Managing Rewards In Turbulent Environments: Strategies That Work

Reward strategies drive the cost of one of the biggest controllable costs available to management. The vast majority of organizations want to pay competitively so they can attract and retain the talent they need. But how employees are rewarded can be varied, even if the how much is dictated by competitive pressure and budgetary constraints. And rewards can be structured so they do not increase fixed costs, which may become unsustainable in the future.

Most employees think of their wage/salary when asked how much they are paid. And in many cases that is the only component of direct compensation they receive. Variable (incentive) compensation is fairly common in the private sector, although much more prevalent for executives and sales personnel… it is extremely rare in the public and not-for-profit sector. But there are factors that must be considered when using variable compensation. One is that different approaches are the first choice for organizations and employees. Organizations, if given their preference, would make all compensation variable, based on organizational performance and its current ability to pay. Employees generally would vote for all base pay, since it is certain, although highly motivated and competent employees may opt for significant variability since they believe they will end up getting more.

By delivering all of the current rewards in the form of base pay increases can have a dark side. Over time fixed cost payroll climbs, often to unsustainable levels. Yet a significant portion of the public sector still uses automatic step increases, despite the fact that this is rewarding survival rather than contribution (although the percentage has dropped considerably in recent years). And public sector employees are more apt to stay with the same employer for their career, magnifying the impact of step increases on fixed costs. But even when organizations use merit pay every pay increase is a career annuity… there are no refunds to the organization if performance declines next year. Some industries in the U.S. have in the past so inflated fixed costs that they became non-competitive.

The economic downturn starting in 2007/8 drove home the reality that when available resources decline sharply direct compensation is inelastic. And cuts to wages/salaries are extreme acts of aggression in the eyes to employees. After all, the organization set the pay level and did not mention that if business got worse they could not count on the previous income level to maintain the standard of living they in good faith committed to. Freezing base pay suddenly after employees have gotten used to annual increases is also shock therapy. Due to these realities many organizations found that reducing headcount was the only feasible solution. Technology that can perform tasks done by people in the past became more attractive. More customers had to attempt to have robotic software empathize with their difficulties with the product they had been sold. And the pressure to offshore more activities intensified. All of these approaches left a large number of employees in the U.S. feeling left behind by events.

This author has argued that more reliance on variable pay can help to alleviate the anguish caused by declining revenues when people costs are fixed. But variable pay is even more challenging to manage effectively than base pay. So what can be done to manage base pay better, and to manage it in a way that precludes the use of incentive plans?

The use of merit guide charts is widespread. The philosophy behind these tools is that the largest (%) increase should go to high performers paid low in the range, while smaller or zero adjustments should go to people paid high in the range but whose performance does not warrant the pay rate. Exhibit 1 is an example of a guide chart that incorporates this principle.

The difficulty with this approach is that every increase still increases the fixed cost payroll going forward. And the differences between doing OK and doing outstanding work are too small when budgets are tight, diminishing the motivation to excel.

Another approach is to segment the budget into base pay increases and performance cash awards. Any portion of the budget allocated to cash awards does not increase fixed cost payroll and over time the compounding of fixed cost payroll is lessened. Exhibit 2 illustrates a “combination base pay increase/cash award” approach.

Using this approach the compounding impact of base pay increases is reduced by one-third. But more importantly the use of outstanding performance awards increases the motivation to perform well. Cash awards also have more impact because they show up all at once, rather than in 12 or 26 increments like base pay adjustments do. Base pay increases send the message that you have to work here all year next year to get the full amount, a reality conveniently not mentioned by organizations. So even in the last few years when 2-3% budgets have been the norm outstanding performers would be rewarded well if this strategy were used. And they are being rewarded contingently… the cash award can disappear the next year if performance drops off.

In order to make this approach fully effective there needs to be a sound performance management system in place and managers must be held to a high standard relative to the allocation of ratings and adjustments. This is bad news for many organizations, since performance management is often the weakest link in reward systems. Dropping ratings altogether, trusting managers to use good judgment, is not possible if this strategy is to be employed.

But one must seriously question whether that is sound management anyway.

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Workforce Management Strategies For Turbulent Environments

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In order to be effective workforce management strategies need to be a good fit to the context within which they must function.

It takes a long time to formulate strategies for staffing, development, performance management and rewards management and to develop the programs to support these strategies. But what happens when the context shifts even before implementation can be completed? This author scraped the rocks on the bottom of the rapids portion of the Rogue River in Oregon even though he had developed the ideal strategy. He consulted the river maps, observed the flows from the rocks above and developed a plan for navigating the series of rapids. But, by the time he got back to the kayak the flows had changed. The lesson learned was that static strategies do not work well in dynamic contexts… what fit when the plan was formulated became less and less appropriate as the river evolved.

Many organizations underinvest in workforce planning. And conventional planning may turn out to be of limited usefulness if what was planned for is not what materialized. Scenario-based planning is a technique that has proven to improve the odds that strategies formulated through planning will be reasonably successful. This is accomplished by developing multiple scenarios about what kind of future may manifest.

The most common approach is to define an optimistic, a pessimistic and a most likely future and to plan for all of them.
Then strategies can be crafted that are robust… they will work reasonably well in any of the possible futures. Of course this requires forecasting, which is challenging in an environment that has been as volatile as the one realized over the last three decades. And forecasting is never perfect… but it typically beats a resigned “whatever” attitude. The book Superforecasting” reports characteristics of exceptional forecasters, based on an enormous body of research. These characteristics are:

not being wedded to a single outcome
being open to considering new information and revising when necessary
changing one’s mind when evidence warrants
attempting to minimize the impact of cognitive bias
attempting to continuously improve
Possessing these characteristics does not act as a magic formula. Cognitive bias exists… we all are prone to more readily accept evidence that is consistent with what we already believe or that is convenient, shunning contradictory data that is inconvenient. Just recognizing that bias exists can help to control the distortion of reality it can create.

Forecasting is a lot of work, but it can increase one’s batting average.
Organizations that staffed using a strategy that supported being a low-cost provider will find that shifting to winning through innovation may be impeded by a workforce ill-suited to doing what is now required. Training people to become skilled type-setters may make them ill-suited to using computerized front-end systems, as discovered by newspapers when they made the shift. Defining and rewarding performance in a way that encourages efficient adherence to cost-minimizing routines does not motivate employees to learn, take risk and to innovate.

Workforce planning is not optional. Even though the best strategies planning can produce may turn out not to be ideal for the future that does materialize. But continuous anticipation and flexibility can enable the organization to refine strategies to minimize the likelihood of ending up with a workforce that cannot cope with the context, lacking the knowledge/skills and the motivation to do what is now needed. The worst strategy is to accept whatever happens. Competent and committed workforces are not built overnight and cannot be ordered through Amazon. They need to be created and sustained using dynamic strategies guided by scenario-based planning.

Pay For Performance Assessment – 10 Questions

Assess the readiness for pay for performance compensation of your organization.

  1. Are jobs documented accurately and does the documentation reflect current duties, responsibilities and qualifications?
  2. Are jobs placed into a grade/classification structure in a manner that reflects internal equity?
  3. Are pay ranges assigned to grades that are competitive with prevailing rates in the relevant labor market(s), and do they reflect the organization’s desired posture relative to the market?
  4. Are performance standards established for jobs (in the form of criteria for assessing performance in the job and/or goals for the current period)?
  5. Is there a defined performance management policy that defines management’s responsibility to establish expectations at the start of the year, continuously measure performance during the year and appraise performance at the end of the year?
  6. Have managers been trained in performance management?
  7. Have employees been informed of the role of their managers and themselves relative to performance management and do they understand how the process works?
  8. Are there policies mandating that performance appraisals be conducted for all employees annually according to an established schedule?
  9. What are the corrective actions if appraisals are not done on schedule, if they are superficial or if the manager and the employee disagree on the rating?
  10. What has been the impact of performance ratings on pay actions in the past?

Robert J. Greene, PhD, CCP, CBP, GRP, SHRM-SCP, SPHR, GPHR. CEO of Reward $ystems, Inc.,

Helping Organizations Succeed Through People.

Managing Culturally Diverse Workforces

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Globalization has created challenges related to workforce management.

Globalization has created logistical, economic, social  and legal differences across countries that have to be dealt with.  But these differences can often be defined in specific terms and can be weighed when formulating business strategy.  Different beliefs, values and priorities are extraordinarily difficult to define tangibly.  People react to how they are recruited, developed and managed based on what they view as appropriate.  And cultural differences have perhaps the greatest impact on how employees react to the way in which performance is defined and rewarded.

Fons Trompenaars and I have a book in press with Routledge/Taylor-Francis entitled “Rewarding Performance Globally: Reconciling The Global-Local Dilemma.” 

In writing that book we called on the large body of research that has been done on cross-cultural differences, principally by Fons, Hofstede and the GLOBE project.  The biggest challenge in managing performance and rewards across cultures is determining what the differences are and how to respond to them.  In a collectivist culture like the one that prevails in much of Asia the response to individual rewards based on individual performance is less likely to be viewed as appropriate than it would be in an individualistic culture such as the one prevailing in the United States.  So utilizing a global strategy without consideration of cultural differences may be received very differently in different cultures.  Hiring a friend or relative in the US is typically resisted, referred to as nepotism.  But in Latin cultures this may be the preferred strategy.

One of the difficulties with applying the research is that much of it is categorized by country (Japanese employees would accept A while US employees would prefer B)In today’s turbulent world there are significant cultural differences within countries as well as across countries.  This presents management with a dilemma when formulating workforce management strategies.

  • Does the organization customize strategies by region?
  • By country?
  • By provinces or states within countries?

Since many of today’s national borders are the result of decisions made after wars were over or as the result of aggregations such as the EU how cultural data should be clustered is problematic.  Do the typical employees in Southern Italy differ culturally from the Northern Italy employees, and if so, does the employer vary strategy intra-country to reflect the differences? Is a single strategy for the EU wise or are there so many cultural variations that this is shortsighted?  In theory the cultural definition models used by Hofstede and Trompenaars could be administered at the individual or sub-culture level, but this would present an employer with an even more complex challenge.  In countries like the US, where employment law can impede treating employees differently, the default might be to use one strategy for the country.  In other countries this may not be effective.

We certainly did not resolve these questions when using the research to write the book.  The best we can do is to raise awareness that cultural differences may result in different reactions to any strategy.  Trompenaars speaks of the 3 R’s of cross-cultural management:

  1. Recognize differences when they exist
  2. Respect the rights of others to view things differently
  3. Reconcile the differences as much as they can be

It may be most effective to vary strategy when distinct cultural profiles exist… whether that be at the regional, national or local levels. But the differences must be accepted by those the organization wishes to attract, retain and motivate.  And the organization  must be comfortable explaining the reasons for the differences to employees, as well as regulators.

Annual Appraisals in Performance Management, a Letter to the Editor

As a frequent contributor and reader of WorldatWork and workspan magazine, I recently wrote a Letter to the Editor in response to “new” approaches in performance management that suggest to eliminate the annual performance appraisal process.
Let’s have a discussion, add your opinion in the comments. 

LETTER TO THE EDITOR: The recent discussions in the literature of a “new” approach to performance appraisal should be discomforting to those who are familiar with the research on the topic. The “new” approach, that relies on continuous measurement and feedback, rather than an annual appraisal, is really just recognition of the reality that without continuous measurement and feedback any system will fail. When the sole requirement is an annual appraisal the night before the event both the manager and the employee attempt to recreate the year (which has not been discussed on an interim basis) and they will come to the meeting… remembering two different years. Research shows that managers tend to attribute employee success to external causes (and their own brilliant management) and failures to the employee’s lack of effort or focus. Employees tend to believe the opposite. So yes, annual end of year appraisals cannot be effective on their own.

Formal appraisals are an administrative tool for tying pay to performance. If done well they also define performance standards and objectives at the start of the year and update them if things change during the year. Continuous measurement/feedback is an integral part of the performance management process and if done well it creates a “diary” that can be reviewed during the annual appraisal. Technology makes the creation of diaries a dialogue that is the real appraisal tool… the year end event is the culmination of the process. And if the appraisal also includes a resetting of performance standards and objectives for the next period, as well as development plans for improving results, then it has done its part in the performance management process.

 Organizations to not need either continuous measurement/feedback or a year end appraisal event…  THEY NEED BOTH.

Branding the Organization

Organizations brand their products to succeed economically. But few effectively brand themselves as employers. Yet, performance is dependent on having a competent and dedicated workforce motivated to make the organization successful. Attraction and retention of high performing people with critical skills that are in short supply is one of the biggest challenges to building the workforce required for success. So every organization must “sell” itself to those fitting that profile. Given that reality, it is puzzling why employer branding does not receive more attention.

The first step toward successful attraction and retention is to offer a value proposition that is attractive to the people the organization needs and wants. Some organizations attempt to establish their credibility as a desirable employer by communicating impressive-sounding mission statements and cultural profiles. Websites are receiving massive investments in an attempt to attract the right people, because of the increased use of web-based search activities by those seeking opportunities. Claims like “our people are our most important asset” and “we have an employee-friendly culture” are common. But in the end, those are claims made by the organization, which will be recognized as self-serving and may not be believable to potential candidates for employment.

There is also considerable effort being invested in gaining “best place to work” certifications, bestowed by third parties that are more likely to be viewed as credible and unbiased. And some organizations believe that candidates are attracted by well managed organizations. Pursuing third party recognition of excellence, such as the Malcolm Baldridge Award, is a way to send the message of competence and success.

People will respond positively to organizations that walk the right talk. If they seek personal development they will view organizations that invest heavily in human capital development positively. If they want short term rewards, they will opt for organizations that claim to offer premium rewards packages. If they are most concerned about doing meaningful or socially responsible work, they will prefer organizations known for exhibiting corporate social responsibility and be less impressed by premium rewards. If they want to work on a project or part-time basis, they will look for indications that the organization is flexible relative to work schedules but also that they will be rewarded appropriately and not as second-class citizens. And if they are security-oriented, they may be more impressed by generous benefits packages than people more focused on short-term direct compensation… public sector organizations are apt to be more attractive to them.

Once candidates have been attracted by the organizations initial proposition, it is necessary during the selection process to honestly portray what employment will be like. Decades of research has established that the most effective device for avoiding unwanted turnover in the first 12-24 months is a “realistic job preview.” This entails telling the truth… the whole truth. It both inoculates the candidate against the likely bumps in the road and begins the employment relationship on an honest, transparent basis. Recently the author orchestrated a session with members of a client’s executive team that resulted in lists of the “good stuff” and the “not so good stuff” associated with working in the organization. That was published and recommunicated during selection interviews. Although some seemingly qualified candidates might have been lost as a result of honest portrayal it is likely they would have left anyway, after the organization invested considerable resources in hiring and training them. False promises are dangerous… a recent public sector client continued to claim they rewarded performance despite giving across the board step increases every year. That hypocrisy created cynicism, rather than motivation.

The final step in the employment process is the “onboarding” of new employees. Proper orientation and attention to ensuring new employees receive close scrutiny is needed to guarantee they know what they need to know and have what they need to have in order to be successful. Even mobile people encounter an alien land when they join a new organization and the time they spend trying to figure things out is time they could devote to performing in their assigned role. Assigning a top performer who is committed to the organization as a guide makes a great deal of sense… assigning someone who is not contributing much anyway could result in a cloning. By directing a new employee rather than mothering him or her, the guide can create an adult-adult relationship and give the new employee the confidence that expectations are clearly understood and that the resources available are understood.

Motivating Critical Talent To Perform

Employees must be motivated to contribute to meeting organizational objectives by performing at a high level.

There is an abundance of research that supports the power of rewards to motivate performance. Of course that same research suggests employees must believe rewards are based on performance and that the rewards are equitable, competitive and appropriate. Occasionally claims are made that extrinsic rewards can negatively impact the intrinsic rewards experienced by employees. But these conclusions are generally based on laboratory research unrelated to the world of work, and there is no evidence the results are generalizable to the field.

The three most widely researched behavioral theories related to motivation are expectancy theory, equity theory and reinforcement theory. The model shown above incorporates all of these theories, suggesting there are four pre-requisites for performance the employee must:

  • Be able to do what is required
  • Be allowed to do what is required
  • Know what is required
  • Want to do what is required

There are numerous things an organization can do to motivate their employees to perform well. Research has found that “knowing what is expected” has the most impact on employee satisfaction and effectiveness. Although it is easy to claim employees clearly understand the criteria and standards used to evaluate their performance this is very often not the case. My experience with focus groups is that employees frequently admit they have a general idea of what is expected, but feel they lack the information necessary to give them confidence that they are on the same wavelength as their managers. Extensive research on goal setting and feedback establishes that a clear understanding and acceptance of stretch goals has more impact on motivation than most other factors. But even though an organization has a goal-based performance management system, much can get in the way of effectiveness.

Rewards practitioners should pay particular attention to how their programs impact the “wants to do it” pre-requisite. For example, if a high performer finds that the “consequences” of their contribution (pay increase, incentives) bear an uncomfortable resemblance to what poor performers received, it is unlikely there will be strong motivation for them to repeat the high level of performance. This situation is a common by-product of the “automatic step rate” systems that have been prevalent in many public sector organizations. The message sent, intended or not, is “stay employed, get a satisfactory performance appraisal and you get the same step increase as those who perform at much higher levels.” This is probably acceptable to those who perform at lower levels but those are rarely the employees an organization most wants to keep.

If individuals are to be motivated to do their best individually and to do their work in a manner that contributes to both the effectiveness of other team members and the effectiveness of the team, it is important to provide incentives to provide that motivation.

motivating

An excerpt from the article “Attracting, Retaining, and Motivating Critical Talent” Email rewardsystems@yahoo.com to request a copy of the full article by Robert J. Greene, PhD, CCP, CBP, GRP, SPHR, GPH