Sometimes employees leave their employers not their managers

The development of effectual employee retention and most of all of talent retention practices definitely represents one of the subjects firmly high at the top of business leaders’ and HR directors’ agenda. The process is virtually invariably the same: individuals very keenly and enthusiastically join the new employer and later on disillusioned leave this.

Employees leave their employers for a whole range of reasons which can be broadly grouped into two different categories: endogenous-environment- and exogenous-environment-related.

Internal-environment-related reasons

One of the reasons, arguably the most recurring reason, for employees leaving their organization is the business management, more specifically their line manager.

The role played by managers

Once candidates have been identified as the best fit for the role and officially appointed to the job, the employer representative with whom these establish the stronger and most frequent contact within the organization unquestionably is their line manager. The establishment of a good relationship between managers and employees, however, does not invariably prove to be smooth sailing. Whenever managers do not succeed in building and developing good relationships with their direct reports in fact the latter tend to become the more and more ill at ease with the former in particular and in the workplace in general. Disappointed employees start consequently making plans to leave the organization as soon as they can. This circumstance has been properly summarized by Buckingham and Coffman (2005): “Employees leave their managers and not their employers”, and rephrased by MacLeod and Clarke (2009) who suggested that in actual fact individuals join organisations, but leave later on their managers.

It doesn’t go unnoticed that all of that clearly occurs at the expenses of employers and to the detriment of the regular unfolding of their business activity. It is likely that employers have carefully and arguably not effortlessly put in place all the resources deemed necessary to attract and recruit the right individuals. Albeit different from employer to employer, it is an axiomatic fact that the cost of the recruitment and selection process is invariably high.

The sub-factors accounting for individuals deciding to leave their employer by reason of their manager may be in turn associated with different circumstances. Also in this case these may be grouped into two main different categories: on the one hand can be included the causes associated with managers’ leadership style; whereas on the other hand those linked to managers’ inability to improve job design and “give individual a good job.”

Leadership style

Increasingly, individuals pay attention to the way they are treated by their managers and tend to associate with this aspect a growing importance. The leadership style adopted by managers needs hence to be appropriate and has to fit both the circumstances and the business culture. The most undesirable situation however occurs when managers adopt no leadership style whatsoever and, even worse, when these totally lack of style when interacting with their direct reports.

Employee involvement and participation

With some exceptions, employees at large aim at performing interesting and fulfilling jobs. It is unlikely that individuals may decide to leave an organization whether their managers organize and design their staff work in a way that makes it significant, compelling and varied and involve employees in this process stimulating and favouring their active participation. As Herzberg (1987) used to say: “if you want people motivated to do a good job, give them a good job to do.”

Not really an easy task

The role of managers however is everything but straightforward. Constantly finding new and more effective ways to improve processes and the way the job can be performed is clearly easier to say than to achieve in practice. Even more so when as it usually occurs managers also strongly contribute with their practical work to the final outcome produced by their unit.

Individual involvement can indeed prove to be the ultimate means to an end. Whether employees are involved and made aware of the overall process which leads to the production of the final outcome, these can actually help managers to identify effectual options and sounder and more appropriate solutions.

Forced to move out of their comfort zone

Albeit managers represent the most common cause for employees leaving an organization, this is not clearly the only one motive for employees making such a decision.

Individuals may also decide to leave their employer by reason of some undesired changes which they perceive as forcing them to leave their comfort zone or, more in general, because they feel that organizational climate has drastically changed, or rather, worsened insofar as to perceive as irreversibly altered their appreciation of the working environment. Such new circumstances may actually sometimes be the fruit of line managers’ initiative, but most of the times these changes are introduced on request of the company top-management and board.

Under such circumstances individuals perceive the workplace somewhat of hostile and no longer enjoyable as it was previously used to be perceived. The detrimental impact caused by this change is at this stage considered as remarkable insofar as to be considered irreversible and the action of leaving the organization hence necessary.

Lack of opportunities for growth and development

The content of the unwritten psychological contract has changed over time; nowadays, individuals want to perform significant and fulfilling jobs and are hence thirsty for growth and development. Whether an individual should realize that s/he is performing a dead-end job and that s/he will never be offered opportunities for growth or development it is very likely that this decides to leave.

External-environment-related reasons

Albeit more often than not the main reasons for employees deciding to leave their current employer are associated with the endogenous context, there are indeed some other additional causes prompting individuals to leave a company.

In some cases, employees can be lured by the objectively captivating and challenging employment offers coming from the external environment, which can actually provide these real opportunities for development and growth that could not even potentially be offered by the current employer.

Especially in the case of a tight labour market, it should not really come as a surprise learning that a talented employee has received an irresistible offer from a different employer. What worse, under such circumstances individuals may also decide to leave very quickly the organization in order to avert missing the boat.

It is not a matter, or rather, not exclusively a matter of value proposition, that is, of the worthiness of the reward package offered; the chance to take a genuine new challenge up, usually associated with a growing level of responsibility and autonomy or with the immediate involvement in a prestigious or ambitious project, can definitely and objectively justify an individual decision to leave an organization; albeit not triggered by any endogenous-related reason.

The international perspective

Sometimes the decision to leave an employer can also be based on the employee desire to move and work abroad. Individuals are the more and more willing and even eager to relocate in a foreign country and experience new lifestyles. Furthermore, whereas for centuries the only attractive places where to move internationally were mainly located in North-America, Australia and Europe, nowadays the appeal and seduction of other areas, especially of those located in South-East Asia, are remarkably helping big corporations to expand their “offering” and contributing to make it more attractive relocating abroad to a constantly increasing number of people.

Also in this case an individual decision to leave his/her current employer is not triggered by any bad feeling toward this. It goes without saying that whether an employer should be aware that some of their staff would be eager to relocate and work in a different country where the employer has a branch, should an opportunity arise, this should be better previously discussed and eventually offered to an internal employee, rather than being offered directly to an external applicant.

Finally

It can be concluded that when an individual leaves his/her employer for internal-environment-related reasons this is due to causes which are actually under the employer direct or indirect control.  This clearly entails that the employer could have averted this type of undesirable event to occur.

It is however hardly believable that once an individual has decided to leave the employer might actually persuade this to stay. In order to prevent unwanted occurrences to happen organizational climate, and in some cases individual attitude toward the employer, should be regularly investigated and monitored as a matter of course: prevention is invariably better than cure.

By contrast, whenever individuals, for talented and significant these may be for the organization, decide to leave the business by reason of objectively justified grounds, that is, a genuine challenging opportunity coming from the external environment, the employer has nothing to regret and to reproach itself. The only exception being whether this was actually in a position to offer a new challenging role to the individual but didn’t.

When reward comes to play

In some instances the worthiness of the reward package received by an individual can cause, reinforce or support his/her decision to leave an organization. Also in this case the drastic employee decision can be justified or be based on endogenous-context-related or exogenous-context-related grounds.

The internal context

As the equity theory teaches us (Adams, 1963 – 1965), individuals build and develop expectations in terms of reward in the workplace. These expectations are essentially based on the assumption that reward is commensurate with the output yielded by each individual and as such equitable. The tenets at the basis of the equity theory are in turn reinforced by the “distributive justice” theory (Leventhal, 1980), which lays great emphasis on the role of managers and more particularly on the fairness they should use when making decisions about their direct reports pay.

Endogenous-environment-related pay issues are typically directly or indirectly linked to bias and unfairness. Individuals are usually unwilling to accept discrepancies in pay levels whenever these are not justified by any means; whereas employees are habitually absolutely willing to accept these whether the individuals receiving higher levels of pay objectively contribute more to the organizational success and yield better tangible results.

Employers and managers should hence pay particular attention to this aspect. These theories clearly apply not only to talents, but also and to some extent mostly to the overall organization human capital. Whether employees are performing and behaving as expected by the employer, losing them would just represent a waste of time to replace these and of money to select and train the newcomers.

The external context

Ensuring internal equity, and hence not equality, can help employers to retain the existing staff, but can hardly help these to contrast the pressure eventually coming from the exogenous environment.

Whether in fact the internal pay rates would not be in line with the rates characterizing the relevant labour market, retaining current employees could just prove to be a sorely tricky feat to attain, never mind attracting new quality individuals.

Market pricing and, where applicable, market forces have to be hence invariably kept into due consideration. Whether individuals should realize that, irrespective of the fairness applied internally, their pay levels are sensibly lower than those offered in the market, is it is very likely that, especially whether the labour market is tight, these will leave the organization.

In order to avert this undesired event to occur employers, by means of reward professionals, should constantly monitor the external labour market and the trends characterizing it. Whether during this activity a gap should be identified, this should be properly investigated and the reward package of the people filling the relevant positions eventually revised.

To identify what the real reasons for employees leaving an organization actually are is paramount to gather and collect the necessary data. Exit interviews are definitely the best tool to gather this information and help employers to identify appropriate and effective solutions to contrast the phenomenon.

Longo, R., (2014), Sometimes employees leave their employers not their managers; HR Professionals, Milan [online].

At times the real problem is when employees stay, not when they leave

Organizations habitually concentrate all of their efforts on coming up with new, sound solutions to improve the effectiveness of their employee retention practices. From this point of view, it could be argued that organizations treat their employees as their customers. Since competition in every market has become increasingly harsh, expanding the current clientele has proved to be an extremely tricky feat to perform in practice so that employers have found out that a great part of their efforts should be devoted to the retention of their current customers, too. Similarly, in addition to the struggle aimed at attracting new talents from the external environment, employers have realized that a considerable amount of resources should be used for and directed at retaining the talented individuals the organization already employees.

Inasmuch as not all of the customers are good customers, nonetheless, not all of the employees are good employees. Customers who do not timely meet payments on their orders, for instance, are not good customers, never mind those who do not pay for the goods or services they order at all. Likewise, individuals who do not behave as expected by their employer or do not perform at the standard desired by this are not good employees. Businesses should hence devote close, careful attention to the employees who stay with the organization. At times, especially in those organizations in which reward is based on individual length of service, that is, on the mere circumstance of employees “being still there”, the fact an employee remains with his/her organization might indeed not necessarily represent a good event for the employer.

Irrespective of the circumstances which have accounted for an individual having decided to leave his/her employer, whether this leave is because this is active, determined, focused and, most of all, because this considers his/her competencies and skills valuable and thus marketable. After all, it actually hardly happens that an individual leaves his current organization whether this has not already received a similar or even better offer from a different employer, which provides an evidence of its own accord that the individual really has some qualities. With the exception of those cases in which individuals are very good at selling themselves, it could be hence argued that people who leave a business are habitually individuals who perform at appreciable levels or have the skills and capabilities to potentially perform at significant standards. By contrast, some individuals stay and are by no means supposed to leave their employer because these are well-aware that no other organization in the market would offer them the same reward package as that offered by the present employer.

People who perform any given job since a decade or longer and receive automatic salary increases based on length of service, but have not developed any skills or capabilities over time, would find it particularly difficult to change their employer whilst continuing to receive the same level of pay. In essence, organizations whose reward system is based on length of service ensure to individuals regular pay increases irrespective of their real contribution to the business results. This entails that in such instances individuals attain over time appreciable levels of pay irrespective of their contribution, performance and capabilities. By reason of their relatively considerable income, these people would find it sorely difficult to find a new job enabling these to receive from the outset the same current level of pay elsewhere, unless these have not gained substantial, remarkable abilities, competencies and expertise over time.

The circumstance an individual remains with his/her employer for decades or even till retirement, notwithstanding, has not clearly be seen and perceived as a negative event. On the contrary, this occurrence should be hailed as somewhat of an achievement by the employer, but only and only whether the employee is satisfactorily contributing to the organizational results. Individuals who receive a valuable reward package and regular pay increases from their employer regardless of their efforts and contribution to the organizational output might tend to create somewhat of a comfort zone and would clearly eventually resist any attempt to alter the favourable state of play. The existence of such circumstance can indeed produce remarkable downsides and prove to be counterproductive.

Employees who with the passing of the years have completely lost interest and enthusiasm for their job and pay lip service to the way they perform their daily activities are very unlikely to develop new skills and capabilities; let alone can these help managers to redesign the way the job is done. By contrast, the lack of interest and the insufficiency used when performing their job may potentially account for these individuals losing part of their abilities. It is hardly believable that, once this vicious circle has been triggered, the level of performance and the results yielded by these individuals might be considered as significant by the employer and fulfilling by themselves.

More often than not, in order to prevent conflicts to openly emerge managers tend to avert dealing with this type of employee behaviour. Conflicts, whether evident, should eventually be managed and since it is objectively difficult to tackle such types of problems, managers habitually prefer to overlook such situations. This clearly represents the worst approach: firstly because, openly emerged or not, the conflict is essentially already existing, secondly in that such occurrences can negatively impact the other employees performance and the overall Unit climate.

Inasmuch as these circumstances are undesirable and difficult to manage, adopting the right approach can definitely help managers to effectually deal with these. It is indeed crucially important that managers take appropriate action in that such situations can just risk degenerating and are unlikely to ameliorate with the simple passing of the time. The activities not performed by these people should be otherwise permanently carried out by the other colleagues, with the obvious consequences this will produce for their workload and the overall Unit climate. Yet, other employees efforts notwithstanding, the Unit concerned may risk not yielding the desired result, fact which according to the reward system run within the business may in turn make an impact on the income of all the employees of the Unit.
  

The first step managers should invariably take is hence that to frankly talk to the individuals concerned, try to find out which the roots of such behaviour are and agree with these the initiatives and actions necessary to let them feel back at ease in the workplace. Apathy amongst employees can be sometimes caused by their discontent with the management decisions, which these may perceive as unfair and biased. In other cases, individuals might (also inadvertently) decide to give up doing their best at work by reason of considering their job monotonous and repetitive or because they have never been offered opportunities for growth. At times, such behaviour can be triggered by the employee perception of the existence of a simultaneous combination of two or more of this type of circumstances.

Openly discussing the reasons behind the employee behaviour can definitely help managers to find out which the origins of such behaviour are and to identify the most appropriate solutions to address the problem. This is not clearly a straightforward objective to attain. Sometimes employees perform below an acceptable standard just because these do not consider it worth making any effort to attain what they receive as a matter of course and take as axiomatic, that is to say their pay. In other cases, the managers’ task is particularly tricky in that, for apparently mundane an activity might be considered to be by the employees concerned, this is absolutely necessary for the Unit to yield the final results. Since the task performed by these employees is truly significant for the business and the attainment of its overall objectives, in this particular instance job design and the employees’ firm and stable involvement should help managers to effectually resolve the issue.

Definitely not an easy task for managers, but turning a blind eye to employee misbehaviour and poor performance will never ever enable these to identify and overcome the problem.

How can reward practises help

In the case of employees deliberately underperforming and misbehaving, despite the management attempt and manifested willingness to mend relations with the individuals concerned and find appropriate solutions, the benefits produced in this sense by the sorting effect can definitely help. Usually used to attract and retain quality individuals from the exogenous context, the sorting effect can be also used to offer more generous reward packages to the company best performers in order to encourage worst and bad performers to either raise their level of contribution or leave the organization. This strategy is indeed likely to work properly when managers have been devolved a considerable degree of latitude to administer the reward budget and a variable pay scheme is in place. By contrast, whether the business reward system is length-of-service-based some individuals may find it pointless to make extra efforts to increase the value of their reward package: the efforts necessary to attain the additional benefit may in fact not be proportionate to its worth. In these instances and according to the circumstances, employers may attempt to reach with the employees concerned an agreement on a severance package.

 

Reward practices may also prove to be useful to engage employees when these are performing repetitive tasks. Gain-sharing programmes, for instance, may show to be effective to make these individuals perceive the significance of their contribution to the overall organizational outcome. Notwithstanding, every financial reward manoeuvre should preferably be implemented in combination with some other initiatives; clearly explaining to each individual how his/her work fits into the overall business process, for example, should invariably be part of the identified bundle in that of paramount importance.

Constantly involving individuals with the aim of coming up with new and more effective ways of designing and performing their job can definitely help, too. Yet, offering employees, according to their attitudes and behaviour, opportunities for horizontal and vertical growth should be placed high at the top of the line managers’ agenda.

Employers should also seriously consider offering individuals the opportunity to expand their knowledge and continue their education. Such initiatives, even whether employees are performing repetitive tasks, will make individuals understand that their employer really cares about them. The psychological contract has changed over time and for employees the opportunity to extended their education and gain new capabilities and expertise, contributing to make their skills more marketable, really matters and counts.

The managers’ and employers’ task is unquestionably daunting, but whether these should identify the most suitable tools and initiatives, which they can realistically implement to support their quest possibly by bundling them where practicable, the task would show to be easier and the final result definitely a win-win for employers, managers and employees as well.

Longo, R., (2014), At times the real problem is when employees stay, not when they leave; HR Professionals, Milan [online].

What is the problem with executives’ and directors’ pay?

During the last decade, executive directors and non-directors pay has attracted public and media interest mainly by reason of the overly generous pay offered by employers to this specific category of employees. According to research, in the period from 1998 to 2011 the median total remuneration of FTSE100 CEOs recorded an average growth from £1m to £4.2m. In 2011, nearly a quarter of FTSE 100 CEOs benefited from a 41 per cent total reward package value rise vis-à-vis the previous year; however, the average pay increase in the period has been calculated at 12 per cent. The findings of the investigation also revealed that pay increases mostly occurred in the form of deferred bonuses and long-term incentives, whereas base pay increased of just 2.5 per cent on average (Manifest and MM & K, 2012).

 

The worth of the reward packages earned by CEOs and the pace at which these have increased during the last years have both attracted public interest and bad press, insofar as political leaders too have turned their attention to this issue and laid specific laws down. In general, governments and regulators of many European countries have imposed restrictions on public sector and financial services organizations, mostly whether these are state-supported. None of the European countries has, however, adopted any particular measures in regard to the executive pay of the private sector organizations.

 

The main reasons why during the last decade executive pay has remarkably increased are usually associated with:

Ø  The extended level of responsibility taken by CEOs for organizations becoming increasingly larger and complex (Kaplan and Rauh, 2007);

Ø  The drawbacks produced by the need for more strict governance controls over executives’ pay, requiring many employers having to disclose executives’ pay details. Since employers benchmark their directors pay against the reward packages offered by their competitors, this has caused businesses to offer executives more generous reward packages in order to retain and attract quality professionals. For the same reasons, employers of countries where no regulations on executive pay transparency are in place have felt a fortiori encouraged to offer directors more generous reward packages (BIS, 2011);

Ø  The evolution of rewarding systems which tend to become the more and more sophisticated, accounting for employers paying larger amount of variable pay in a bid to more effectively link executives’ performance and results to pay;

Ø  The trend pushing reward specialists to develop more complex reward systems favouring deferred pay. Since according to these arrangements the higher the level of risk the higher the pay, the base for pay is usually inflated in that  objectives might not be attained and executives might in turn receive reduced bonus payments, if any (PwC, 2011);

Ø  The complexity of reward arrangements which may cause the link between performance and reward to be blurred, at best, and completely lost, at worst. Moreover, being these systems based on a larger number of reward options, it is very likely that in the end some of them will be paid despite not completely justified by the real executive performance.

 

According to the Croner’s “Directors’ Reward Survey” (Cree, 2010), however, the typical director’s fat cat image can be considered just as an executive representation of the past. Findings of the investigation revealed, but this should not come as a surprise, that many executive directors work more than 60 hours a week (21 per cent) and that some of them seldom take all of their contractual holidays. As regards the link between pay and performance, only half of the participants said that their pay is linked to performance; it also emerged that this occurrence is mostly typical of large organizations. Nearly 50 per cent of directors reported just a 2 per cent salary increase, 37 per cent said that their pay had been frozen and 9 per cent of the respondents to the investigation said that they had even undergone a pay reduction. Only 40 per cent of the directors reported having received a bonus during the previous twelve months. The investigation also revealed that the typical bonus amount was of £25,000 for executive directors and £15,000 for executive non-directors.

 

The findings of the survey actually depict a scenery overly different from that known to the general public. The investigation backdrop may possibly help to find out the reasons for such different depiction. The questionnaire was sent by Croner to 45,000 members of the UK Institute of Directors (IoD) whereas only 745 executive directors responded to the survey, namely less than 1.7 per cent. The final result of the overall investigation is hence the result of the opinion expressed by a minority of directors, possibly those less happy with their current experience and circumstances.

Notwithstanding, the real reason for executive pay having caught the public interest and having had bad press during the last decade is not that much associated with the generous sums of money paid in absolute terms by employers to this specific category of professionals, but rather with the lack of a clear cause-effect relationship between such generous payouts and performance. In many cases, executive directors have received very large amounts of money even for having failed to attain organizational objectives. This bad practice, known as “rewards for failure”, has also actually had a remarkable impact on executives’ and directors’ payment of severance packages. In some cases in fact executive directors have received extremely generous severance payouts upon leaving their companies also after having outrageously failed to attain their objectives.

 

Averting to reward executives for failure

In many countries the awareness of the negative impact provoked by such bad practice has prompted governments to take appropriate actions. However, also the shareholders of many organizations have expressed concern for the serious threat this undesired habit could pose to their companies, not least from the reputational viewpoint.

 

The identification of a series of measures aiming at preventing executives to be rewarded for failure has become hence necessary. Amongst these, requiring shareholders vote on executive directors pay and attributing to this a binding value is definitely considered of crucial importance. Giving firms’ shareholders “say on pay” is believed to prompt these to be more involved in the business management and to publicly provide evidence of the significance organizations associate with their executives’ pay decision-making process. Indeed, by reason of the relevance the phenomenon has lately acquired, shareholders’ vote should also be introduced for severance payments determination. In the UK, this requisite has been legally introduced by the Companies Act 2006.

 

Since the largest component of executives’ reward packages is represented by variable rewards, particular attention has to be paid to the development of schemes establishing a clear line of sight between pay and performance. Care needs indeed to be taken during the implementation phase too; also in this case a sensible difference could emerge between what has been designed on paper and implemented in practice.

 

The role of remuneration committees is clearly paramount and members composing these should never forget that their main objective is that to foster the long-term interest of the business.

 

Members of remuneration committees are habitually individuals who have the professional experience and expertise to identify challenging objectives, set appropriate reward packages and develop effective assessment methods of executive performance. On the other hand, however, these individuals, just by reason of their past experience, are also considerably influenced by the “generous pay” culture, insofar as what may be deemed as excessive for the general public could be simply considered as a norm for them (The High Pay Commission, 2011). Additionally, remuneration committee components usually tend to design and introduce pay arrangements based on traditional approaches, rather than coming up with new methods fitting the business circumstances (Main et al, 2008).

 

It is the more and more believed that diversifying the composition of these committees, avoiding these to be entirely formed by non-executive components of the board, may definitely help (BIS, 2011). To this extent it may turn to be particularly effectual asking independent members with, for instance, academic, consultancy and advisory background (Hay Group, 2011) to become part of the commission with no need for these to become full non-executive members of the board (BIS, 2011). The different background and expertise of these individuals could indeed enable organizations to gain new perspectives and develop new approaches to executive pay practices (TUC, 2011).

 

An additional feature, more directly associated with the full independence of the remuneration committee members and in turn with their impartiality of judgment in terms of executive pay decision-making, relates to the circumstance that many directors may cover at the same time different positions in different organizations. This may cause that, for instance, a person making pay decisions about the pay of another individual in a given organization is subject to the decision made by that same person in a different organization, still in terms of reward. This could clearly affect the pay decision process in both organizations and cause evident conflicts of interest which should be averted from the outset (BIS, 2011).

 

Some stakeholders in the UK have supported the idea that, in order to implement a radical and effective change in the executive pay decision-making process, employee representatives should be invited to be part of remuneration committees. This recommendation is based on the assumptions that employees would better dissect pay or severance pay proposals practically aiming at rewarding executives for failure and would better assess extremely generous executive pay offers and increases vis-à-vis those offered to the other employees, especially when the latter have benefitted of very modest pay increases or the business has made people redundant.

 

Where implemented this initiative has produced mixed results, as well as has produced mixed reactions the proposition to introduce this initiative as a rule in some other countries. According to research conducted by Buck and Sharhrim (2005), for instance, employee involvement has produced positive results in Germany; by contrast, several other investigations have underscored the difficulties emerging when trying to execute this approach in practice in other countries.

 

The effectual implementation of this initiative implies first and foremost that employees have or gain an in-depth knowledge of the business strategy. Additionally, it should be clearly defined what their responsibilities are and this aspect could be clarified only determining whose interest these are supposed to protect: that of the employer, that of the employees or both? Whether these should be representative of the employer interest, it should be assumed that it would be up to the employer nominating these, whereas in the case they should be representative of the overall workforce interest it should be most appropriate these to be elected by the employees.

 

The implementation of this approach should be also clearly based on the company law in force in each country. Europe, for instance, is characterized by a fair level of heterogeneity in term of employee representation at board-level insofar as three different grouping of countries can be identified with reference to this aspect (Worker Participation, 2013):

Ø  Countries without any specific legislation (Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Lithuania, Malta, Romania and the United Kingdom),

Ø  Countries where employee board-level representation is limited to state-owned companies (Greece, Ireland, Poland, Spain and Portugal),

Ø  Countries where employee board-level participation is extended to private sector employers (Austria, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Luxembourg, the Netherlands, Norway, Slovakia, Slovenia and Sweden).

 

Notwithstanding, board-level employee representation is differently regulated in each nation. In many countries, for instance, it is subject to the number of employees forming the overall workforce. The lowest threshold has currently been set in Sweden with 25 employees, whereas the highest in France with 5,000 individuals. Differences are also concerned with the rate of board seats occupied by employees and the title seats are occupied, namely whether these are taken on a supervisory board or single tier board title (Worker Participation, 2013).

 

The introduction of laws regulating board-level employee participation can also have an impact on, and may require hence a revision of, the company law accordingly. In the UK, for example, company law entails that individuals participating at board or committee meetings are companies’ directors. The introduction of a rule extending employee participation to remuneration committee would, by extension, require the amendment of the company law accordingly.

 

Irrespective of the legal constraints, however, it can be considered questionable assuming that employee involvement in remuneration committees could reveal to be beneficial for organizations. Once employees would be invited to participate to the committee meetings these should clearly have an active role and it is unlikely that these may have the technical knowledge and experience to actively participate on a decision-making process for which committees members, when needing advice, are used to have recourse to accredited national and international firms. As discussed earlier, executive pay arrangements tend to be the more and more complex and sophisticated; employees not having the required expertise and experience would clearly be in difficulty and would be essentially unable to have their say in such meetings.

 

As mentioned above, even though responsibility for executives’ pay will invariably rest with remuneration committees, it is possible for their members to seek external professional advice. Since consultancies could hold sway over the remuneration committees final decision, in 2009 was introduced in the UK a voluntary Code of Conduct in relation to the executive remuneration consulting activity. The Code, developed by the Remuneration Consultants Group (RCG) in representation of the major consultancies of the UK listed organizations, as stated by the same Remuneration Consultants Group, basically “sets out the role of executive remuneration consultants and the professional standards by which they advise their clients, whether their clients are Remuneration Committees or the executive management of the company.” It therefore aims at clearly explaining the scope and conduct of consultants when providing advice to the UK listed organizations as regards executives’ pay and defining the standards of the information that consultancies should provide to their clientele.

 

The conflict of interest which might potentially arise when remuneration committees have recourse to external consultancies has prompted many governments around the globe to take some actions. In 2011, for instance, the Australian government enforced stricter rules on the type of relationship which can be established between companies’ remuneration committees and consultants. Similar initiatives were also adopted in the United States were remuneration committees have the obligation to unveil how these have managed and sorted out the conflicts of interest eventually arisen (BIS, 2011).

 

Excerpt from Rhetoric and Practice of Strategic Reward Management

To read the whole paragraph (Par. 110, Section XVI, pages442-456)

 

Longo, R., (2014), Rhetoric and Practice of Strategic RewardManagement; Milan.

Underpinning variable pay practices

Findings of the very large number of studies and investigations carried out over the years and across the globe on the effectiveness of variable pay, determined and granted on the basis of individual performance, have revealed that in many circumstances this approach has produced very good results, whether in many other cases just failure and fiasco. This can only lead to the conclusion that the successful implementation of a variable reward programme depends on the circumstances; by extension the effectiveness of variable pay practices can be essentially deemed as contextually-based.

The fact that the introduction of a variable pay scheme ends in failure does not necessarily entail that the organization is not compatible with the introduction of such type of programme. The reason why the initiation of a variable pay plan proves a failure might in fact be due to the launch of the wrong programme or to the introduction of the right programme at the wrong moment. The contextual or situational aspect is therefore unquestionably of paramount importance.

 

The design and development of a variable pay scheme are usually fairly demanding, it is therefore unlikely that, after the efforts and resources deployed to design, develop and introduce a new scheme later resulted in a failure, an organization and its management would be willing to make another attempt, unless a considerable length of time has passed. When introducing or amending such programmes hence employers and reward professionals have to carefully consider all of the possible backlashes and potential causes for failure at the outset. It has to be definitely considered preferable postponing or even withdrawing the introduction of the scheme rather than introducing the wrong programme or the right plan at the wrong moment.

Albeit the miraculous recipe for a universal variable pay scheme does not exist, there are a few tenets and aspects which, if respectively duly considered and managed by the architects of the scheme, can enable these to design the most appropriate programme effectively fitting the organizational circumstances. If the worst comes to the worst, duly considering these elements at the outset will enable employers to avert disaster and cushion the eventual blow. Indeed, the successful or otherwise introduction of the scheme is essentially based on the accurate and thorough knowledge of the organization and of its people and on the investigation of all of the aspects which may have an impact on the employees concerned, both individually and as part of a group.

The first aspect which clearly needs to be taken into consideration is hence represented by the contextual factor. Reward practices, regardless of employers’ awareness, talk. The behaviour and actions which the employer wants to recognize by means of variable pay has to be reflected into the organizational culture, or rather, be reflective of organizational culture, and must be in line with the current business circumstances, financial conditions included. Consistency, as usual, is crucially important; introducing, for instance, schemes rewarding individual performance whereas the organizational culture is aiming to foster teamwork or introducing a new scheme when the business is experiencing financial difficulties, which may put the concern in the position not to pay the promised cash additions, can just represent a couple of glaring examples of this type of scheme misuse.

Employers and business executives tend sometimes to underestimate the effects produced by the introduction of new policies which later reveal to be inconsistent and inappropriate, not to mention ludicrous. Indeed, being different the one from the other, individuals may react to the introduction of a new scheme in many disparate but negative ways do not necessarily openly manifesting their disappointment and discontent. This, however, does not really mean that individuals do not perceive inconsistency and the eventual lack of integrity and that this does not affect their sense of belonging, motivation and ultimately performance. Additionally, all too often it is the occurrence of events like these which accounts for organizational climate being perceived by individuals differently from the organizational culture that the business management is striving to foster within the business.

Whether within a firm should actually coexist differences from the contextual point of view, employers could appropriately decide to implement different schemes according to the different organizational areas or business units peculiarities. These contextual differences may also be reflected in the existence, within the same company, of different cultures. Under these circumstances, in order to ensure the scheme consistency and favour its employee acceptance, the introduction of different schemes could even be preferable to the introduction of a unique common programme which might work well in some cases and drastically fail in others. This objective, according to the circumstances and to the type of scheme, could also be attained by maintaining the same scheme framework but changing in some way the mechanic by means of which it is operated in practice.

Context and situations are however very likely to change over the time, the contextual factor has therefore to be considered as a fairly dynamic aspect influencing variable reward schemes. It can consequently be concluded that variable pay programmes need to be flexible and adjustable in order to be amended according to the possibly changing circumstances. This feature leads to consider schemes’ maintenance as an additional key aspect to be carefully weighed up by reward managers and professionals. What works well and proves to be appropriate at the moment in time may reveal to be outdated, inappropriate and not working by any means in the near future.

In the light of the changeability feature of the contextual factor, and practically as a natural consequence of taking account of this aspect, variable pay plans need to be tailor-made. Reward managers should therefore act as bespoke tailors capable to design variable reward plans meeting individual and organizational needs under the current circumstances, but being at the same time constantly ready to re-design and implement the required alterations as soon as these might be required.

The effectual introduction of variable reward plans is very much depending on their credibility and trustworthiness. Albeit, as we will see later, execution typically represents a key success factor when introducing and altering management and HR practices, it is worth stressing the importance assumed, especially in this case, by the design and development phases.

 

 

In order to a variable pay programme be genuinely trusted by individuals, it is important, first of all, that each award granted by the employer is proportionate to the actions and outcome produced by the individual concerned (Reilly, 2003). A small premium for an outstanding feat or achievement will be negatively perceived by an individual as well as the award of a large amount of money for the attainment of a relatively modest, albeit appreciable and appreciated, result would be. The respect of this tenet is also important in order to establish a clear scale of values and the worthiness of variable rewards. Individuals need to be aware from the outset that their actions, activities and consequent appreciable output are rewarded with a premium whose worth is proportionate to the objective value of their attainment.

As suggested by Reilly (2003), it is also absolutely important for employers to establish a clear line of sight between the outstanding achievement, behaviour or performance and reward. Is has not to be neglected that the moment a variable reward plan is introduced, this has to clearly communicate in practice the scope for its introduction. Establishing and maintaining a clear cause-effect relationship between achievements and pay additions represents therefore the best way employers can factually communicate and show individuals that the scheme is fulfilling the promise.

Inasmuch as reward systems need to be fair, equitable, unbiased and sustainable, a fortiori these tenets need to be at the basis of variable reward practices. Only and only if employees perceive and feel the scheme as fair and equitable will these trust it and contribute to its successful implementation enabling, in turn, employers to attain their intended objectives.

Transparency, clarity and simplicity definitely represent additional, pivotal features of a variable reward scheme. In order to trust and appreciate the scheme individuals clearly need to understand it and its mechanic. Communication and employee involvement, as usual in such circumstances, is crucially important and can really make the difference.

Notwithstanding, the careful design and development of bespoke variable reward schemes can head employers nowhere without appropriate and consistent execution. Fairness, proportionality and timeliness can be impressively put on paper but whether these underlying principles are not properly implemented in practice, the introduction of the scheme can just be destined to end in an inevitable and predictable failure.
 

Companies’ managers need to be involved in the process and have the genuine feeling and conviction that the introduction of the scheme can actually help them to effectually attain their objectives, as well as those of the organization, by receiving the full support of their direct reports.

Inasmuch as employees will trust and accept a new plan whether they really know it, managers can support and become convinced advocates of the scheme if they are familiar with the mechanic of the scheme and of the way it has to be managed and operated. Provide to all of the business managers training in the way the scheme has to be managed will certainly avert many issues to raise soon after the scheme introduction and throughout its execution.

  

 

Taking into account all of these elements can definitely help reward managers and professionals to design and develop sound variable reward plans, safe in the knowledge that financial reward in general and variable pay in particular can be regarded as a means to an end and not as the only means to the end. The effectiveness of financial reward is essentially based on the bundle approach, that is, on the synergetic use of different, simultaneous actions on which is in essence based the total reward approach. In any case, employers and managers should also act on Herzberg (1987) suggestion: "if you want people motivated to do a good job, give them a good job to do."

Longo, R., (2014), Underpinning variable pay practices, Milan: HR Professionals [online].

 

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