Sunday, 28 October 2012

Strategic extent of reward management

Even though the need for a strategic approach to reward management should be taken as axiomatic, relatively recently, some Authors have cast doubt on the strategic value of reward. Indeed, in some cases, more than the effectiveness of strategic reward it seems that is the need for prudence and the necessity to empirically test strategic reward theory which comes to play. Clearly, if this should be the case, disquiet can be acknowledged and understood.

Those who firstly raised a certain degree of uncertainty, and to some extent curbed their enthusiasm towards the concept of strategic reward, were Armstrong and Brown (2006) who, outlining the traits of new strategic reward management, warned against the excess of attention paid by employers and reward practitioners as well to the reward designing and planning phases rather than to the process and delivery ones. The Authors basically aimed to highlight the negative attitude of reward specialists, increasingly involved on emphasising the rhetoric of the strategic reward idea, rather than its practical impact on business performance and results. Yet, some factors such as the importance of line managers and communications, definitely critical for the successful and consistent implementation of reward management practices, seem to be too often exceedingly neglected. Armstrong and Brown (2006) also maintained that business are over reliant on the effects of strategic reward and so concentrated on using the best fit approach insofar as they end up to overlook the growing pressures coming from the external environment. Rhetoric is usually so predominant that not only the need for line managers having the necessary capabilities and skills, but also reward managers and specialists’ required expertise and technical knowledge are often underestimated and virtually ignored by employers.

This warning was subsequently echoed by Trevor (2008 and 2009) on the basis of the findings of his research based on the analysis and comparison of a number of case studies concerning multinationals organizations operating in the consumer goods industry.

Findings of this extensive research revealed that not always, in terms of strategic pay, what it is attained in practice coincides with what has actually been planned and designed in theory. More in particular the study revealed a sensitive gap between strategy, practices and implementation. Clearly, ineffective and inappropriate strategy and policy execution can lead to a different employee perception vis-à-vis the employer’s expectations and aims,ultimately causing reward practices implementation ending in failure and the consequent withdrawal of the programmes associated with these.
Indeed, the study also revealed that not always using strategic compensation, such as incentives, can enable firms to motivate their staff from management to the shop floor. In some cases, employers who considered pay as the main lever to induce motivation even experienced some remarkable drawbacks. More in particular, had to deal with the conflicts generated by the compensation system which, in turn, caused disengagement, poor performance and unwanted behaviour. Additionally, these conflicts also needed a good deal of time and resources in order to be managed and settled, contributing to keep even further afield employers from the attainment of their strategic objectives.
Trevor (2008 and 2009) also maintains that, even though his research provides strong support to the contingent, best fit model it also provides evidence of the existence of a certain degree of isomorphism. In that, the same managers are moving from one organization to the other and all of the multinational firms investigated were used to having recourse to the same external consultancy. This contributed and accounted for all of the businesses concerned to essentially putting in place nearly the same compensation practices. Risk reinforced by the dominating habit, which could not be wronger, to introduce within a business pay policies only because they have proved to work well in others.

According to Trevor (2008 and 2009), pay practices rather than being designed and inspired by the economic circumstances are mainly driven by the social and political pressures. This is actually the main reason for a relevant divergence between what has been designed in theory and what it is implemented, and hence achieved, in practice occurs.

The investigation, nonetheless, provide clear evidence of the importance of practices execution. Although the different policies were developed by the same consultancy and showed several similarities, in some businesses results were better than those achieved in others.

It is important to highlight that, rather than proposing to abandon a strategic approach to compensation, Trevor posits a revision of the approach to strategic pay and maintains that findings of his research do not question the importance of compensation. Prudence, however, is mandatory and reward specialists should be cautious about promising quick and unquestionable positive results. Whereas the benefits of strategic compensation are in fact difficult to assess and measure, the drawbacks of managing it inappropriately and inconsistently would emerge manifestly (Trevor, 2008).

Trevor (2008) posits that reward specialists rather than promising value maximization by means of strategic compensation should, instead, act in order to minimize the risk associated with compensation, operating, hence, as risk managers in the compensation field. This conclusion is certainly consistent with Trevor’s recommendation that prudence needs to be used when introducing and implementing a reward strategy within an organization, especially in terms of the outcomes the new strategic approach can enable employers to achieve and of the necessary period of time in any case required to achieve them.

Indeed, these recommendations are absolutely justified, but it could actually appear to be rather limiting considering reward management, and the role played by reward specialists, as only restricted to risk management. Although in fact it is absolutely true that employers and reward specialists should definitely pay much more attention to this aspect, risk management can be considered part of strategic reward but cannot totally be identified with it. To put it another way, reward risk can be considered as a mandatory prerequisite of strategic reward management rather than as an activity reward specialists should deliver in lieu of defining and identifying a strategic approach to reward.


Recent Reward Risk Survey carried out by the CIPD (2012) has identified, amongst the nine reasons for reward risk disquiet, misalignment between reward and business strategy as the fourth most problematic issue reward specialists will need to cope with over the next two years. Attraction and retention of quality staff, pension cost management, budget limitations and the circumstance that incentives are not motivating staff are amongst the main concerns of reward managers and specialists. Strategic reward is indeed meant to address these and other organizational issues.

Reward or pay strategy
But there are a few aspects emerging from the topics discussed above which definitely deserve to be investigated more in-depth. One of these relates to terminology. Whilst in fact in his studies Trevor (2008 and 2009) refers to pay and compensation, Armstrong and Brown (2006) refer to reward. Indeed, Trevor (2008 and 2009) in his research clearly refers to pay and compensation basically meaning by these salary. Yet, he associates the effects of aligning employees’ behaviour to organizational strategy in order to achieve competitive edge. Pay should hence represent the way employees should attract, retain, engage and motivate staff and induce individuals’ commitment and loyalty. Indeed, that money of its own could not enable employers to achieve all of these remarkably ambitious objectives can nowadays be considered unquestionable. Findings of several investigations in fact have revealed that, at best, money can eventually help employers to just attract quality individuals, but it can hardly enable employers to retain, and let alone motivate and engage, them especially in the mid- to long-term.

Clearly, reward specialists promising miracles to their businesses shareholders thanks to new pay strategy approaches would seriously put at risk their credibility and reliability as reward specialists. Pay is just one of the several components forming the overall reward system which should be based on total reward where results and objectives can be attained thanks to the combined effects of different, concurring and simultaneous forces, i.e. thanks to the effect of the bundling approach.

Essentially it can be said that the findings of Trevor research (2008 and 2009) are not that surprising after all. It actually appears to be slightly different, instead, the point made to this subject by Armstrong (2009), who raised some doubts to the extent reward could be considered strategic. Reflections following the expression of concern for the strategic significance of reward (Armstrong and Brown, 2006) are actually comprehensible and compelling, these are essentially intended to highlight the importance of execution and of achieving real results rather than just focusing on rhetoric and theory. Additionally, the Authors appropriately warn about the difficulty of the process and put evidence on the circumstance that real change and good results cannot be attained quickly.
As mentioned above, Armstrong and Brown (2006), differently from Trevor who basically refers to strategic pay, refer to reward and seem to warn about the strategic value and effectiveness of reward management. This is actually more surprising in that the Authors are firm supporters of the total reward approach which, being inspired to the bundling idea should be considered strategic beyond (a) reasonable doubt. Total reward approaches enabling employers to develop an effective value proposition, formed both by tangible and non-tangible components, should effectually enable employers to pursue their intended strategies. 

Clearly, all of this has not to be confused with simplification or with the promise of the desired outcomes achievement, especially in the short run. The developmental and implementation phases are important as well as tricky to deliver and a constant review is necessary in order to analyse if the intended results have been achieved and eventually what kind of changes need to be implemented.

Rhetoric and practice
The crucial point here is essentially represented by effectiveness. Even though rhetoric, design and development are undoubtedly of paramount importance, these cannot really be considered as detached from what in the end matters the most, i.e. the final practical outcomes and results. Theory of strategic reward management is absolutely important in that it is very much associated with defining and identifying the route, the direction and the desired objectives an organization intends to pursue by means of reward management and the underpinning principles, guidelines and philosophy to which it has to be inspired. Once the direction and the objectives have clearly been identified and strategy implemented, assessing the effectiveness of the strategy which has been executed, in that considered the most appropriate, is key. Whenever reward specialists should find out that the achieved results are not as effective as expected, appropriate action will need to be taken promptly and accordingly.

It can be said that the effectiveness of reward strategy rhetoric has to be assessed as a marketing strategy or, for instance, as a radio or TV commercial. It can also be nice and interesting to watch and/or listen to, but if it does not help the organization to sell more items of the marketed goods it clearly is ineffective and needs to be withdrawn and changed.

The arguments provided by Armstrong and Brown (2006) in support of the care and attention which need to be secured to strategic reward approaches undoubtedly deserve to be supported, but have little or nothing to do with the questionability of the strategic importance and relevance of reward management. Developing fascinating theoretical concepts which do not bring results in practice might possibly be an interesting exercise but it will hardly be financed by organizations shareholders and let alone would ever be supported by a business’ CEO, simply because it would not lend any practical support to the achievement of an organization objectives. Being cautious about the results which can be achieved, especially in the short run, by means of a reward strategy implementation is also a matter of good and common sense. Yet, paying extra care to external influences is part of the process, as well as is part of the process constantly reviewing and assessing the reward system introduced in order to ascertain that this is in line with the exogenous environment and its developments too. But all of these factors do neither jeopardise nor weakens the strategic importance of reward; they rather show how difficult to manage the process is.

The importance of execution
Indeed, strategic reward is not really immune from all of the vulnerabilities typical of strategy in general. The importance of execution is not just an essential feature and requirement of a successful reward strategy, it is indeed a crucial aspect of, for instance, business strategy as well. So important is considered business strategy execution that it is even gaining growing importance the idea that the real problem with strategy is not its definition rather its execution. Linda Gratton (2000), for instance, suggests that “There is no great strategy, only great execution.”
Another example of the importance of strategy execution can be identified in marketing strategy. Zyman (1999) suggests that if marketing specialists want people to buy their organizations’ products they have “to plan strategies carefully and implement them aggressively.” Once again the importance of implementation clearly emerges as a crucial factor contributing to the success of the overall strategic approach.

To be successful, the implementation of a reward strategy needs the full support of every single individual within the business. But in order to be embraced and supported by everybody strategy needs, first of all, to be known and understood by all of the employees. For its successful execution, the genuine involvement of top and middle-management is crucial. Indeed, it is also important that managers will have the required skills and capabilities and receive the training necessary to properly and effectively carry out this difficult task. Again, all of these factors are absolutely important and have to be considered mandatory prerequisites for a successful strategy implementation. It can hence be said that managing reward strategy as well as business strategy is everything but straightforward: a good deal of care needs to be paid to many details, but this does not entail that reward and business management cannot be strategic.

It can, on the contrary, be said that the success of reward strategies rests with employers and reward specialists and their ability to properly, effectively and consistently execute what they have developed in theory and to eventually assess and review strategy in order to achieve the intended, planned results.

Execution as source of competitive advantage
More importantly, recognising to execution a distinctive merit for the overall strategy success can be considered as a significant element to support the importance of human capital as an element effectively contributing competitive edge to a firm. Whereas, although inadvisable and injudicious, theories and practices can actually be imitated, execution cannot. Reward specialists, the overall organization’s management and ultimately all of the individuals forming the organization can prove how important their personal contribution is to the successful attainment of the final objectives to which the strategic approach is inspired by means of the successful execution of strategy or to put it another way, by the contribution each of them will be able to provide to the attainment of the pre-identified strategic outcomes.

Strategic compensation
On the other hand it must be neither disregarded nor forgotten the hygiene significance of pay. Regardless of the effects that financial reward might have or otherwise on individual retention, motivation, engagement and commitment in fact according to the circumstances and the external influences impacting individuals psychological contract, pay is an element to which individuals attach a certain importance and which employers can wisely try to use in a relatively strategic way too.

Although total pay represents one of the groups forming a total reward system, it is in turn formed by a series of components which need to be wisely and appropriately used by employers. This does not mean that businesses can engage and motivate staff exclusively by means of financial rewards, but that they can and need to wisely use the financial components of reward available to them in order to influence individuals’ behaviours, curb disquiet and better provide support to their overall approach to strategic reward.

Indeed, the benefits of aligning compensation to strategy were already predicated in the early 1970s (Salter, 1973), whilst the effectiveness of this approach was also supported by some empirical studies (Kerr, 1985 and Galbraith and Merrill, 1991).

Boyd and Salamin (2001), analysing findings of the investigation they carried out over two Swiss financial institutions, found out that, with the exception of top management, there is not a causal-effect relationship between strategic compensation and basic salary. Their study also revealed that Prospectors (organizations characterized by a strong orientation to market and aiming to develop new products) offers the highest level of variable compensation, mainly bonuses, independently of the hierarchical position. Whereas, with the exception of top management, differences between Defenders (businesses internally oriented, aiming to contain cost and offering a stable range of products) and Analyzers (which are somewhat in between Prospectors and Defenders) are insignificant.
Boyd and Salamin’s (2001) investigation also revealed that, differently from bonuses, factors influencing base salary are quite limited. Even though it is recognised to base salary a slight strategic value, more than being influenced by strategy in fact it is mainly set according to individuals’ features (age, position, gender). Base salary is, hence, likely to be more static and more difficult to manage at strategic level. On the other hand, bonuses represent the most strategic component of pay and, being acknowledged regardless of personal characteristics, can be adapted and flexed rather easily. Since coherence and flexibility represent the most important and, at the same time, the trickiest objectives to attain by means of pay systems, Boyd and Salamin (2001) suggest to use base pay to achieve consistency and bonuses to endorse flexibility.
Indeed, findings of the different studies analysed by Boyd and Salamin (2001) (Rajogopalan and Finkelstein 1992 vs. Balkin and Gomez-Mejia, 1990; Napier and Smith, 1987 vs. Pitts, 1976) provided conflicting results, so that they concluded, consistently with Trevor (2008 and 2009) suggestion, that although the assumption that businesses align pay system to corporate strategic orientation has been widely supported, outcomes have actually been scarcely assessed. They also admitted that aligning compensation systems to corporate strategy is more intricate and elaborate than believed and that the kind of hierarchy in place within the different firms plays a relevant role on designing pay systems, regardless of being aligned to 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 strategic alignment of reward. More in particular, the investigation revealed that “careful reward management”, enabling employers to retain staff and curb individuals’ concern over pay, contribute to improve relationships between businesses and staff. This result, as it will be further seen below, is actually in stark contrast with the findings of Trevor investigation, according to which strategic compensation is, instead, cause of conflicts between employers and employees.

The study also revealed that private sector organizations adopting different business-level strategies also adopt sensibly different reward strategies. In line with the findings of Boyd and Salamin’s (2001) investigation, 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 firms’ 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 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 to the overall business strategy. Additionally, consistently with Trevor’s (2008) investigation findings, the best fit approach emerges as the favoured method used by employers. Reportedly, all of that produces 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.

Businesses having experienced problems with their staff because of the financial reward system in place are likely to use individuals’ potential, 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 by the CIPD (2012) investigation is that, despite the long and intense debate about the effectiveness of 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 decisions 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.

Longo, R., (2012), Strategic extent of reward management, HR Professionals, Milan [online].

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