Tuesday, 29 November 2016

Executive Pay and Other Reward Innovation

In advance of today's announcements from the UK Government on executive pay here is my summary of the recent event 'Positioning Reward for the Future' where I presented a few ideas about innovating and transforming enterprise reward agendas. This was delivered to a group of senior reward leaders in a session at Microsoft’s London HQ ably organised by beqom.

I opened the session by describing the changes in total rewards and the ‘new pay’ which have taken place but may not have lived up to their initial promises. Certainly if you compare changes in reward to the huge changes which have taken place in recruitment, learning, communication etc, and now even in performance management, I think reward looks increasingly out of step. And given all of the concerns with and challenges to current reward approaches this might be a good time to look again at what we can do. These challenges include a still increasing numbers of shareholder revolts, and people questioning the value of bonuses etc. It also relates to the new types of employees and other workers (including in the gig economy) often with new expectations. All of this is supported by ongoing changes in legislation together with increased uncertainty following the Brexit referendum over here and the US election over the pond, e.g. with the likely unpicking of DOL overtime regulations etc. And if Trump’s planned investments in US infrastructure do send global interest rates upwards this will give us greater opportunity to make larger reward increases and to change the basis for paying people as we do so.

I asked those attending about the recent innovations they had implemented or were planning in their organisations and was initially met with a suggestion there had not been that much; that where there had been innovation it had tended to be incremental rather than transformational; and that there may not even be much of an opportunity to innovate anyway. I challenged back that I believe there is and referenced Gary Hamel and Julian Birkinshaw’s suggestions that the greatest opportunities for innovation today may not relate to our products, processes or business models but be about the way we manage our firms, very much including HR and Reward. I also think the current debate around basic / universal income shows the extent of what we may be able to do.

I was pleased to see that as the session progressed we did flag up quite a few examples of what I thought were absolutely transformational approaches. My personal favourite example was the alignment of reward around behaviours displaying a growth mindset e.g. developing, coaching, collaborating etc.  Some of the main opportunities which we discussed were:
  • Making better use of what we are already trying to do. E.g. taking a more employee centric perspective ensuring rewards are designed to motivate people; and then communicating the value they are gaining (eg through total reward statements). Also allowing managers more direction to set pay (within a framework) - partly because this is one of the key responses required in firms which have abolished performance appraisals or have dropped performance ratings.
  • Team level reward. CEB suggest the proportion of work which is now collaborative vs individually based increased from 20 to 50% over the last decade. So shouldn’t our rewards be more team focused too? This might be about motivating people to demonstrate team behaviours; rewarding teams (whilst avoiding social loafing) or even enabling team members to agree their own pay levels across a team. It’s hard to do but I suggest we may now need to go there. I talked about Whole Food Stores as an example. This company empowers their teams to decide how they want to use their pay budget e.g. to decide whether to recruit another person or simply to work harder and take more out themselves.
  • Increasing pay transparency - partly because this is probably going to be the best way to resolve intractable equal pay problems and partly because organisations will need to do this to enable managers to take responsibility for reward decisions, or for team members to do the same. Transparency is only going to increase anyway - e.g. see the new Glassdoor ‘Know your worth’ (US) and Linkedin salary (US and UK) tools both launched earlier this month. See Buffer’s approach as an example of what can be possible.
  • Reducing pay differentials. The High Pay Centre suggest that an average FTSE CEO now earns 183x the pay of their average worked. This is having a huge impact on engagement, collaboration and even companies’ licence to operate. It’s why Whole Foods has a maximum pay differential of 14x. One of the attendees suggested they all understand that they need to tackle this in their organisations. I was pleased to hear that this is the case and didn’t challenge the point but if we understand it let’s do something about it! Taking a proposal to reduce the CEO’s pay to the RemCom may be a potentially career limiting move but if the differential in your business is anywhere near 183x and you can see the damage this is causing are you doing your job effectively unless you raise this?
  • Reducing or at least being smarter about the use of variable pay as so much research suggests this interferes with collaboration and innovation. Even investment bankers and salespeople often see their bonuses as a simple recognition of their value vs their colleagues rather than a fair reward. Attendees noted that this was something else they all knew they needed to do something about. So once again, let’s do it!
  • Taking advantage of the opportunities provided by prosocial rewards i.e. making a donation to charity, the local community or some good cause to show that the company wants to do the right thing and encouraging this response from the employees. I mentioned a recent attempt to do this at Virgin Atlantic but my understanding is that this wasn’t really prosocial. Offering an incentive of a payment to charity is still just an example of an incentive. Prosocial reward is about making that payment in advance in the expectation that this may encourage a return of effort and discretionary behaviours. 
  • Using gamification e.g. virtual currencies as at IGN, and probably even more usefully, social recognition. This builds on people’s traditional willingness to recognise each other and makes it easier for everyone to do it, all of the time. It uses the principles of social proof to create a reinforcing cycle in which people see recognition taking place which encourages them to recognise people too.

So I do think there is plenty of opportunity and I’m sure we’ll see other approaches emerging too. We didn’t even touch on some of the bigger opportunities such as switching from payment for peoples’ time to rewarding based on their outputs!

However I’d repeat the word of caution I finished with at the event. The above suggestions may prove to be aspects of the way forward in reward but they can never be the sum of what’s needed in any one business. There’s a lot of attention currently on ideas like disruption and the future of work however moving from one set of best practices to any other set, including the ideas listed above, is unlikely to be much of an advancement. The real need is for better, smarter, best fit thinking that identifies particular opportunities for a particular business. And the ambition, bravery and creativity to do things differently, or at least to run simulations and experiments in doing so. This is obviously enabled by having good data and technology which helps do the analytics necessary to inform good decision making.

My final words were an encouragement for attendees to go and create havoc - which I didn’t quite mean! But I think people understood my intent - that there is plenty of opportunity to shake things up in reward, and that increasingly, there may be a strategic requirement to do so.

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