and

Development.

MILES, R. E. and SNOW, C. C. (1984) Designing

strategic human resources systems. Organizational

Dynamics. Vol 13, No 1. pp 3652.

OFFICE FOR NATIONAL STATISTICS. (2011) Labour

force survey. Newport: ONS.

PERKINS, S. J. (2006) Research report: international

reward and recognition. London: Chartered

Institute of Personnel and Development.

PFEFFER, J. (1998) The human equation: building

profits by putting people first. Harvard, Mass:

Harvard Business School Press.

SHIELDS, J. (2007) Managing employee

performance and reward: concepts, practices,

strategies. Cambridge: Cambridge University Press.

WRIGHT, P. M., McMAHAN G. C. and McWILLIAMS,

A. (1994) Human resources and sustained

competitive advantage: a resource-based

perspective. International Journal of Human

Resource Management. Vol 5, No 2. pp 301326.

OTHER TITLES IN THIS SERIES

LEARNING AND TALENT DEVELOPMENTThe annual Learning and Talent Development survey provides valuable commentary on current and future issues and trends. It explores employer support for learning, talent management, employee skills, managing and evaluating coaching and training spend. The latest report is brought to you in partnership with Cornerstone OnDemand.

RESOURCING AND TALENT PLANNINGThe annual Resourcing and Talent Planning survey contains valuable information on current and emerging trends in people resourcing practice. The report provides benchmarking information to support employers on resourcing strategies, attracting and selecting candidates, labour turnover and employee retention. The latest report is brought to you in partnership with Hays.

ABSENCE MANAGEMENTThe annual Absence Management survey provides useful benchmarking data on absence levels, the cost and causes of absence, and how organisations are managing absence. The latest report is brought to you in partnership with Simplyhealth.

EMPLOYEE ATTITUDES TO PAYThe annual Employee Attitudes to Pay survey investigates employee attitudes and expectations towards pay and bonuses. This survey is carried out by YouGov and focuses on employees in the UK.

2012

Issu

ed: J

uly

2012

Ref

eren

ce: 5

909

C

hart

ered

Inst

itute

of

Pers

onne

l and

Dev

elop

men

t 20

12

Chartered Institute of Personnel and Development

151 The Broadway London SW19 1JQ UK

Tel: +44 (0)20 8612 6200 Fax: +44 (0)20 8612 6201

Email: cipd@cipd.co.uk Website: cipd.co.uk

Incorporated by Royal Charter Registered charity no.1079797