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.
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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