The severe contraction in the global economy brought by the economic crisis will have profound and lasting implications for the way organizations use reward to help deliver their business strategy, according to a recent study from the Hay Group. The war for talent has narrowed to three fronts: around high performers; high potentials; and 'mission-critical' roles.
Companies are now channelling what limited rewards there are to these key groups, often drawn from Generation Y, for whom money in itself is not the only motivating factor. As a result, these differentiated reward programs are now geared toward offering clear career paths, global mobility and targeted development in addition to higher monetary awards.
The Hay Group study, conducted over three months with over 230 companies, collectively with revenues of approximately US$4.5 trillion and employing around 4.7 million people, claims to be the first this decade to indicate the drivers in reward and remuneration that now dominate the thinking of boards in the post-recession world.
Three clear messages emerge from the findings:
- Companies are looking for ways to balance the need to reward executives and employees responsibly, with an increasing interference from regulators and governments in the process.
- The recruitment and retention of key talent continues to be an important strategy; with the market for these individuals remaining strong despite the downturn, the focus is on motivating, engaging, and rewarding critical high performers
- The use of bonuses is increasing; incentives are a critical lever for motivating performance and employee engagement, and provide flexibility of the reward cost base.
Nick Boulter, global managing director, reward services at Hay Group comments: "The trauma of the global downturn for multinational businesses means many are struggling to re-build profitability. With revenue growth hard to come by, boards are focusing on cost containment and performance improvement as the paths to profit growth. Reward strategy is now driven in the boardroom as executives recognize that the war for talent knows no boundaries, so strategies for retention, motivation, engagement and performance improvement are integral to competitiveness."
Compliance, regulation and taxation are cited as a major issue for boards and compensation committees as they seek to balance responsible reward programs with, in some geographies, de facto regulation by taxation of specific types of reward such as bonuses, or arbitrary caps on pay. This is most prevalent in the financial services sector, and noticeably in jurisdictions like the US and UK where specific taxes have been introduced to curb bonus payments. The study finds that this is an unwelcome major distraction for senior management, and also is stifling innovation as boards become wary of attracting attention with non-conformist reward structures.
Boulter continues: "Regulation and taxation are blunt tools, and their effectiveness in terms of reducing risk is limited. We believe that the most effective solution for governments and regulators is to take a holistic view of reward to enable organization's reward programs to drive long-term, sustainable, performance that is not defined solely by shareholder returns. It is also about trust and social responsibility and is what we term 'responsible reward' which builds engagement, drives sustainable performance, and reduces risk."
But companies should be cautious about focusing exclusively on high performers to deliver their business results, says Boulter. "There is a danger that 'average' performers – who make up the bulk of the population – can find themselves ignored in the rush to reward top talent, and weed out poorer performers. But for most companies, shifting performance in this middle category is what will really make a difference to surviving the present recession and performing in the upturn. Organizations should not take their eye off the ball in efforts to keep this critical set of staff motivated, engaged and adequately rewarded for the positive contribution they make."
Finally, the study confirms that in certain circumstances bonuses are back. In the post-recession world, there has been a growing long-term trend for companies to offer a higher proportion of pay as a bonus, and to increase the numbers receiving them. Variable pay is a key lever to motivate and engage employees in the organization’s goals. The top performing companies are using variable pay strategically, increasing the opportunity for more to benefit from incentive schemes, and providing incentive opportunities further down and through the company to show that individual performance affects the success or otherwise of the business. Employers have also learned from the downturn: having a higher proportion of compensation linked to performance builds an important component of flexibility into the overall management of costs - and can preserve jobs and talent.
"Cost management and a focus on risk-adjusted performance measures will be key for all organizations,” Boulter concludes. The growth in bonuses does not indicate a return to the unsustainable practices of the past but reflects that boards are taking a broader view of performance that includes the impact upon variables such as social, environmental, and brand issues.
“Reward represents anywhere between 10 per cent and 70 per cent of a company's total costs, so CEOs are now asking of their teams: what are we getting for what we pay? how effective is this cost allocation? and what's my ROI on reward? Our study concludes that getting rewards right is mission critical for all organizations."
Hay Group conducted The changing face of reward research in order to better understand the factors driving changes in reward strategy, design and implementation, and how organizations are responding to those changes to meet the challenges of the new business environment.
The majority of respondents were HR specialists, with around two thirds of those at director level and a third at manager level. There were a small number of senior and line management respondents. Around 40 per cent had a global remit, 20 per cent had a regional remit and 40 per cent had local responsibilities. Half reported directly in to senior management (CEO, COO or board). Almost half were based in Europe, a quarter in Asia, a sixth in North America and others evenly distributed across South America, Africa and Pacific.
The organizations who took part in the survey manage revenue streams of approximately US$4.5 trillion and employ around 4.7 million people. Of the organizations represented in the survey, three quarters were multinational, with a fifth operating in more than 50 countries. A fifth have revenues of US$10 billion or more, around half have revenues of between US$1 billion and US$10 billion, and the remainder have revenues of over US$100 million. Around 40 per cent had between 10,000 and 100,000 employees and a similar proportion had between 100 and 10,000 employees. The most common industry profiles were fast moving consumer goods, retail, communications media and technology, financial services, manufacturing, energy and life sciences.
Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. The group develops talent, organizes people to be more effective and motivates them to perform at their best. Hay Group focuses on making change happen and helping people and organizations realize their potential. For more information, please visit www.haygroup.com/ca.