How to Create a Successful and Legal Reward Strategy

The fundamental reason that human beings go to work is to earn money to support their lifestyles. This point is evidenced by asking a simple question: if you could afford not to work would you still do so? The honest answer most people would give is no. The HR specialism of reward is, however, far more complex than simply considering what employees earn. Work defines who we are, how we are perceived by others and the status we hold within society. Work also provides many of the challenges and other experiences that give purpose to an otherwise meaningless and meandering journey between birth and death.

With this in mind it is therefore extremely puzzling why so many employers have little or nothing in the way of a reward strategy. I have even heard some employers -partly tongue in cheek, partly serious- making statements like ‘we pay the staff each month. What more do they want?’ Having a coherent, well considered and effective reward strategy is as important as opening the doors of a business each day. Getting it wrong will drive numerous HR negatives like avoidable attrition and low productivity. Worse still, having a bad reward strategy will almost certainly drive disputes and even litigation. 

Having developed numerous successful reward strategies over the years and having also lectured about this key HR topic I would summarise the following as considerations for any organisation developing in this area:

1. It’s about aligning the individual to the holistic strategy | We have all heard the expression ‘a small cog in a big machine’ in reference to the role of individual employees within an organisation. Although often a quasi-derogatory term of reference, where reward strategy is concerned, there is often a strong degree of relevance to adopting this kind of overview. By identifying the key objectives of the business at a strategic level it is then possible to identify how disparate groups and how individuals therein can contribute to the attainment of these holistic objectives. However, as always, theory and practice are often very different propositions.

An recent experience I had when buying a new car exemplified how oversimplifying the correlation between holistic strategy and individual contribution might prove counter-productive. Car salesmen should be rewarded for selling as many cars as they can . . . right? Not necessarily. Good selling is not just about flogging the commodity. It is far more about building long-term and sustainable relationships. Against a cultural backdrop in the UK of saying everything is fine at the point of sale but then complaining bitterly in private later pressure selling is almost always ineffective in the long-term. As with employment, building trust and confidence is far more important.

After deciding to buy my new car at the garage in question the salesman went on to tell me that the main part of his commission was based upon customer feedback I gave about his service standards. He was excellent so I naturally gave him very high marks. The reward strategy of the garage in question here was very good in my professional view. They have not specifically focused on just selling a car (even though this is clearly the key objective). They are instead focused upon winning a customer. The salesman in question was not being rewarded for selling the car per see but instead for demonstrating behaviours that would lead to a sustainable customer relationship. To summarise:

  • Hard sell = Car may (or may not) be sold. But probably no more sales
  • Winning the customer (via good service) = Car sold anyway + more cars probably sold later

The salesman therefore becomes a business conduit of longer-term business values and strategy rather than being a conventional sales facilitator. This is a key aspect of developing a cogent reward strategy. Effective reward is not simply about driving a particular outcome. But instead a mechanism for cultivating multiple outcomes and behaviours that will deliver deeper and more sustainable benefits.

2. Intrinsic or extrinsic, that is the question | The temptation with a reward strategy is to consider it entirely in a financial sense. After all, money is the main reason that people go to work, right? Well yes this is true at a base level. But if an organisation wants to effectively develop meaningful engagement, improved productivity and diminished worker deviance it has to first understand the concept of intrinsic and extrinsic reward. 

Extrinsic reward is the concept of what I would describe as conventional rewards: pay, bonuses, commissions, fringe benefits and working conditions. These are often the areas that create the most obvious overt conflict in the workplace. It is also a common misconception that if you deal with these issues effectively everything else will be rosy thereafter. It is rarely (if ever) the case that this happens. 

Intrinsic rewards are in my experience far more important in terms of developing an effective reward strategy. Intrinsic rewards include: providing a sense of achievement, praise being given by senior members of staff, taking pride in the job or work done and creating a culture of ownership and autonomy. Building a reward strategy with these considerations in mind will inevitably help drive positive outcomes like stronger psychological contracts and increased discretionary effort. It sounds like an easy thing to develop and implement. It isn’t. It takes time, skill and dedication to develop an effective intrinsic reward strategy. It sometimes takes a financial investment too. 

By way of an example in the recent past RHHR™ worked with an excellent creative marketing business who wanted to positively improve the workplace for their employees. Like all businesses they had a finite budget and timescale in which to make the hoped-for improvements. After conducting an detailed engagement survey and employee forums we produced detailed findings and recommendations for the client. The key theme of our findings was that a far greater focus was needed in relation to intrinsic reward. In particular there was a strong need for feedback and praise. The workforce was a relatively young one due to the industry sector in question. So the findings came as no surprise to us.

Unfortunately the Director who appointed us decided to instead concentrate of extrinsic rewards including new initiatives such as: providing employees with free daily breakfast and allowing them to bring pets to work on certain days. The staff were of course delighted with the new changes when they came in. But they were all quickly forgotten, accepted as core benefits and rendered largely pointless. Employees will often be happy to tell employers what they want to see change. But be careful. If you ask employees what they want and then ignore what they say, the damage caused will always outweigh any potential benefits.

3. It is very easy to break the law with an ill-conceived reward strategy | A number of years ago I was working as a senior member of the HR team within a large facilities management and construction business. One day all support staff received an email announcing a new bonus scheme. The email stated -amongst other things- that those working in Finance would receive annual bonus potential of up to 10%. Those working in HR would receive just 5%. At first glance the scheme seemed grossly unfair as two directly comparable functions were effectively being forced-ranked in terms of their perceived importance within the business. Worse still though, on closer inspection the scheme was also most likely illegal. 

The reason that such a scheme would be potentially illegal was because the majority of the Finance team were male while the majority of the HR team were female. As the work was undoubtedly of equal value the opportunity to create indirect sex discrimination was obvious to many except, apparently, the operational and HR facilitators who had developed and published the scheme. On almost every level such a reward scheme is -or at least should be- counter-intuitive. It certainly did nothing for motivation within the HR team or for inter-departmental relations either.

Reward schemes that have been created with the wrong focus can also drive negative behaviours that result in potentially significant operational or legal risks and associated financial or reputational damage. The PPI scandal and many other similar examples provide good case studies in this regard.

4. KISS – Keep It Simple Stupid | If a reward scheme is too complex to understand, engage with or administrate it is highly likely that it will fail. For example, if an organisation wants to reduce its debt position, convert WIP to cash, improve its EBIT, reduce RIDDOR incidents and improve customer satisfaction it is unlikely to achieve this via a single scheme. Even if it were possible to somehow blend such disparate variables it would be very difficult -if not impossible- to apply this in a widely digestible context. The opportunity to discriminate or otherwise treat unfairly also grows significantly dependent upon how complicated a reward strategy becomes.

A simple reward strategy that is fair and easy to engage with is far more likely to succeed. Having a fair, clear and concise reward strategy will generally receive a positive reception from employees. It also has to be attainable. Dangling a carrot that most will never reach will generate a lot of ill feeling and even resistance. Making organisational objectives understandable as an individual interest also leads to employees feeling that they are a stakeholder in the future success of the organisation rather than a simple overhead in the conventional ‘I say, you do’ employment relationship sense. 

5. Can we gain-share? | I am a big fan of gain-share reward strategies. Whilst some environments and objectives may not lend themselves to using a gain-share approach there are many situations where they can work very well.

Let’s say we are dealing with a business where there have been a lot of costly errors due to quality issues. The rework and loss of clients might be costing the business in question millions of pounds. In such a organisation the negative impact of the waste being incurred at Point A can be made in to a positive reward strategy at Point B (following improvement and measurement) by reducing the loss via a simple gain-share scheme.

The challenge here is how to generate a scheme that encourages and rewards those who contribute to tangible improvements. The scheme also has to distribute the gain-share in such a way that it is fair, equitable and non-discriminatory. With effective HR support this can be done and the future benefit derived by the company can be personalised to individual employees thus creating mutual benefit and a net saving. Intangibles like customer satisfaction and perhaps additional orders are also potential parallel benefits.

6. Don’t assume, communicate | Smaller companies, in theory at least, often have an advantage in terms of communicating key messages to employees. The reality, however, can often be very different. Larger organisations will often instinctively consider issues like practical administrative obligations and communication mechanisms when developing reward strategies. Smaller companies can be very good in this regard. Many are not.

If a business develops a great reward idea or initiative it must ensure that the message is clear from the outset. The message must, as a minimum, consider:

  • What are we doing?
  • Why are we doing it?
  • When will it be happening?
  • How will it be measured?
  • What will the benefit (or penalty) be?

As with all HR activities the level of buy-in will vary dramatically depending upon how the initiative is developed and introduced. Creating an effective reward strategy that has a genuine chance of succeeding is no different.

Having an effective reward strategy will be more important than ever once Brexit has been completed and the UK labour market is largely internalised. Businesses that adopt the mindset in relation to their reward strategy of ‘we pay the wages every month and that’s enough’ will increasingly see competition for even unskilled labour becoming more difficult in coming years. Skilled roles, particularly knowledge workers, are about to become prized assets.

At Reach Higher Human Resources™ we work with businesses to develop bespoke reward strategies that deliver measurable and sustainable future benefits. We see this as one of the key post-Brexit HR issues and one which will catch many business out if they do not react quickly enough or indeed at all.

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