which way now for reward?

How reward processes and professionals are having to change across the UK private sector in the face of continuing economic challenges >>

The continuing evolution of reward in the recession

Which way now for

reward?

Contents

Executive summary

The business context

2

5

7

15

18

The reward agenda for 2012

The implications for reward

Appendix – further findings

Which way now for reward?

©2011 Hay Group. All rights reserved

222

Executive summary

In 2010, international Hay Group study The changing face of reward looked at reward trends in the light of the global downturn. It examined evolutions in reward at the global level and described the very clear direction that reward was taking at the time.

2

Since that report was published just over 18 months ago, the economic picture has become even more transient and unpredictable, which was almost unthinkable at the time. As a result, Hay Group has decided to look more closely at the specific changes to reward thinking and practice in the UK private sector. The global perspective was really insightful but we wanted to understand how these changes manifested themselves more locally. To achieve this we have gathered the views and opinions of over 65 UK companies (or UK divisions in global companies) covering a wide range of business sectors. The intent behind this has been to provide more understanding and insight on the reward challenges facing business today and to consider the impacts for us all as reward professionals.This study provides a number of insights under four main headings:

n the profile of reward

n reward strategy

n employer brand

n communication.

There is some degree of overlap between these four points and the findings from The changing face of reward research but the nature of the challenge and the pressure has evolved further in the last 18 months.

The profile of rewardReward continues to gain in prominence as a tool to help companies tackle difficult times. There have been some questions as to whether the emergence of ‘strategic reward’ was just a passing phase but it is looking like this focus and mindset is here to stay. Perhaps an initial area of focus due to the scale of the salary bill, senior management teams in the UK today are showing signs of really understanding the potential impact of a well designed reward scheme on their business. At a time when they need to do whatever they can to give their business a competitive edge in the market this is an opportunity that cannot be ignored.

Reward strategyIt might be a direct consequence of the point above but the number of companies looking to change their reward strategy in the coming months is quite exceptional. In many cases organisations are looking to evolve their

The economic picture has become even more transient and unpredictable, which was almost unthinkable at the time


strategy to help ensure a focus on performance but the broader issue of alignment is never far from the surface. As the markets have changed businesses have responded by adapting their operating models, changing organisation structure and identifying efficiency savings. In response, reward must now change to help ensure that it is aligned with the business direction and helping to encourage the right behaviours and embed the desired culture. Furthermore, many organisations have gone back to first principles in reward and thought long and hard about their underlying reward philosophy. This survey clearly shows that we can expect to see many more companies rethinking their reward strategies in 2012.

Employer brandAs companies have begun to develop new reward strategies they have worked hard to ensure internal alignment, however there are signs that a new level of complexity is creeping into thinking. The significance of reward as a communication tool within an organisation is well understood but there is an increasing amount of evidence to suggest that the impact extends externally. Companies are increasingly

having to think about the link between reward and employer brand which has consequently reappeared on many HR agendas for the coming year. The stated intent is to develop approaches which are consistent with and help to add value to an organisation’s employer brand, an area of neglect for many during the recent financial crisis. There is an increasing amount of research available which describes the link between the employer and consumer brands so there may well be some commercial benefits available to companies which achieve this balance.

CommunicationThe significance of reward communication, particularly during a recession is well documented in many studies in recent years. It is well accepted that effective reward communication will help in many areas including enhancing employee engagement, focusing individuals on their performance (and that of their organisation) and help to retain key talent. Despite this knowledge it can be seen that it is still an area of real concern that many organisations are struggling to get to grips with.

Clients are cautious and holding back on committing to bigger projects

Survey respondent



44

About the research

Our findings come from over 65 UK companies across a wide range of sectors and from medium sized businesses to multinationals.

■ Manufacturing

■ FMCG

■ Retail/sales organisation

■ Energy

■ Financial services

■ Chemical and life sciences

■ Technology, media and telecoms

■ Professional/business services

■ Other

15

15

14

83

3

12

15

15

■ 1–1,000

■ 1,001–10,000

■ 10,001 - 100,000

■ Greater than 100,000

45

17

30

8

■ Less than £50m

■ £50m - £500m

■ £500m - £5bn

■ Greater than £5bn

53

7

1822

Break down of total number of participants

Total number of employees Annual revenue

All values shown as a percentage


Annual revenue

Combined with massive government spending cuts, the global recession in developed markets has kept up the pressure on the private sector. Companies are finding mature markets stagnant and are looking for opportunities in developing countries, but their performance is affected by a weak sterling. Extreme weather and climate events have made the situation even tougher for certain sectors, raising the costs of raw materials and disrupting international supply chains.

In sum, the companies we spoke to tell us that their world is now much more

competitive. And while cautious customers and cost pressures are making them have to push much harder, they feel that at the same time, legislation and regulation are dragging them back.

Despite all this, companies tell us they are holding their own. In a sign that recent years have toughened businesses against recession, we did not find the same fear of failure that we saw two to three years ago. The attitudes of the HR people we spoke to suggest that while their companies still face renewed challenges, the pain they have gone through so far has better prepared them to face the future.

The business context

Trying timesBut businesses are better prepared

Figures are holding up, but work is instructed for short term rather than longer term. So looking forward diaries are committed for up to several months in advance rather than one to two years in advance

HR manager, professional services sector



66

There’s no single formula for tackling today’s conditions, no blueprints for success and no right answers. Companies are using many different strategies beyond the obvious lever of cost reduction. Cost-cutting or in many cases now, cost management remains a key focus and they are thinking up innovative ways to find savings to pass on to customers, for example identifying cheaper, alternative energy sources which help them keep product prices down.

Some are still looking at their organisation structure: re-evaluating operating models to become leaner operations, or using acquisitions to buy in products or expertise they feel will help them through the downturn. Joint ventures are also reappearing as organisations look at their markets and their opportunities in different ways to previously.

Others are continuing to adjust their business strategy and many are refocusing to chase profit rather than volume. Often, the result is a major change in direction which forces them to re-think their priorities for investment and expansion. Quality has become an increasing focus too, as companies build on differentiating their brands in their respective markets to boost sales and market share.

Despite all of the different strategies highlighted above there is a clear sign that this downturn does not automatically stop investment in people, we have found many organisations actively working on management capability and quality in a bid to improve and focus employee performance and contribution.

How UK companies are rising to the challengeTheir diverse strategies include investing in people

Tight budget control, exploring new business opportunities and people development to meet those challengesGroup compensation and benefits manager,

transportation sector


1 Unprecedented changeIn the past, reward strategy was not particularly dynamic. It was set, implemented, and not changed too much, or too often as stability was valued. So when nearly two-thirds of our 2011 respondents say they are planning change in the coming year and nearly half say that change is ‘significant’, it’s clear that reward is on the move. What has caused this surprising level of change?

The chart below shows that cost reduction – the obvious driver in a downturn – plays only a relatively small part in organisations’ plans to change reward. Employee engagement and performance, retention and linkage to strategy are showing to have equal or greater importance. It’s clear from our findings that behind the surge in desire to review reward is a recognition that it has a mission-critical role to play.

The reward agenda for 2012

Four strong themes emerged from our study, the most striking of which is the percentage of organisations planning to change their reward strategy. The research also highlights that reward is continuing to climb the board agenda and companies are rediscovering the importance of their ‘employer brand’. Good reward communication, though, is key to ROI.

■ Yes

■ No

64

36

Do you plan to review or change your reward strategy in the next 12 months?


Now 12 Months

Managing costs 15 15

Managing and reducing risk 6 9

Link the business strategy 16 18

Return on investment 7 7

Employee engagement 17 17

Employee performance 15 13

Market/sector trends (data driven) 9 6

Retaining talent 15 15

What factors are the primary drivers in your decision making around reward strategy and design for now and in 12 months?



8 Which way now for reward?

Despite the relatively low priority given to cost as a driver of change, research undertaken by Hay Group last year highlighted the increasing use of variable pay to help manage reward costs1.

However, to illustrate the potential need for change the latest research shows that nearly 40 per cent of organisations do not feel the links between performance and pay are appropriate. Furthermore, just over 40 per cent felt that their performance management process was not credible as an underpinning to reward decisions.

1 Source: Hay Group’s research Work on your winning strategy

■ Yes

■ No

62

38

■ Yes

■ No

57

43

Do you think the links between performance and pay in your business is appropriate at this time?

Do you feel your organisation’s performance management process is credible as an underpinning for reward (bonus/base pay progression) decision making process?


■ None

■ Minor enhancements only

■ Some focused developments

■ Signi�cant review/package development

43

17

38

2

What major initiatives have you taken recently or are planning to take in reward management?

Which way now for reward?Which way now for reward?

2 The increasing profile of reward

It’s not unusual to hear a claim that reward is ‘much more than a HR issue’ as many HR professionals have been arguing this case for some time. What’s particularly striking about our findings in this survey is the degree to which they now back up this statement. The idea that reward sits in a specialist HR silo is history. As we’ve seen with their plans to change reward in the coming year, organisations have clearly woken up to its strategic value as a lever that can be linked to employee engagement and performance.

HR professionals are expected to apply reward more strategically too. As repetitive tasks are centralised or even outsourced, their employers expect them to take a more strategic ‘business partner’ approach, mirroring other parts of the HR function.

One of our respondents told a story of how a newly appointed head of reward was impressed with his new team’s technical skills but felt he would still have to replace half of them. The problem was that he needed people who could manage relationships as well as spreadsheets, and talk at a high level about how reward can help underpin change. This also highlights the importance of communication, a theme we develop further in this report.

Our global 2010 study The changing face of reward showed reward climbing the agenda of boards and executive teams and our latest UK findings reinforce this trend. Cost is one of a number of drivers, as we’ve seen – and it is prompting closer interactions between the head of reward, the top team and the remuneration committee.

The power of reward to drive performance, rather than just control costs, is being increasingly recognised by executives looking to get a better return on their people investment. Nearly 70 per cent of the people we surveyed saw a link between their reward programme and engagement.

■ Yes

■ No

■ Don’t know

77

8

15

Do you believe that the management of reward is changing?


“ Reward is no longer just an ‘HR issue’. Reward capabilities and understanding need to sit outside of reward and the reward function itself needs to be challenged by the business to give support that is more than just running the annual reward processes” Group reward manager, retail sector

“ The visibility of reward is increasing, the HRD is now on the board and reward is now high on their agenda…New initiatives are now tested at the highest level” International reward manager, retail sector



1010

This increased focus on the cost – and the power – of reward is making it more visible too, to both employees and at board level. And the recession has brought about a greater governance and scrutiny on reward for all.

In hard times, companies have woken up to the extent of their reward costs – and are now waking up to the value of their human capital and the difference this can make to the performance and success of their organisation.

As a consequence, they are aligning reward strategy more clearly to the wider strategy of the business. Reward and HR professionals are asking themselves: What does the business want to achieve? How will it attract the right people? And how will it engage staff to come with them on the journey? For many, this has meant going back to first principles on reward and thinking hard about their overall reward philosophy and employer brand.

This need to align reward with strategy is affecting those who work in the field. As reward becomes more visible and more mission-critical, reward professionals need to be able to do more than design and roll out pay and benefits packages. They need to be able to support the leadership team in ensuring that reward is differentiated, fit for purpose and delivering ROI.

Senior management can see the value in a reward strategy and its use in motivating and driving performance of employees as well as creating engagement

■ Yes – there is a signi�cant link

■ Yes – there is some relation between the two

■ No – the two are not really linked

■ No – it’s currently a de-motivating factor

■ No – don’t need it, reward is ‘threshold’

■ No – not at all

13

56

23

00

8

Do you think your organisation’s reward programme drives employee engagement?


Survey respondent


3 The return of the ‘employer brand’The concept of ‘employer brand’ got lost a little during the growth years. When the financial news was generally good and people felt well paid and secure, employers found that they did not have to work too hard to burnish their image with existing or potential employees.

However in a world of redundancies, pay freezes and bonus cuts, feelings of security and trust can melt away. This leaves employers with a tough task to maintain motivation and retain their top talent and to act in a way which is consistent with their wider consumer brand and market image.

This study shows that the issue of employer brand is firmly back on the agenda, although there are some differences of opinion over what it actually is.

“ Brand is the cornerstone of the employer identity and the values underpin the reward strategy”

Anonymous

“ It is an important element in the attraction, retention and motivation of individuals”

Group compensation and benefits manager, transportation sector

“ We explicitly link aspects of the brand to performance management which links to reward outcomes”

Anonymous

“ We have commissioned an external review of our market positioning and employer value proposition and this will inform the decisions we make in our reward strategy review”

Group talent and reward director, FMCG sector

For some of our respondents, employer brand plays a clear role in reward:



1212

“ This is something we are working on currently - no strong brand at moment”

Head of global pay, technology, media and telecoms sector

“ Employer brand is still developing. We have remained true to it, but need to build its profile”

Group reward manager, business services sector

“ Awareness is not as strong as it should be, need for greater management of the brand”

Group reward director, FMCG sector

“ We are not a high street name, but we need to be better known within the industry sector for our innovation and exciting technologies to attract the best staff”

HR manager, remuneration and benefits, manufacturing sector

While for others, employer brand is nonetheless on the ‘to do’ list:

Overall, while most companies feel they have kept true to their employer brand in the downturn, many are aware they could do more to promote it to existing and potential employees.

The overall philosophy and strategy will stay the same but we will shift the emphasis in how it is delivered. We have to do this to ensure that we sustain an alignment with the business strategy

Head of reward, FMCG sector


4 Communication, communication, communication

On the whole, our respondents feel their reward strategies are effective and well connected with the needs of the business. The problem is that employees are still not getting the message. As a result, companies are potentially missing out on the engagement benefits of reward and the need to improve reward communication is a key theme in this study. One of the companies we spoke to had even hired a communications professional to work with HR full-time and the trend to import this type of expertise into HR is becoming more pronounced.

It’s not just that employees perform better when they know what’s expected of them and how well they will be rewarded. When companies can’t offer more pay, a positive message about ‘total reward’ – the full scope of pay and benefits to which employees are entitled – is essential to motivation. It can make a significant impact on engagement, recruitment and retention and on the performance focus of employees. This is crucial at a time when focusing employees performance in the right way and keeping top talent are front-of-mind concerns for many companies.

If you could change one thing in your organisation to make your reward strategy more effective – what would it be?

Hay Group’s Stuart Hyland, who commissioned this study, stresses the importance of communication: “There’s no point having a Ferrari if you don’t have the keys. The best total reward package in the market will not achieve its potential if employees are not fully aware of it. In every client engagement I’ve worked on in the last two years, better communication has emerged as one the strongest recommendations. It’s critical to getting good ROI on reward programmes and essential to managing talent.”

Good communication can also help employers offer more cost effective rewards. Our research into the 2010 World’s Most Admired Companies2 show that one of the things they do differently is to communicate reward well to employees. This is thought to be one of the reasons why these top companies pay on average 5 percent less than their competitors.

“ Better communication and understanding of business targets and measures”

Group reward director, FMCG sector

“ Investment in communication networks” Group reward manager, retail sector

“ Improve communication of total reward, rather than cash reward”

Group compensation and benefits manager, transportation sector

2 Hay Group has partnered with FORTUNE® magazine to identify and rank The World’s Most Admired Companies® – and to reveal the business practices that earn these companies their status



1414

“ Need to have further upskilling of HR and managers to really help explain the reward approach”

Anonymous

“ We are reasonably effective but need to get managers to take more accountability rather than seeing this as a HR task”

Reward manager, technology, media and telecommunications sector

“ The use of segmented communications to different communities (e.g. taking into account earnings) - have been well received and enables succinct messages to be delivered”

Anonymous

Communications need to go both ways, too. The reward managers we spoke to wanted a clearer understanding of what employees care about most, so they can develop metrics on the value they are getting for reward spend.

So how should organisations communicate? Our findings suggest that a balance must be struck between individual and group-wide communications. One thing is clear: it’s certainly not enough to tell employees that ‘it’s all on the intranet’. There is a view amongst our respondents that line managers should play a more active role in explaining and promoting reward, rather than leaving it to HR. Tailoring communications to different groups rather than relying on single messages is also found to be effective.

If you could change one thing in your organisation to make your reward strategy more effective – what would it be?


The ongoing evolution of reward The findings of this latest piece of research all point to one thing – what has been a challenging time for business has led to a challenging time for reward.

Reward practices have had and are having to continue to evolve to respond to new business approaches. The change that was highlighted in the The changing face of reward in 2010 has accelerated and looks set to continue for the foreseeable future. It is notable that much of the change is significant and involves redefinition of the overarching reward strategy and in some cases, the redefinition of the fundamental reward principles in a business, its reward philosophy. An interesting reflection on the extent to which many businesses have had to reinvent themselves during the recession.

Faced with all of this change, it is worth remembering how challenging the process of developing an appropriate reward strategy is becoming. The increasing complexity comes from the need to integrate with an ever-expanding number of related issues including:

n business strategy

n HR strategy (and related HR processes talent, succession etc)

n employee engagement

n desired behaviours

n desired culture

n employer brand

n consumer brand.

It is debateable as to whether a reward strategy can really integrate all of the points above (although they are all related) and still deliver the basics. If this is the case it is important for an organisation to determine where the strategy is to be directed and the priorities it must address. To attempt to cover everything might render the reward strategy impotent and consequently it could fail to deliver the real value and impact an organisation needs.

The implications for reward




Employer brand – a focus for 2012 and beyond?The concept of employer brand is clearly evolving to meet the challenges of business today and is re-emerging as a concern for organisations. The historical focus of employer brand on the quality and imagery on a recruitment advert is dying away to be replaced with something much broader and linked to an organisations’ wider image and reputation. In developing a reward strategy today it is perhaps no longer enough to focus on internal business alignment alone. There is a need to consider external dimensions as well and to ensure the reward strategy is sending out appropriate and consistent messages to potential employees and customers as well.

In the search for competitive advantage, a positive employer brand presents an opportunity that companies are realising cannot be ignored. The over-riding ambition is to create a positive and sustainable brand which not only helps to attract talent but also is supportive of the consumer brand. In addition, creating a positive impression in the minds of employees and the consumers can present

additional opportunities including providing a certain degree of operational freedom to the management team.

Communication – the holy grail for rewardIt is clear that a reward strategy can only be effective when supported by an effective communications approach. There are many instances of organisations who have invested significant amounts in developing new reward approaches only to have them fail to deliver significant positive impact on employees due to a failure in communication. Effective reward and effective communications go hand in hand and both are a core component of employee engagement. Many in HR and reward have attempted to develop their own communications with varying degrees of success, but today we are seeing more acknowledgement of the need for professional support. Companies are asking communications and marketing specialists to devote time to working alongside HR to produce more professional and impactful messages which are distributed through an increasing range of channels.


The ongoing evolution of reward professionalsWith the evolution of reward in recent years, reward professionals also have to evolve to ensure they are able to continue to add value to their organisations. Technical expertise is increasingly a threshold competency but what really differentiates the best from the rest are their abilities to go beyond their technical skill set and address broader challenges including increasing demands:

n to get close to the business through a partnership approach

n to understand the business and the performance that is required from individuals so they can develop appropriate variable pay systems

n to understand a wide range of other HR practices beyond payroll including talent management, development, succession planning and recruitment

n to have conversations on business issues with senior management with a reward perspective

n to become communications and marketing specialists

n to become a market analyst and to understand how the organisation is perceived externally.

The best and most sought after reward professionals have perhaps always been able to work in this way. The difference is that today, organisations are looking for a far greater number of people with this capability and the demands are becoming the norm rather than the exception.

Companies expect reward professionals to act as a business partner, technical skills on their own are not enough. This means we are seeing a change in the type of reward managers out there (particually at senior levels)

Head of reward, FMCG sector



18

As well as uncovering four key trends our research also asked specific questions about pay, benefits and benchmarking practices. Our insights are summarised in the charts on the pages that follow.

Appendix – further findings

■ Annual bonus

■ Spot recognition scheme

■ Share options

■ Long-term incentives

33 42

178

■ Annual bonus


■ Share options


2347

12

18

What elements of variable pay does your organisation provide to different groups of staff?


Executives Senior management

Strong management development programmes. Increased investment in market data for salaries across the global business. Cost management integral to business strategies and practices for all parts of the business

Group reward manager, retail sector


■ Annual bonus


■ Share options


8

56

10

25

■ Annual bonus


■ Share options


6

57

2

35

What elements of variable pay does your organisation provide to different groups of staff?

Management Staff

■ Yes

■ No

20

80

Is this likely to change in the next 12 months?




20

Benchmarking and competitiveness

0 5 10 15 20 25 30 35 40

n 12 months n Now

Percentage

When reviewing salary and benefits, against which other organisations do you currently compare your packages? Do you see this changing in the next 12 months?

Functional or specialist market(s)

Peer group of named companies

Wider UK market

Specific sector

No comparison made

In 2010 the focus was on efficiency savings – there was a review on how to make the most of the money available – now the balance has shifted toward communication and, it is hoped, engagement

European reward manager, FMCG sector


■ No consistent policy

■ Lower quartile

■ Median

■ Upper quartile

■ Other

76

53

88


■ Lower quartile

■ Median

■ Upper quartile

■ Other

69

33

817


■ Lower quartile

■ Median

■ Upper quartile

■ Other

56

63

9

26


What is your policy for competitiveness of your pay, benefits and total remuneration against your comparator group?

Pay Benefits Total remuneration




■ Yes

■ No

5941

■ Yes

■ No

5149

Do you vary salary and benefit packages for specific functional groups?


Salary Benefits

Functional and regional variation

The general climate of uncertainty makes planning a challenge, but opportunity out of adversity underpins our approach and we have seen the businesses grow in the past two years with increased numbers of employees too

HR manager, manufacturing sector


■ Yes

■ No

31

69

■ South East including London

■ South West

■ Midlands

■ North

■ Scotland

■ Wales

■ Other

30

9

17

17

9

17

1

Do you vary salary and benefit practices for specific regions within the UK?

If yes, which regions?


Maintain focus on quality. Increase communication on value add proposition, work more closely with intermediaries and grow market share

Head of reward, business services sector




Reward is becoming more focused on delivering commercial benefits rather than being a rule book to stop managers spending money

Reward manager, FMCG sector


For more information please contact:

Stuart Hylandt +44 (0) 20 7856 7471e [email protected]

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