UK: RE-ENGINEERING THE CARROT. - In the delayered, downsized organisation, hierarchy-based rewards systems are no longer relevant. The trouble is - no ready-made replacement exists.

by Stuart Crainer Crainer Crainer.
Last Updated: 31 Aug 2010

In the delayered, downsized organisation, hierarchy-based rewards systems are no longer relevant. The trouble is - no ready-made replacement exists.

Amid the constant flurry of change programmes, re-engineering initiatives, downsizing and delayering, incentives are often overlooked. Motivating the managers who remain after the ritual shedding of managerial layers remains more a matter of wielding a large stick than producing a bag of new and enticing carrots. Companies can appear content to allow fear and uncertainty to stimulate their managers to ever greater efforts.

In the short term it clearly works. Managers are working longer hours, taking on greater responsiblity, pushing initiatives and changes through the organisation. But, in the long term, is the stick the answer or do companies have to re-invent the carrot?

'You can't rule by fear,' says Kathy Scholfield, director of human resources at HFC Bank. 'In 1994 we made 100 people redundant. We had gone through a period of explosive growth and it was the first time we had a chance to look at ourselves and the way the business was structured. The decisions were hard and there is not a single person who does not think about the possibility of their job disappearing. No one is immune.' To overcome the fear factor HFC has taken a radical look at how it motivates and provides incentives for its people. The guiding principle is explained by Scholfield: 'You don't motivate individuals. You provide them with an environment to be self-motivated. It is a personal decision, but it is management's job to provide the right environment.' HFC has introduced Performance Planning systems which identify key objectives for all of its staff. The resulting bonus is 60% based on a final appraisal rating and 40% on the acquisition of competencies. Executive bonuses are also linked to overall corporate performance and the company is introducing an employee stock purchase option available to all. 'We want to create a sense of ownership and to educate people about the real truths of corporate life. Share prices don't always go up; we aren't simply an organisation which dispenses monthly salary cheques; but we are a company in which what people do, think and value makes a difference. How we reward and motivate people has to reflect this,' says Scholfield.

The balance of fear and incentive is a precarious one. The bottom line is that if they are not balanced, companies will fail in their attempt at achieving change, argues David Harvey of Business Intelligence and author of Re-engineering: The Critical Success Factors: 'If incentives are out of kilter with a new structure and new organisational principles, change will simply not happen. If there is no incentive to adopt new working practices it is a hollow exercise.' As Harvey points out, companies which have instituted re-engineering programmes have a poor record of changing their rewards and remuneration systems. It is one thing identifying core business processes, quite another to tinker with emotive subjects such as annual bonuses and company cars. This is the untouchable in pursuit of the unthinkable. 'If companies are intent on finishing the job of re-engineering, they must tackle reward systems. In the re-engineered organisation, traditional, hierarchy-based reward structures are irrelevant,' says Harvey, adding the catch-22: 'The trouble is there is no ready replacement for the traditional pay scheme.' The traditional pay package includes a base salary, an annual performance-related bonus, perhaps share options, as well as an array of peripheral incentives such as cars and health insurance. It remains steadfastly in place despite the best efforts of consultants (who tend to want rewards more closely tied to change initiatives), institutional shareholders (who want executives to own shares in the companies they lead) and a host of academics (who argue that companies need highly flexible packages tailored to corporate and individual needs).

Wading through the theoretical mire is a daunting prospect and partly explains why the lure of the traditional package remains strong. It also explains why remuneration committees now spend days considering the possibilities rather than an hour or two after a board meeting. In fact, the more organisations examine the way they reward their executives the more fundamental questions they are likely to encounter. 'There is a paradox. Organisations are looking at longer-term incentives, while people's expectations no longer include life-time employment,' says Paul Bienkov, group remuneration manager of the Prudential Corporation. 'This paradox is particularly evident in a business such as ours selling long-term products.' In response, Prudential has re-aligned its incentives. It abandoned share options early in 1995 and is introducing a restricted share plan at the beginning of 1996. 'We want to develop a community of interest. Our reward systems give people an incentive to be entrepreneurial. They are based on the acquisition of shares and people are encouraged to hold onto them.' Relating rewards to longer-term corporate performance is highly complex. While the logic is simple - if the company does well, you do well - there are a troubling variety of means of measuring corporate success. Do you take earnings per share, share price, profitability or total shareholder return (the measure preferred by Prudential) as the key performance measures for your business?

The downside of too strong a link to share price is that executives often have to sit and watch impotently as their prospective bonuses rise and fall with the markets. Clearly, if managers don't have some measure of control, there is little motivational value in rewards packages tied inextricably to share performance. 'Corporate goals are an imperfect measure as they are easily influenced by external forces - 70% of share price movement comes from with-in the market,' says Elizabeth Hubbick, consultant at senior executive compensation practice William M Mercer.

And then there is the question of defining what constitutes long term. With most companies taking a five-year view of the future, perspectives longer than this are likely to be fanciful and demotivational. Bienkov admits that long-term yardsticks, rather than annual bonuses based on short-term performance, produce another difficult balancing act. 'If the incentives are too long-term there is no reality. If the pay-out is in 10 years there is no motivation. We are continually seeking a balance, the right one for the business as a whole and the individual employee.' It is this balance which perhaps lies at the heart of current discussions about rewards structures. 'Business performance and incentives had become divorced. Now, rewards are much more relevant to the needs of the business and rather less preoccupied about the various techniques available,' says Derek Pritchard of Hay Management Consultants. 'It is about understanding the value you want from the human resources you have at your disposal and how they will help the business to succeed.' Sceptics might argue that it is one thing having a stake in the future of a business, quite another to have a sizeable cash bonus deposited in your bank account. If in doubt, there is always money. 'Money is a short-term motivator,' concedes HFC's Scholfield. 'But, if people aren't well managed and their values don't fit those of the organisation money won't motivate. Incentives and motivation are more subtle and sophisticated than pure finance.' Indeed, it is fashionable to suggest that cash is no longer king when it comes to providing an incentive. The managers of the 1990s are more interested in developing skills, enhancing their employability, and being given the opportunity to manage their own careers and personal development. The theory is neat, but the profusion of articles, seminars and conferences on the subject cannot disguise the fact that it remains largely theoretical. 'There is a lot of hype surrounding the entire issue of incentives and motivation,' observes Andrew Mayo, former human resources director at ICL. 'I am not sure there is a need for something radically new. People are motivated by work; heavy incentive packages don't make a great deal of difference to the way we work. Managers need to be challenged first and then be given a share in the rewards for good results. There is, however, a need to help people to look to the future. And there's a need to balance rewards for today's results with financial encouragement for continuous learning.' Executives are naturally suspicious that attaching terms such as career development and competencies to rewards packages is simply a means of reducing core salaries. It is something strongly refuted by Mike Kinski, director of corporate resources at Scottish Power. 'You have to pay competitive rates. The long-term aims of the company and the long-term aspirations of people are mutually inclusive so it is not a trade-off. Employability cannot be used as a means of keeping basic salaries down. You don't attract and retain the best people by simply paying the going rate. They can get that elsewhere.' Scottish Power emphasises employability as a key part of its overall incentives package. 'We have to face up to the facts of business life: in the future we will employ less people due to greater efficiency,' says Kinski. 'In this environment, working is about acquiring new skills, becoming more mobile and flexible.' Scottish Power now has 21 open learning centres offering its 8,000 employees the opportunity to develop the skills they believe are necessary, from MBAs to learning another language. Three years into the initiative, one third of employees are studying new skills and the aim is to raise this figure to 50%. 'Increasingly these sorts of programmes will become regarded as part of the rewards package,' says Kinski. From a corporate viewpoint, talk of employability tends to imply that individual goals have supplanted corporate objectives. Not so, says Kinski. 'The top 150 managers are a key corporate resource and should be rewarded in relation to corporate and personal performance. In the past our salary structures were based on how long people had been with the company; now they are related to competencies and are based on appraisal reviews.' A more flexible approach undoubtedly leads to greater complexity. Now split into 10 autonomous businesses, Scottish Power has a Save as You Earn scheme linked to shares; a group incentive scheme - gainsharing; profit-related pay for all employees; and each business can develop incentive schemes to support its aims and focus. Within this there is a constant search for a balance between the performance of the individual, the team, the division and the company as a whole.

To this pot-pourri can be added the vexed question of management competencies. 'Competencies can be misinterpreted,' says Hay's Pritchard. 'It is dangerous to base packages entirely round competencies because you can lose sight of the fact that you want people to actually do something.' In an increasingly typical initiative, Glaxo Pharmaceuticals is testing a pay structure based on 'effective use of competencies', 'corporate, individual and team outputs' and 'market rates'. It has also increased the importance of bonuses in the total rewards package. The fatal flaw of the competencies-based approach is that the organisation - and its managers - must agree on the competencies relevant to the business now and in the future. This has proved notoriously difficult. 'There is a high level of subjective judgement when it comes to competencies,' says Scholfield. 'They have to be generic rather than prescriptive. You can spend too long talking about them.' Given this, it is not surprising that measuring performance and relating this to executive incentives remains an imprecise art. If there is any degree of consensus, it is that they must achieve a number of objectives.

First, they must strike a balance between short-and long-term business objectives, and individual and team performance. Second, companies must offer a portfolio of benefits, such as cash, shares and development opportunities. 'There is a healthy trend to combination packages,' says Mayo. 'Share options are extending downward because it helps people to identify with the company.' Portfolios may also have to be tailored to the requirements of the individual. 'The more senior managers become, the more they are interested in capital accumulation rather than short-term cash,' says Prudential's Bienkov. Third, performance measurement must be in tune with the focus of the business. 'The business strategy you adopt has to be underpinned by a remuneration strategy at all levels,' says Scottish Power's Kinski.

At HFC Bank, rewards at its branches were traditionally related to sales. Now they are based round overall performance and the profitability of the branches. 'In our case, having rewards tied to sales led to hard selling which, in turn, leads to bad debts. When you are designing incentives programmes you have to determine what sort of behaviour you want to encourage,' says Scholfield. 'People need to know what is expected of them and that certain objectives have genuine deadlines which have an impact on their rewards. And you must be flexible enough to accept their input in identifying and setting objectives.' Striving for focus means an increase in performance measurements linked to the nitty-gritty of the business. BA's 'Leadership 2000' initiative, for example, is seeking to introduce more precise measures of managerial performance. Rather than vague business targets, managers will have targets based on customers' perceptions of service. 'The variable element of the rewards package can allow companies to focus on a particular element of their performance which they want to improve,' says Hay's Pritchard.

Finally, rewards need to be linked to the values and culture of the organisation. 'People will not accept a 2% pay rise instead of a 3% rise simply because we give them the chance to develop useful skills,' says Kinski. 'But they will think about what it is like to work here, the culture, the values and the opportunities.' From being a single, often isolated, issue, managerial incentives now impinge on all activities. 'No longer can it be assumed that an inflation-linked pay increase, a one-off annual performance review, or vertical career progression either satisfies or motivates individuals, or indeed helps improve organisational effectiveness,' observes the Business Intelligence report, Pay, Performance and Career Development. When it comes to truly motivational rewards, the old ways are no longer the best. The carrots are changing, but yet more persuasive ones may still have to be discovered if organisations are to attract and retain the high performers of the future.

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