Reward policy requires further integration with corporate strategy

Companies looking to implement sound reward policies still have a lot of work to do. Effective reward management implies that, as a manager, you look beyond the merely technical aspect of the matter. You also need to be able to explain the reward system to your staff, and you need to establish a link between the corporate context and activities on the one hand, and reward policies on the other. “A good Compensation & Benefits Manager actually has three important roles – he is an engineer, a strategist and a salesman”, Professor Xavier Baeten explains. Along with researcher Femke Dhont, he has identified three concrete challenges for the Reward Manager of the future.

Reward policies in line with corporate strategy

Research from the British Chartered Institute of Personnel and Development (CIPD) among a large group of companies has shown that only 26% of them have adopted an explicit reward strategy. The study did not analyse whether or not this strategy was efficient and included all aspects of compensation. “A survey among Compensation & Benefits professionals has shown that less than half of them think they have the skills needed to translate the corporate strategy into reward policies. They tend to focus mainly on implementation and operational matters.”

Xavier is convinced that a sound reward strategy should provide an answer to three questions: “How much reward do we want to give? What do we want to reward? And how do we intend to do so?”

The first question raises the issue of total rewards. The research mentioned above shows that only one in five companies has a global approach to compensation. “Currently, there is too much focus on financial compensation, when research has actually shown that non-financial aspects, such as autonomy, colleagues, the company’s reputation etc., are in fact considered more important. This results in a mainly strategic challenge. Your rewards model depends on your corporate strategy (customer intimacy, operational excellence or product leadership). If your strategy focuses on innovation, for example, flexible reward components take centre stage.”

Pay for performance

Many companies struggle with the link between compensation and performance. Research has shown that the pay for performance system does work, and that rewards have a positive impact on performance. Femke stresses, however, that there are some important provisos to be made. “When it comes to compensation, employees are not rational. Research has revealed that the impact of a one-time bonus on their performance is five times greater than that of a small increase in their basic salary. That bonus has an entirely different psychological effect than a reward that is more spread out, i.e. a gradual salary increase.”

“This also emerged from our survey among managers. Most of them agreed that in the future, variable rewards will become more and more popular. This form of compensation not only has the greatest impact on the employee, it is also positive for companies because it results in lower labour costs”, Xavier adds.

Moreover, the timing should be questioned. “Traditionally, companies work with periods of one year, but sometimes it is better to use shorter or longer timeframes. It actually depends on your corporate cycle”, Xavier adds.

Last but not least, pay for performance also works best at collective level. “We tend to focus strongly on individual performance, which results in competitiveness between employees because everyone wants to excel individually. As a team you can achieve so much more, but that means you need to set goals at team level”, Xavier says.

More – and individual – communication

Employees are not sufficiently aware of the various aspects of their compensation. They do not always know what salary packages include or why certain choices are made. This is mainly a question of communication. “Research shows that better communication leads to an improved understanding of what the salary package includes, which, in turn, leads to greater appreciation of fringe benefits in particular. These easily amount to 25% of the total package. Today, communication is often limited to the technical aspects of the salary package. Managers should explain the reasoning behind the compensation philosophy better and substantiate their decisions”, Xavier explains.

The demand for better communication tools is coming increasingly from corporate headquarters, even at international level, which is a positive development. Until recently, communication was considered primarily a local task. “The higher levels are starting to assume their responsibility in terms of communication”, Xavier says.

Last but not least, we are seeing a clear trend towards individual compensation statements. Companies use these tools to give their staff an overview of the contents of their personal salary package on a yearly basis.

Femke believes that this ties into the expectations employees have of their companies in terms of communication. “A recent survey involving focus groups shows that, first and foremost, people want an individual approach. Besides wanting to know what their current package includes, they also want an overview of how it has evolved over the past few years. Secondly, they want to be actively involved. Interaction is very important, and one-to-one meetings are preferable, particularly when it comes to complex issues like pensions and bonuses, because such discussions also leave scope for personal and direct questions. Lastly, employees are also asking for consistent communication geared to the knowledge and requirements of the target group. After all, you don’t communicate with engineers the same way you would communicate with people in marketing”, Femke concludes.

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