Strategic Approach to Reward Management
with corporate strategy is more intricate and elaborate than believed and that the type
of hierarchy in place within the different firms plays a relevant role in the design of pay
systems, irrespective of the circumstance these are aligned with the business strategy or
otherwise.
Findings of a recent survey carry out by the CIPD and Benefex (2012), instead, tend to
recognise a certain level of effectiveness to the strategic alignment of reward. More in
particular, the investigation revealed that “careful reward management”, enabling
employers to retain staff and curb individual concern over pay, contribute to improve
relationships between businesses and staff. This result, as it will be further discussed
later, is actually in stark contrast with the findings of Trevor investigation according to
which strategic compensation is, on the contrary, cause of conflicts between employers
and employees.
The study also revealed that private sector organizations adopting different business-
level strategies also introduce sensibly different reward strategies. In line with the
findings of Boyd and Salamin’s (2001) investigation, the CIPD survey shows that
businesses having recourse to Prospectors strategies make decisions about
compensation system on the basis of the information gathered in the market and offer
financial reward packages mainly based on performance-related approaches. Additionally,
Prospectors are much more likely to link managers’ base salaries to managers’ abilities
and skills rather than to individuals’ length of service.
Defenders, on the other hand of it, are likely to resort to more prudent approaches to
financial reward, offering salary on the basis of shareholders indications and the firm’s
ability to honour the promised payments. Contrary to Prospectors, Defenders are also
less likely to offer their managers financial reward packages based on performance-
related pay approaches, whereas length of service is the most widely used yardstick for
pay progression decisions.
Overall, Prospectors employers seem to achieve better level of employee relations and
remarkably better level of productivity, whose standard has noticeably increased during
the last three years. Defenders, by contrast, have recorded lower level of productivity
vis-à-vis their competitors and have also seen, during the last year, increasing pay-
related disquiet amongst employees.
In general, findings of the investigation reveal that businesses are actually pursuing, also
in practice, the alignment of their reward system with the overall business strategy.
Additionally, consistently with Trevor’s (2008) investigation findings, the best fit
approach emerges as the favoured method used by employers. All of that seems to
produce considerable positive results in terms of HR outcomes, in particular better level
of productivity for managers and non-managers positions within Prospectors employers,
despite individuals covering non-managers positions receiving lower median total
earnings.
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Businesses having experienced problems with their staff because of the financial reward
system in place are likely to use individuals’ potential and value or retention as a
reference for pay progression and are less likely to introduce performance-related pay
approaches.
One of the most important indications emerged from the CIPD (2012) investigation is
that, despite the long and intense debate about the effectiveness of the performance-
related pay approaches, this method still holds a widespread favour within the UK
organizations. It must be highlighted the circumstance that its effectiveness is proven at
strategic level, which basically supports the idea that performance-related pay have to
be implemented as a strategic choice wherever and whenever there are the right
conditions and requisites for introducing it. To put it another way, performance-related
pay, as well as any other decision about a reward system, has to be implemented as a
matter of strategic choice and not just because it has proven to work well within a
competitor or in other organizations.
Defining reward strategy
All the activities carried out within an organization are basically aimed to support the
attainment of the business strategy developed by the company business leaders. All the
functions within an organization consequently design, plan and develop their activities,
policies, procedures, practices and actions on the basis of those objectives. There can
clearly be differences in the way each function supports the organization, but the efforts
of everybody are directed towards the same end. HR and reward strategies make no
exception.
Once an employer has decided to have recourse to a strategic approach to reward and a
reward philosophy and the related guiding principles have been identified, it is finally
time to develop the reward strategy, which is still part of the mandatory and crucially
important rhetorical stage of the process.
Reward philosophy is essentially concerned with the description of how an organization
intends to manage reward and what series of actions and initiatives it plans to carry out
in order to achieve in practice what has been developed and designed in theory. Clearly,
regularly assessing real outcomes against theory is crucially important. In order to
determine a consistent and effective plan of action, employers have to assess the
current reward state of play and compare it with the desired state. A gap analysis would,
hence, help employers and reward professionals to identify and plan the initiatives
necessary to successfully implement the intended changes (Armstrong, 2010).
Reward strategy is essentially concerned with identifying the desired scope and direction
of reward management, whilst caring to meet both business and employee needs. When
planning to adopt and introduce a reward strategy within their organizations, employers
can essentially choose between two different approaches in term of its coverage and
extent. They can decide to having recourse to an overarching approach, meaning by this
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that reward strategy will be extended to the overall reward system: from grade and pay
structure to performance related pay, from job evaluation to market pricing, from
flexible benefits to intangible/non-financial form of reward, pension, health and medical
benefits included, or to a partial approach limiting reward changes to one or more, and
anyway a limited number, of the reward system components (Armstrong, 2010).
The latter approach is usually used when organizations prefer to be cautious about the
introduction of new practices and prefer an incremental approach to change rather than
an aggressive or radical one. In some circumstances in fact even though employers are
planning to introduce sensible changes to the overall reward system, in order to gain
employee support and acceptance, they might prefer to start progressively introducing
quick-win, win-win changes.
Why should organizations develop and implement a reward
strategy
Reward strategy can be basically meant as a means to an end, as the avenue where the
business and the workforce needs streets converge and, most importantly, as a
framework enabling employers to reward their employees for what they practically do to
help organizations to achieve their objectives and overall business strategy.
Reward strategy should be used by employers to induce staff to behave and perform in a
way which can contribute to the achievement of the organization competitive advantage
or, as suggested by Brown (2001), as the way of thinking how to help businesses to
generate value from the reward issues arising within the organization.
The most compelling reason for developing and implementing an effective reward
strategy is linked to the circumstance that for many employers the personnel cost
definitely represents the largest balance sheet’s expense entry. More often than not,
labour cost exceeds 60/70 per cent of the annual total costs faced by businesses and, in
any case, it represents the largest expense faced by employers. This is what mainly
happens in labour-intensive organizations and, in particular, in service provider
companies, whose activities are entirely carried out through the work delivered by
people, rather than by machineries.
This single reason would be more than enough of its own to draw the attention of
business leaders to the way they manage their costs and investments and to the return
they are expected to get in the mid- and long-term from these. But there are, indeed,
additional good reasons for organizations having to develop a reward strategy.
Taking as axiomatic that every employer always has crystal clear ideas of where it wants
to go, reward strategy could reveal to be extremely helpful to help employers to:
Plan how to get there,
Be sure of being in the right path throughout,
Recognise and determine when the intended objectives have been achieved.
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Since firms resort to reward to attract and retain, but also engage and motivate, staff,
they implicitly recognise the positive relationship existing between reward and
performance. Having a clear, consistent and aligned reward strategy can definitely enact
employers to strengthen and positively influence that relationship.
Last but not least, as argued by Cox and Purcell (1998), the benefit offered by reward
strategy lies in the complex linkages it has with the other HRM practices. In fact, the
most important and authoritative HRM models developed in the last decades duly keep
into consideration the relationships and, more in particular, the multiplicative and
synergic effect played by each practice when linked or being part of a wider bundle of
policies and practices.
What need to be considered when developing a reward strategy
Reward strategy should be devised by employers keeping in mind, and duly considering,
that its aim is basically to induce staff behaving and performing in a way which can
actually contribute to the organization achievement of competitive advantage. Differently,
employers’ struggle to come up with new and more effective ways to reward people
would reveal to be only a massive waste of financial resources and of human time and
effort.
In general, a strategic approach to reward is basically intended to attract, retain,
motivate and engage staff. Encouraging individuals to go the extra mile and trying to
foster loyalty and citizenship amongst staff can be all considered as ancillary, albeit not
secondary, objectives which employers can pursue by embracing a strategic approach to
reward management.
If whilst designing and developing reward strategies employers and reward professionals
should just consider the business needs, however, it is very unlikely that these strategies,
once developed and introduced, will produce in practice the intended objectives. In order
to effectively function and produce the wished positive outcome a reward strategy also
needs to be developed taking into due consideration and trying to satisfy employee
needs too (Brown, 2001). Before designing a reward strategy, employers should hence
investigate and acquire a thorough knowledge and understanding of their employees’
wants and preferences. This knowledge can by extension be considered as an additional,
fundamental prerequisite necessary to design and develop effective and sound reward
strategies.
Before commencing designing a reward strategy having a clear and thorough knowledge,
comprehension and understanding of the aims which the overall business strategy
intends to pursue is absolutely crucial too. Since reward strategies are introduced to help
organizations to achieve their overall business strategy, thinking to plan and develop a
reward strategy regardless of an organization overall business strategy goals would
certainly reveal to be a massive blunder and the cause of an inevitable failure (Longo,
2011).
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To develop an effective and consistent reward strategy, however, having an appropriate
knowledge, command and consideration of the overall business strategy objectives is not
enough; having clear ideas of the aim an organization intends to pursue by means of the
implementation of the reward strategy itself is in fact of paramount importance too.
The preliminary identification of specific and clear objectives before the development of a
reward strategy could appear to many somewhat as the glaringly obvious;
notwithstanding, CIPD research (2005) has showed that many organizations develop and
implement reward strategies without having previously neither agreed clear objectives
nor identified the assessment tools necessary to measure the effectiveness of the
implemented strategy and the results produced by this. Findings of the same research
(CIPD, 2005) have revealed that all too often confusion also prevails in terms of what,
how and when the newly developed and implemented strategy is intended to bring
changes.
To this extent, a gap analysis investigating weaknesses and strengths of the current
reward practices will definitely help. It can in fact enable organizations to assess how
things are going, compared to how things were supposed or were intended and believed
to be going (CIPD, 2005). At the end of this investigation, businesses will be able to
determine if a gap actually exists, analyse the causes of this gap and identify and
execute the required actions needed to bridge the gap eventually encountered.
Since the one-size-fits-all approach will not be of any help, employers should also ensure
that the reward strategy and practices they are planning to develop and introduce
properly fit their organizations design and the management processes and systems their
organizations operate.
In some cases, different approaches to reward could even be required within the same
organization, namely when sensibly different employees’ profiles are available within the
same business and/or when a firm is operating by means of several branches situated in
different locations. Employers need to be aware that applying the same reward practices
in these cases is very unlikely to produce positive results. Practices in actual fact will
shortly reveal to be inflexible, possibly showing to be effective in some areas of the
business, but lacking of consistency and of any sense in other areas. By contrast, a
uniform set of practices could successfully be applied and will reveal to be effective and
likely to enable employers to attain the intended results in businesses “with common
activities and a single location” (CIPD, 2005).
Reward strategy is then clearly influenced both by the business strategy and the internal
environment. Amongst the endogenous factors likely to exert a significant influence over
reward strategy, may reveal to be particularly important the degree of appreciation and
significance attached to reward issues by the organization’s top management (Armstrong,
2006).
There are indeed many other factors which may affect reward strategies and which need
consequently to be duly considered by organizations when designing and developing
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their reward strategies. Particular attention needs to be paid to the external environment
and HR Strategy.
Amongst the external factors influencing reward strategy it is definitely worth stressing
the importance of the labour market trends and features, with particular reference to the
market rates, that is, the average salaries paid by the other organizations for similar job
positions. Since both the external market rates and the way employers manage reward
are object of constant investigation and evolution, businesses should implement
initiatives enabling reward specialists to regularly receive updates on the latest relevant
theories, trends and studies which may offer them suggestions on and hints about how
to come up with brand new ideas.
Table 18 – Strategic reward process flow
Inasmuch as reward strategy flows from the overall business strategy (Armstrong, 2006),
which implies a complete alignment of the one with the other, it is important that reward
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strategy would also align with HR strategy. This is a necessary prerequisite in order to
effectively and consistently foster integrity within an organization and provide evidence
to the entire workforce that all the organization efforts are converging towards a clearly,
well identified, common and shared direction and end.
In order to achieve integrity, hence, the reward management strategy alignment process
needs to be pursued both at horizontal and vertical level.
This might reveal not to be enough; in order to encourage and foster integrity within an
organization reward policies, consistent and coherent with the business strategy, should
also reflect the organization culture and its shared values and beliefs.
Employees are becoming the more and more sensitive to and wary and intolerant of the
discrepancies existing between what an organization states and communicates, both by
means of formal and informal communication, and what the organization actually does
and executes (Longo, 2010b). Employers should completely avoid talking the talk, but
do not walking the walk; employee reactions to this specific behaviour tend to become
the more and more negative and productive of long-lasting dissatisfaction which is really
unlikely to not affect their levels of performance, engagement and motivation.
The impact of reward philosophy and guiding principles on reward
strategy development
Reward management’s main aim is to support the business in achieving its intended
strategy. To attain this objective it is necessary that reward managers and specialists
would develop a reward management strategy, identifying the values and guiding
principles underpinning this, which have clearly to be based in turn on the organizational
values and beliefs.
The circumstance that, in general, the foundations of a reward management philosophy
are represented by consistency, transparency, equity and fairness does not clearly mean
that all of the employees have to receive exactly the same amount and type of reward.
On the basis of a reward philosophy inspired to human capital promotion, for instance,
individuals will be rewarded according to the different contribution they make to the
business success, profitability, growth and, more specifically, on the basis of the return
on investment they are able to generate (Armstrong, 2006).
This is a point employees could be likely to miss; a clear, open and extensive
communication process aiming to explain what objectives reward practices are intended
to pursue and what behaviour these aim to encourage within the firm should by
extension be implemented and periodic refreshing sessions organized.
Line managers, provided these have received the necessary training and showed to have
gained what it takes, should become central and fundamental part of this process.
Additionally, in order to avoid future disappointment – but also the apparent breach of
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the psychological contract -, employers should better devote part of the induction
process to explain their new recruits the guiding principles, values and beliefs, in other
words the philosophy, behind their reward practices. It will also help to make it clear to
newcomers what the organization is expected from them in terms of behaviour and
performance level and what and how the firm assesses and rewards work and
performance.
Reward management philosophy values and guiding principles, consistently with the
overall business strategy, need to enable organizations to address reward problems in
the mid to long run, namely finding suitable and fair ways to reward people according to
their practical and real performance and contribution.
In order to motivate, engage and ultimately retain staff reward strategies must also be
based on a total reward approach, considering both intrinsic and extrinsic aspects of
reward which, linked as a whole to the other HR initiatives, will produce a multiplicative
bundle-like effect capable of boosting individual motivation and engagement.