Changing the paradigm of pay

38 Kanban Board J Robenstone 2740 min

The financial sector is under the blowtorch. Competition is increasing, regulators are paying closer attention, the community is critical. One major repercussion is companies are being forced to rethink their traditional approach to pay and performance.

The role of reward - traditionally fixed salary and bonuses - is changing in Australia and globally. Companies and shareholders are more sceptical than ever about whether the right people are being paid the right amounts for the right performance to deliver the right outcomes.

"Company success will be questioned if it comes at the detriment of any one stakeholder group.”

While the detailed future of reward is still uncertain, there are some clear trends emerging.

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Multiple stakeholders

Shareholders, organisations and employees have always had an interest in reward but the global financial crisis and, more recently, the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have greatly raised the prominence of pay and bonuses in the community.

Reward is at the forefront of regulators’ interests and splashed across the media. Customers are demanding greater transparency in relation to conflicts, expect greater customer service and unbiased advice and are wanting to know the basis under which their service provider’s employees are paid.

Critically, company success will be questioned if it comes at the detriment of any one stakeholder group.

To manage multiple stakeholders and views of performance, non-financial risks are increasingly recognised as a key input into performance and pay decisions. Wellbeing, culture, reputation and misconduct all have a financial impact in the short and/or longer term. Companies now recognise they need to identify, understand and manage these impacts.

Changing reward structures

In response, we are witnessing a trend away from the traditional pay and bonus style of reward structures. Models are evolving to encompass recognition (for employee effort, performance and service), performance (at an individual, team and group level), learning and growth, workplace environment and culture to enhance the employee experience and engagement.

Bonuses are being removed, reduced or changed from being largely individual performance-focused to team- and organisational performance-focused - with less financial focus.

Research backs the benefits of this model. The value of intrinsic motivators and social rewards over extrinsic (that is, financial) motivators has been consistently proven. For example, Cable and Freek found intrinsic motivators are more effective for innovation and creativity. This is backed by neuroscience, which demonstrates that on a biological level, social rewards (such as praise and group inclusion) better promote sustained productive effort over financial incentives.

Evidence also shows incentive payments based on individual and financial performance result in the prioritisation of these factors above all else. Shaw and Mitra found incentives which focus on individual outcomes promote individualistic (versus collaborative and team-based) cultures.

The case of Wells Fargo Bank demonstrated the link between incentives and decision making. Employees prioritised the achievement of their prescriptive, volume-based key performance indicators (KPIs) to the neglect of other factors (such as customer value). Employees made decisions they otherwise classified as unethical to achieve their KPIs.

Broadly speaking, companies recognise the value of collaboration, innovation, creativity and ethics, and are starting to move away from traditional reward models. While ANZ has been an early adopter locally, we have also seen this trend emerge globally with the likes of ING, Lloyds, and Royal Bank of Scotland Group.

However, one size does not fit all and companies are considering if pay arrangements should be consistent or customised for particular roles and teams across the organisation. While there is no one right answer, we can expect companies to now regularly monitor and review, redesign and implement reward arrangements to ensure they best support the organisation’s purpose, strategy and culture.

Real-time recognition

One element receiving a significant increase in focus is recognition. Real-time recognition creates a simple link between action and reward.

A study by SHRM and Globoforce found companies with a values-based recognition program see a 90 per cent positive impact on employee engagement. Employee engagement is a key indicator of employee culture, which is in turn a key input into company success.

According to a study by the O.C. Tanner Institute, both leaders (48 per cent) and employees (57 per cent) say “making employees feel valued and appreciated” is the aspect of workplace culture most important to them. The survey found appreciation and recognition are key inputs to creating a great culture in the workplace.

A well-run employee recognition program contributes to a great workplace culture but also impacts the bottom line and improves business results in some very specific ways including attracting talent, engagement, retention, wellbeing, performance and innovation.

However, recognition is not one-dimensional. Companies benefit from having multi-faceted recognition programs that connect their people with each other, their leaders and organisational values and purpose in a meaningful way.

The study identified three core areas of recognition proven to have the most profound impact:

  1. Celebrating careers - celebrate loyalty and contribution at key milestones of tenure; not just long service recognition.
  2. Rewarding results - formally recognise ‘above and beyond performance’ that accompanies big wins, exceptional project completions and exceptional positive behaviour.
  3. Encouraging effort - informally recognise for ongoing effort and progress.

Findings from O.C. Tanner indicate while a majority of organisations have one of the three forms of recognition, only 37 per cent have all three.

Moreover, the study indicated the resulting degree of organisational ‘pride’, retention, health and wellbeing (among other engagement indicators) of these recognition programs are significantly higher when companies diversify programs to include all three areas of recognition.

The difference in impact between one and three programs can range from 27 per cent up to 45 per cent (depending on the indicator).

The impact of this approach on retention in particular can be significant. Glassdoor reports 53 per cent of employees would stay at their jobs longer if their employers showed them more appreciation while research by Qualtrics says people who have managers who regularly acknowledge them for good work are five times more likely to stay.

The O.C. Tanner Institute found having a service award program means companies can retain employees for 2-4 years longer than companies without a service award program.

Communication and transparency

While it is important to have a competitive and organisationally-aligned reward framework, it is even more important that leaders are capable of playing their part in explaining performance and reward outcomes and linkages to company performance. A study in 2014 found employees place a significant premium (approximately 20 per cent) on certainty, simplicity, and less discretion in the allocation of incentives.

Building capability requires leaders to be coached and developed in understanding and communicating reward structures. We are increasingly seeing companies recognise the value of this investment.

Changing pay can be challenging. Companies know it’s important to get it right.

Regulators agree. The Australian Prudential Regulation Authority (APRA) recently issued a draft proposal to increase the emphasis on non-financial measures of performance in remuneration.

APRA’s proposal recommends “stronger requirements” on remuneration to enhance conduct, risk management and accountability. The proposals would limit financial drivers of bonuses, introduce clawback provisions on bonuses and increase the onus on boards to oversee remuneration.

Companies are recognising ‘the way it’s always been done’ might not be acceptable for much longer. But how will companies know if the changes they are making are positive or making a difference?

I believe it means reward ultimately enables, not inhibits, people making good decisions in the interest of the customer, the community, the organisation and the shareholder.

The success of any change should be measured against organisational values and purpose, which must reflect the key interests and concerns of a broad range of stakeholders and, most notably, the customer.

Written by Mark Phillips

Mark is Partner at Ernst & Young Australia

The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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