Corporate Reward Programs Out of Date in a Rapidly Changing Market

October 4th, 2007 · No Comments

Towers Perrin Press Release:

Results Show Rewards and Performance Management Seldom in Line With Business Strategy and Viewed as Less Than Effective in Meeting Business Needs

STAMFORD, CT, September 5, 2007 — Reward and performance management programs are not keeping pace with the demands facing businesses today, says a new Towers Perrin study. Despite enormous shifts in the business landscape over the last decade — driven by increased competition, cost pressures, globalization, aging populations, technology advances, and skill and labor shortages, to name just a few — most companies have made minimal changes, at best, in the design and delivery of their base pay, incentive and performance management programs. As a result, current programs do not appear to be meeting talent and people management needs effectively, especially in an environment increasingly focused on attracting and retaining people at all levels in an organization.

The Towers Perrin study, the fourth in a decade-long series of studies on rewards and performance management, surveyed more than 600 human resource and compensation managers at midsize and large organizations in 21 countries. The survey found a growing “say/do” gap around reward design and delivery. Although many of those surveyed said their reward strategies were designed to retain and attract talent (73% and 57%, respectively), few of the actual tactics they reported were consistent with this stated focus.

“Overwhelmingly, we found that companies are making very incremental changes in reward and performance management programs,” said Ravin Jesuthasan, Managing Principal and Practice Leader, Towers Perrin, “and they’re doing so year in and year out. What makes this of concern is that business changes have been anything but incremental. In fact, it’s fair to say the last decade has been among the most turbulent in recent business history, encompassing the dot-com boom and bust, post-9/11 cycles of recession and recovery, and dramatic technological and workforce shifts that are changing both the way companies do business and the way people do their work.”

“In this environment, we expected to see comparable innovations in rewards practices. Instead, we found most companies doing things like adding or eliminating measures in variable pay plans, broadening or cutting back on eligibility for incentives, and shortening or lengthening the pay communication cycle. Put simply, our data confirm what amounts to a pattern of ‘tweaking’ at the edges of programs, rather than creating the more systemic and integrated approach required to address the scope, intensity and magnitude of change on the business side.”

Some of the trends highlighted in the study include:

Minimal customization of rewards beyond the sales function — Although a majority (59%) of respondents do customize rewards, most (79%) do this chiefly for sales positions. Very few extend this approach to other functions or roles that are critical to executing their strategies (e.g., customer service staff for retail organizations or R&D talent for pharmaceutical companies), despite evidence suggesting customized rewards can make a difference in both retaining and motivating people.

Increased use of company-wide results in variable pay — More than three-quarters of the respondents have changed their variable pay programs in the past three years, and nearly half expect to implement more changes to variable pay and bonus programs in the near future. Yet the most common shift is an increased emphasis on using company-wide performance as a metric (cited by 42% of survey respondents) — a surprising focus given the relatively small number of employees who can materially influence corporate results.

Practicing performance management as a high-tech, not high-touch, activity — Fully 90% of respondents reported changes in this area in the last three years, and almost the same number expect to make more changes in the next three years. For the vast majority, however, the nature of the changes are technological, typically involving automating more aspects of the process to enable employee and manager self-service online. As Jesuthasan noted, “While technology can go a long way toward increasing the efficiency of performance management systems, and is a ‘needed to play’ attribute, it cannot take the place of the human interaction that truly powers performance management: the personal relationship between manager and employee. This focus on high tech over what we call high touch could explain why just 43% of the respondents said their performance management program was only somewhat or not at all effective. It’s certainly easier to implement technology than teach managers to have meaningful performance discussions, but an effective program requires both.”

Limited measurement of ROI on rewards spend — A disturbing 68% of the survey respondents said their organizations have no formal method for measuring the return on their considerable investment in rewards. Yet, without such data, HR and compensation executives can find it difficult to make a case for more strategic investments in rewards programs or to justify current expenditure.

Insufficient alignment of performance management and business needs — Fully 43% of the survey respondents said that their performance management systems did not effectively link to business needs. And 42% felt their systems did not effectively equip managers to identify, develop and reward high performers or deal with poor performers. As Jesuthasan noted, “These are critical strategic gaps that will ultimately derail the very purpose of performance management. Getting the strategy right is a key first step in effective performance management and one that few companies appear to be paying enough attention to right now.”

“On one hand,” Jesuthasan continued, “it’s encouraging to see that companies are emphasizing performance and talent retention. On the other hand, what they’re doing to reward and improve performance is not particularly effective, or in line with overall business performance and strategy. There’s a clear disconnect between the contributions senior management wants to elicit from the workforce and the specific tactics organizations are engaging in to realize this contribution.”

Breaking With Past Patterns

To break the cycle of incremental change, according to Jesuthasan, organizations need to engage in “discontinuous change,” and identify actions that will have a clear and sustained impact on the bottom line. Towers Perrin recommends four steps companies should consider when revamping reward programs:

1. Think big, bold change. Shake things up, but in a way that aligns with core business goals for performance, cost, talent management and employee engagement.
2. Identify required changes in terms of desired business outcomes, and prioritize and sequence those changes based on an analysis of the efficiency, effectiveness and impact or strategic relevance they will have in meeting specific business goals.
3. Place calculated and systematic bets on specific programs and segments of the workforce that align with business objectives and priorities. Avoid the “one size fits all” generic approach to rewards because it lacks focus and can marginalize the return on investment.
4. Develop a balanced set of metrics that encompass the key outcomes needed, and measure results against those metrics, adjusting course over time as required

About the Survey

The 2007 Towers Perrin Reward Challenges and Changes Survey presents data from 637 HR and compensation executives at midsize and large companies in 21 countries in North America, Latin America, Europe and Asia. Fifty-one percent of those surveyed come from organizations reporting more than $1 billion in revenues in 2005. The survey builds on similar research from 1995, 1999 and 2003, to compare changes in reward and performance management programs over time.