Strategic rewards: maximising the value of reward programmes*
By Watsonwyatt who can be contacted at www.watsonwyatt.com
The 2002/2003 Strategic Rewards survey provides a blueprint for companies seeking to balance their short-term goals against long-term concerns. From incentive pay to global compensation philosophies to customisation of rewards, the study identifies what works — and what doesn’t — when it comes to maximizing the return on investments in rewards. As the economy struggles to regain equilibrium, successful companies will use this information to invest in strategies that mitigate short-term cost concerns while ensuring long-term competitiveness.
2. Survey report
Companies have become more aggressive about cost cutting in the past year. While they have tried to avoid reducing their human resource investments, continued economic uncertainty has forced them to move from cost containment to cost reduction.
The types of cost-cutting measures taken by companies vary according to their financial performance. With few exceptions, poor-performing companies are more likely to implement a range of cost cutting measures. For example, poor-performing companies are much more likely to reduce staff, eliminate or severely cut bonuses and reduce salary-increase budgets.
When high-performing companies do use some of the same cost-cutting tactics adopted by poor-performing companies, they are more likely to consider them a success. More than half (58 percent) of high-performing companies said their staff reductions were very effective in cutting costs, compared with 40 percent of low-performing companies. Similarly, reducing salary increase budgets was judged more effective by high-performing companies (36 percent) than by low-performing companies (14 percent). The timing and success of these actions may be contributing steps in achieving financial success during challenging business environments.
3. Attraction and retention
Companies continue to have difficulty attracting and retaining critical-skill employees, although the challenge is not as great now as it has been for the past two years. Forty-five percent of companies reported at least moderate difficulty attracting critical-skill employees, compared with only 8 percent that reported at least moderate difficulty attracting noncritical-skill workers.
Retention challenges have also continued to ease from the highs reported in 2000. However, the gap between critical and noncritical-skill employees remains, with 26 percent of firms reporting at least moderate difficulty retaining critical-skill employees vs. only 12 percent for noncritical-skill employees.
4. Merit increases
Merit increase budgets declined for 2002 (from 4.1 percent to 3.4 percent), with 9 percent of employers reporting no increases at all. For those companies that are providing increases, the distinctions in pay increases for top-performing employees may not be large enough to truly differentiate pay based on performance.
Looking ahead, companies are projecting growth in their merit-increase budgets for 2003 to 3.8 percent. One explanation is that, after several cycles of conservative salary increases, companies believe they need to make more significant adjustments to salaries or risk attraction and retention problems.
5. What drives top performing employees?
Employers and top-performing employees alike agree that annual incentives are powerful programmes. Top performing employees said annual incentives are more effective than base salary or stock-based, long-term incentives in five key areas: motivating employees to improve their companies’ financial performance; aligning employees’ goals with those of the business; aligning employees’ actions with company culture; making the company an attractive place to work; and focusing attention on cost control.
If a company is facing financial difficulties and needs to cut costs, but does not want to alienate its top performers, what should it eliminate first? Reflecting declining value perceptions in a weak economy, just under half (47 percent) of top-performing employees say they would prefer to lose their stock based rewards first. Twenty-nine percent would opt first to give up skill and career development opportunities. Which programmes should be left untouched? Only 2 percent of top-performing employees said companies should cut their benefits or reduce their salaries/bonuses.
6. Why do top performers leave?
(Top reasons in rank order)
A. Dissatisfaction with pay
B. Dissatisfaction with management
C. Inadequate promotion opportunities
D. Inadequate opportunities to develop skills
E. Conflict with managers (tie)
F. Uncomfortable with work environment (tie)
7. Total rewards
Our findings show that it is important to consider multiple reward vehicles in a total reward strategy to obtain the optimum mix of rewards to achieve alignment with business strategies and provide value to employees at the right cost. Thus, in considering which reward programmes to implement, companies need to consider and balance the following, as the optimal mix includes both monetary and non-monetary rewards.
A. Monetary rewards
Similar to the effectiveness of annual incentives, group incentives are viewed by survey participants as the best monetary reward across the board for achieving alignment and cost management. Customised pay is meaningful to employees, but few companies are offering it (13 percent). Stock options ranked second best in terms of cost management, but this assessment may change if proposed legislation related to stock option accounting is enacted.
B. Non-monetary rewards
When it comes to non-monetary rewards and retirement benefits, there is some overlap among the rewards employees value and those that encourage alignment and help manage costs. Flexible work schedules, advancement opportunities and job customisation are effective in all three areas, making each especially important to lower-performing companies.
8. Customisation of rewards
High-performing companies may be customising rewards more often than low-performing companies, but both groups are missing significant opportunities for customisation. Among surveyed organisations, those companies that provide Customised rewards have a median three-year TRS nearly double those of organisations that do not customise (9.4 percent vs. 4.9 percent).
High-performing companies are also much more likely to offer higher variable pay for critical-skill employees (13 percent vs. 2 percent), management (28 percent vs. 13 percent) and top performers (11 percent vs. 2 percent). While the number of companies customising rewards is still very low among all companies, high-performing companies are making more pay distinctions based on performance compared with low-performing companies.
9. Performance measures
Both high-performing and low-performing companies report using the same types of measures to determine short-term and long-term incentive awards. The four most prevalent measures employed are revenues, sales growth, operating income and management by objectives (MBO). The high prevalence of these four measures indicates that most companies try to strike a balance between revenues and profits in setting bonus levels.
The best-performing companies do not simply have more or better-funded human capital programmes. Instead, they have different human capital portfolios and strategies than low performing companies. High performers tend to use certain rewards strategies, such as annual and group incentives, customisation and globalization, that are designed to optimise performance results against money spent. In addition, they do not use — or use in a very different manner — other strategies, such as adjusting short-term incentive performance goals and metrics in response to economic uncertainty. There appears to be a payoff, as they also report much more effective short-term incentive programmes.
Specific best practices include:
>> Focusing head count reductions to noncritical-skill positions
>> Recruiting and retaining critical-skill employees in order to better position the human capital portfolio for an improving business environment
>> Strengthening annual incentives to improve line of sight and differentiate pay based on performance
>> Responding to accounting and tax changes to adjust total reward portfolios to achieve higher levels of effectiveness
>> Globally aligning total rewards programmes for consistent support of business strategy
Customising reward programmes to capitalise on demographic preferences
To help their companies use human capital investments to improve financial results, HR executives should compare their rewards practices with those of the best-performing companies. This may mean adopting new rewards strategies and eliminating others, but by putting the right practices in place that direct the right rewards to the right people, organisations can position themselves to compete over the long term.
* Reprinted by permission of Watsonwyatt
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