Monday, 13 September 2010

Reward Risk Management 2010 Survey and Reward Risk Management Process

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In 2009, the CIPD carried out, for the first time, an investigation on the subject of reward risk management and published in October 2009, the “Managing reward risks: an integrated approach” report, revealing the more likely risks relating to the fascinating subject of “reward risk management” as emerged from the investigation.
The findings of the 2009 report revealed that there were substantial gaps in the way organisations identified, assessed and managed risks relating to their rewarding policies and practices and tried to come up and suggest the most appropriate and effective ways to close the identified gaps.

The survey has been very recently carried out anew, with the aim to identify the risks which reward managing professionals do currently consider more difficult to face and that, consequently, are more likely to cause pitfalls in their activity.

As the CIPD warns, the findings of the survey “are not predictive”, so that what emerged from the survey does not represent the CIPD and the Cranfield School of Management (which carried out the survey with the CIPD) predictions of what it is likely to happen in the incoming future. The report just summarises respondents’ opinions and expresses what respondents believe will be the next challenges they will need to face.

2009 findings and suggestions
Before examining the recent survey’s findings, it could be possibly interesting consider which recommendations emerged from the 2009 survey in order to properly carry out reward risk management.

1 - Establish effective reward risk intelligence-gathering systems.
Effective gathering is necessary to identify possible risks arising both externally and internally to the organisation.

2 - Proactively review your reward strategy and systems for risk.
Reward strategy design, execution and impact, can incur in a whole range of risks. So that, it is strongly recommended to review reward strategy for the following kind of risks: strategic, behavioural, financial, legal and ethical, operational, implementation, change and governance.

3 - Use established risk management tools to assess and manage identified reward risks.
Once risks have been identified, appropriate tools, like impact/probability matrices and risk maps, need to be used to asses and manage them.

4 - Manage risk consistent with your reward risk appetite
Risk management is not about completely eliminating all the identified risks, but it is very much more about managing risks in order to make them acceptable. So that, first of all, it takes to identify, working with the business management, your acceptable level of reward risk, then manage it accordingly.

5 - Build your risk management capability and build a permanent risk management culture.
You cannot think to have the ability to anticipate every reward risk to your company, but every organisation need to build and develop the abilities, skills and competencies to keep this treat under constant control, in order to take action should any problems arise. Reward risk management does not require a frequency or schedule to be carried out; it is something you have to monitor and constantly keep under control.

2010 Survey
The 2010 survey was carried out amongst a panel formed by 191 respondents, 84% of whom were practitioners. Amongst those practitioners 67% were working and biased for large employers (i.e. companies employing more than 1,000 staff). This circumstance should be well kept in mind when interpreting the survey’s findings, in that the presence of this bias towards larger employers may indicate that such organisations are more likely to have the necessary resources to establish reward risk identification and, consequently, be in a better position to answer the survey’s questions than smaller employers.
As suggested by Table 1, reward professionals concerns over the capability of reward to attract and retain talent has sensibly increased between 2009 and 2010. This might possibly be explained by the circumstance that during the downturn, when companies were prompted to face much more serious risks, such as pay freeze and redundancies, benefits and reward related matters have been in general overlooked.

The signs of economic recovery and the consequent likely change of trend have more recently pushed reward professionals to change their strategies in order to fit the new business landscape.

Many reward professionals, nonetheless, do not feel their organisations are competitive in all segments of the business. The major gaps and concerns they identified relate to the lack of tools and means available to them in order to effectively retain key talent within their organisations. In case of failure, the backlash and additional risk being of increasing the turnover ratio, which is, in fact, considered the most challenging risk employers could be called to face.

Reward professionals also expressed their concern over the line managers’ ability to manage reward issues in general and the reward changes which have recently occurred, in particular.

Reward management success relies on organisation’s staff understanding of reward, aspect to which reward professionals attach a crucial importance. This objective can be achieved through the best use of rewards means by line managers, and persuading managers that rewarding is not exclusively a money-related subject.

Cost management, which emerged as a sensitive factor during the 2009 survey, is still perceived as a sensitive issue according to the 2010 survey’s findings. The aftermath of recession have clearly had its negative impact, consequently cost reduction has been an objective all the organisations have tried hard to pursue. So that, although, on the one hand, reward professionals are well aware of the need to change their rewarding strategy in order to retain key skills, on the other hand, they are also aware do not having the required fund to implement the necessary strategies.

Affordability risk, then, emerges as one of the main concern reward experts will need to cope with in the incoming months, raising from the twentieth position it held in 2009 to the eighth position in 2010. Many organisations are still struggling to cope with the uncertain economic context, cutting benefits, changing pension schemes and freezing salaries.

If anything, according to the 2010 survey’s findings, arguably because of the ongoing dialogue between organisations and unions, the reward changes impact on employee relations has fallen from the fifth position in 2009 to the thirteenth position in 2010. It must now be seen how long this dialogue’s effects will last, since 52% of respondents claimed that they feel this risk very likely to rise during the next year, it really sounds something like the lull before the storm.

Another positive note is represented by the fact that reward communication is no longer perceived as such a strong risk as it was last year. This is possibly due to the investment employers have made in communication, so that employees are now more conscious about what their employer needs to be successful and is consequently expected to get from their staff. Similarly, employees are more knowledgeable about what, and how, their employers are willing to reward them. To some extent, this open communication process has definitely helped to redress or, worse comes to worst, to redefine the psychological contracts.

Practitioner Vs Consultants
Table 2 shows the different levels of perceptions expressed by practitioners and consultants on the main risks they envisaged in terms of reward.
Clearly consultants seem to be much more concerned with issues such as the reward strategy alignment to the overall business strategy, the reliability of benchmark data available to organisations and the capability of the companies’ reward team to properly and effectively face reward risks. Whilst practitioners seem mostly concerned with the effectiveness of incentives and retention-related issues.

Although some differences clearly emerge, both practitioners and consultants agree on the fact that attraction and engagement remain crucial factors for the incoming months.

The findings provided by the analysis of risk, as seen from the different industry sectors, shows that, once again, change management risks are at the top of organisations concerns.

In line with the intended cost reduction strategy pursued by the UK Government, affordability and pension issues are raising more concern within the public sector, whilst private sector professionals are more concerned with their ability to attract and retain talent.

Additionally, public sector organisations are more concerned with the risk to their reward strategies and implementation coming from poor industrial relations.

Likely future risks
The survey also tried to identify which risks need more attention, in that more likely to impact rewarding in the near future. The first ten identified risks are showed in Table 3, compared with their 2009 position.
The economic climate still remains one of the most important reasons for concern in the incoming future whilst, on the other hand, respondents seem to be more confident about pension funds future performances.

The reward managers’ concern over the possibility to lose control of their intended strategy, because of the downturn, is expressed by the substantial rise of the importance they attach to the effects of possible changes in taxation and regulation, respectively bouncing to the fourth and sixth position from the twenty-fifth and fifteenth.

In particular, respondents showed concern over possible changes in pensions and income taxation which will make it harder to attract overseas talent for key positions to their organisations.

Public sector employers expressed, instead, concern over the way government wants to address the public deficit, which will make it difficult, and pose serious limit to their ability, to reform pay and reward packages, at least for the next two years.

The way the UK Government intends to manage public sector reward, not only in the banking sector but, more generally, in the public and private sectors, is pretty clear. Now it is up to the businesses trying to take control and manage appropriately this more and more politicised area.

It also appears remarkable the number of changes on the reward risks more likely to increase in the incoming future, compared with the major concerns identified just one year ago. This is clearly showing the high degree of complexity of this field and, at the same time, it could also sound as an incitement to reward professionals to continue to proactively investigating the environment in order to identify likely risks and treats to their organisations and come up with solutions able to effectively help organisations to overcome these risks by the means of reward.

According to a respondent of an Asia-Pacific-based organisation, in China changes in the labour regulation, such as the introduction of a minimum wage and trade unions spreading out throughout the country, will cause some new reward strategies implementation problems.

Public sector respondents highlighted their difficulty on having to face an increasingly difficult to manage issue, with diminishing funding.

Are organisations and their reward professionals ready?
Respondents were also asked to express their opinion on the way they consider themselves prepared to face the identified risks. Compared to 2009 the ratio of reward professionals considering themselves not prepared to manage the identified risks has raised from 9% to 15%.
The reasons behind this increasing unpreparedness trend are, very likely, linked to the speed of changes reward professionals are called to keep pace with and their feeling to have neither the abilities nor the capabilities to effectively cope with the current difficult environment.

Obviously lack of appropriate expertise and of relevant capabilities makes it difficult to address reward-related issues, but clearly, difficulties exponentially increase in the event bonus schemes within an organisation are not aligned with its performance.

Public sector employers in the UK could be prompted to face even more difficulties if, rather than dealing with reward challenges, will have to cope with redundancies and restructuring.

Required skills and competencies
The 2009 survey tried to identify the skills and competencies necessary to properly manage reward risks and help reward professionals to effectively face the challenges and concerns related to their activity.

Although the necessary skills required to pursue a risk-based approach have not yet been officially acknowledged, the research carried out by the CIPD has identified some skills and competencies which can definitely help to implement a risk-based approach. These skills are related to the three different stages identified in the reward risk management process.
Clearly the above listed behaviours are of paramount importance but, in order to properly and effectively approach and implement reward risk management, also technical skills and competencies are required.

Being business knowledgeable, having a strong technical reward understanding and operational management will surely contribute reward professionals the ability to properly and effectively manage and overcome all the kind of risk management issues they will be prompted to face.

Finally, the survey identified that a growing number of risks are likely to affect and hamper the activity carried out by reward professionals on behalf of the organisations they work with. These risks are, in part, due to the changes occurring in the political and economic environment.

Confronting reward risks, pursuing a consistent and coherent process throughout the three phases of the reward risk management process (risk identification, risk assessment and risk mitigation), will surely allow reward professionals to better and confidently face future challenges.

Systematically carrying out reward risk management, to stay on top of the dynamic and complex challenges that organisations’ reward specialists constantly need to face, is key.

Longo, R., (2010), Reward Risk Management 2010 Survey and Reward Risk Management Process, HR Professionals, [online].

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