Monday, 13 December 2010

What reward strategy is and why every organisation should have one

Attracting, retaining and engaging staff definitely represent top-of-the-list priorities of the modern-day employers. Many organisations have recourse to the “efficiency wage theory”, that is to say to an approach based on setting salaries levels at an above-than-average percentile in their industry, to attract and retain talented people and use pay-per-performance schemes in combination with this to motivate and engage them.
In any organisation no scheme, system or issue is indeed approached, operated and settled in a so simplistic way.
Just try to imagine what would it happen whether a marketing project team should propose to its organisation’s business leaders introducing in the market a new product similar in price, features and value proposition to a product already available in stores? What would it be in such a case the business leaders’ reaction? Why many organisations tend hence to replicate and introduce the same rewarding system used in other organisations? Would not it be possibly better and even more suitable to develop a distinctive scheme, rather than just reproduce and replicate a system used in another different business?

Why should people desire to work for and stay with your organisation? What makes your organisation as attractive insofar as people wanting to work for it? Yet, how much money spends your firm to pay salaries? Which percentage of revenues or operating income does it represent? Does the organisation have recourse to the same level of strategic and operational decisions process to deal with the personnel budget as it does for other types of investments and expenditures? Every time an employer spends or invests its money, it is clearly expected to maximise the return from these expenditures.

The need for an organisation to have a reward strategy relates to the added value it is able to produce giving appropriate answers to all of these questions and enabling organisations to effectively tackle all of the issues associated with these aspects.

Nonetheless, according to the findings of the CIPD Reward Management Survey 2010 only 33 percent of UK organisations have a written reward strategy, whilst a further 31 percent is planning to formulate and implement one. Arguably, in many other European countries the percentage is even lower. The picture emerging from the CIPD investigation is fairly discouraging; even more so, whether we take into consideration that many researches and consultancy studies reveal that firms having a defined reward strategy attain better financial results than those organisations not having one.

Defining reward strategy

As suggested by Armstrong (2006), reward strategy is a “declaration of intent” defining the actions an organisation intends to take in the long term to develop and execute reward policies, procedures and practices, which will enable this to achieve its business goals and those of its stakeholders.

As for the formulation of strategies in general, business strategy included, reward strategy aims at providing guidance, direction and a clear path for developing reward policies and practices within an organisation.

Since reward strategy should aim at helping the organisation achieving its overall business strategy, reward strategy formulation needs to take into due consideration the organisation needs, values and shared beliefs. Nonetheless, a good and effective reward strategy also needs to duly take into consideration employees’ needs and the way these can be satisfied, ultimately balancing the needs of the one with the ones of the others.

The reward system is also of paramount importance to foster and encourage the behaviour, ideals and principles the organisation values and is expected will be exhibited by and shared with its staff.

Similarly to Armstrong, Torrington et al. (2008) argue that reward strategy is most of all intended to align an organisation’s payment arrangement and wider reward system with its business objectives. This means developing systems improving the chances that employees will seek actively to contribute to the attainment of their employer objectives.

Whether the improved quality of service is, for instance, the organization major objective, this must be reflected in a payment system which rewards front-line staff who provides the best standards of service to customers. Whether the main aim of the business is to increase productivity, an approach rewarding efficiency would be instead more appropriate.

The problem is not as straightforward as it might seem, organisations are in fact obliged to compete one another for good staff as well as for customers. In the CIPD 2007 Reward Practices Survey, Charles Cotton points out that “respondents report that employees are becoming just as discerning as their customers in what they want from their employer.” The tighter the labour market becomes, the harder is for employers to recruit and retain the best-qualified people. In such circumstances employers are under increasing pressure to come up with and develop reward packages enabling them to suit both their staff and their own needs.

Why should organisations develop and implement a reward strategy
Reward strategy has to be intended as a means to an end, somewhat of an instrument enabling employers to establish a direct link between the business and the workforce needs and find appropriate ways to meet them. The formulation of reward strategy essentially aims at clearly defining the founding tenets on the basis of which employers should reward their employees, that is, for their contribution to the attainment of the business objectives and of its overall business strategy.

Reward strategy should be thus used by employers to induce staff to behave and perform in a way which can contribute to the achievement of the organisation’s competitive edge. As suggested by Brown (2001), reward strategy is the way of thinking about ways helping the organisation to generate value from the reward issues arising within the firm.

The most compelling reason to develop and implement an effective reward strategy is linked to the circumstance that for the largest number of organisations the personnel cost definitely represents the largest entry of expenses in their profit and loss statements. In many cases, labour cost exceeds 60 to 70 percent of the annual total costs paid by organisations and in any case the largest expense incurred by employers. This is what happens in labour-intensive organisations as a matter of course and in particular in service provider companies, whose activities are entirely performed by means of the work carried out by people, rather than by machineries.

This single reason would be indeed more than enough to draw the attention of business leaders to the way they manage their costs and investments and to the return they are expected to receive in the mid and long term. But there are indeed several additional good motives for employers to develop reward strategies.

Taking for granted that every employer invariably has crystal clear ideas of where his/her organization intends to go, reward strategy could turn to be extremely helpful to:

- Plan how to get there,

- Be sure of being in the right direction, throughout,
- Recognise and determine when the intended objective has been achieved.

Since organisations have recourse to reward management practices in order to attract and retain, but also engage and motivate individuals, these implicitly recognise the positive relationship existing between reward and performance. Having a clear, consistent and aligned reward strategy can definitely enable organisations to strengthen and positively influence that relationship.
Last but not least, as argued by Cox and Purcell (1998), the benefit offered by reward strategies lies in the complex linkages with other HRM practices. Unquestionably, the most important and authoritative HRM models developed in the last decades duly keep in consideration the linkages and, more in particular, the multiplicative and synergic effect produced by each practice when linked or being part of a wider bundle of policies and practices.
Each of these reasons would singularly be worth the effort to develop and implement a reward strategy within an organisation, never mind the results yielded by these practices when implemented altogether.
It must be kept in mind that a reward strategy also plays a pivotal role on helping the organisation to achieve its business objectives and strategy so that the urge to develop a reward strategy is everything but mundane.
The link between business strategy and reward practices
In order to ensure that reward practices are consistent and coherent with the overall business strategy and that these are actually able to help the organisation to achieve its intended objectives, it clearly emerges the need for reward strategy to be aligned with the overall business strategy and be inspired by the values and beliefs on which the business strategy is founded.

As discussed earlier, the relationships between business strategy and reward practices could be intended in the form of a link or pathway which starting from, and aligning with, the overall business strategy and to the HRM policies and practices, ends up in the reward programmes based on the reward strategies previously determined.

The CIPD (2005) provides a clear and extremely useful graphic representation of this pathway:

This representation gives evidence of the key stages which need to be defined, starting from the business strategy, in order to consistently and coherently formulate an effective reward strategy, progressing from:

• The organisation strategy, mission and goals

• The cultural and people requirements to deliver these goals

• The HR strategy and principles

• The reward goals
• The specific reward policies and practices.

Longo, R., (2010), What reward strategy is and why every organisation should have one, HR Professionals, [online].

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