A Reward_ Recognition_ and Appraisal System for Future Competitiveness

8/7/2019 A Reward_ Recognition_ and Appraisal System for Future Competitiveness

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Research Paper: RPECBPM/0033

Copyright 2010 www.ecbpm.com Page 1

A Reward, Recognition, and Appraisal System for Future Competitiveness:

A UK Survey of Best Practices

Research Paper: RP-ECBPM/0033

By

Professor M. Zairi, Dr. Yasar F. Jarrar & Elaine Aspinwall

Copyright 2010 www.ecbpm.com


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A Reward, Recognition, and Appraisal System for Future Competitiveness: A UK Survey of

Best Practices

Yasar F. Jarrar1, Elaine Aspinwall

2, Mohamed Zairi

3

1 Dr. Yasar F. Jarrar

European Centre for Total Quality Management

University of Bradford, Emm Lane, Bradford, BD9 4JL

E-mail [email protected]

2 Mrs. Elaine Aspinwall

University of Birmingham, Edgbaston, Birmingham B15 2TT


3 Professor Mohamed Zairi

European Centre for Total Quality Management

University of Bradford, Emm Lane, Bradford, BD9 4JL


Keywords

Human resource management, survey, best practices, rewards, recognition, appraisal

Abstract

Managing business productivity has essentially become synonymous with managing change effectively. To

manage change, companies must not only determine what to do and how to do it, they also need to be

concerned with how employees will react to it (Cooper and Markus 1995)(Reger et al., 1994). It is becoming

increasingly clear that the engine for organisational development is not analysts, but managers and people

who do the work. Without altering human knowledge, skills, and behaviour, change in technology,

processes, and structures is unlikely to yield long-term benefits.

In this respect, the role of Human Resource Management (HRM) is moving from the traditional control and

command approach to a more strategic one (Oram and Wellins 1995)(Cane 1996). Various studies have

highlighted reward and recognition systems as one of its major critical success elements (Agarwal et al.,

1998).
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This paper is based on outcomes from a study which was aimed at identifying best practices in reward,

recognition and appraisal systems by analysing the experiences of pioneering organisations and validating

the findings through a survey of leading UK organisations.

1. Introduction

Managing business productivity has essentially become synonymous with managing change effectively. To

manage change, companies must not only determine what to do and how to do it, they need to also be

concerned with how employees will react to it. Organisations are bound to continue having trouble

implementing change until they learn that people resist not change per se, but the way they are treated in the

change process and the roles they play in the effort (Cooper and Markus, 1995)(Reger,1994). When

companies make changes, employees experience transitions during which they adapt. While changes can be

implemented relatively quickly, transitions often require a longer time frame (Decker and Belohlav, 1998).

It is becoming increasingly clear that the engine for organisational development is not analysts, but

managers and people who do the work. Without altering human knowledge, skill, and behaviour, change in

technology, processes, and structures is unlikely to yield long-term benefits. In fact, human development is

a viable alternative to traditional organisational development as a strategy for bringing about dramatic

performance improvements. The key to our long sustainable success was, and is, people. Rained, equipped,

properly rewarded and recognised TNT Director, 1999.

The new world of work is introducing flexible working hours, knowledge workers, working from home, etc.

So while these patterns emerge, organisations must change the way they deal with their people to achieve

maximum benefit. It is firmly believed that the success of an organisation lies more in its intellectual and

systems capabilities than in physical assets. Without altering human knowledge, skill, and behaviour, change

in technology, processes, and structures is unlikely to yield long-term benefits. The process and IT

aspects of any organisation are continuously changing, subject to daily improvements, and easily replicated

by competitors. It is estimated (Slater, 1995) that competitors secure detailed information on 70% of new

products within one year of introduction, and that 60 to 70 % of all process learning is eventually acquired

by competitors. In fact, human development is a viable alternative to traditional organisational


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insights into best practices). The sources used to select the sample were case studies analysed in the

literature, market knowledge, and quality award winners (e.g. EQA, MBNQA). A further selection process

involved the individuals to be contacted. Where possible, the contact was the most senior manager in the

organisation. The sample size was based on the participants of the study, i.e. an available resource rather

than ensuring a sufficient size to emulate the population (this was not an objective). Like most decisions

relating to research design, there is rarely a definitive sample size for any given study (Wunsch,

1986)(Fowler, 1993). A decision was taken to send out 300 questionnaires for the UK/USA study (hoping

for a response rate of at least 20%. In total 75 companies took part from both the UK/USA with a response

rate of 25%. Organisations that responded included Ove Arup Partnership, Cap Gemini, BT PLC, Oracle

Corporation UK Ltd, 3COM (UK) Limited, Nortel Ltd, Kodak Ltd, DHL International (UK) Ltd, IBM UK

Ltd., Royal Mail, Skandia Life, Xerox (UK) Ltd., Dana Commercial Credit Corporation, Trident Precision

Manufacturing Inc., Globe Metallurgical Inc., Rolls Royce Aero Engines Ltd., Honda Motor Europe Ltd.,

among others. The organisations that responded came from the manufacturing (44.3%) and services (55.7%)

sectors. The manufacturing sector included industrial and consumer goods manufacturers like automotive,

auto parts, medical products, and office equipment. The service sector included business consulting, banking

and financial services, food retail, advertising, IT consulting, courier, insurance, and education. All the

respondents were experienced practitioners at senior levels in their organisation. Figures 1 shows a

breakdown of the respondents by job function.

Figure 1 - Breakdown of respondents by job functions

3. Study Findings

Initially, the study participants were presented with several statement to assess the perceived importance of

people and people management for organisational competitiveness. Participants were requested to show

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Process / Operations

Quality Head

Human Resource Management Head

Senior Management (CEO, MD, GM)


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how strongly they agreed with these statements on a 5-point Likert scale. In focusing on reward, recognition

and appraisal systems, the participants were presented with several proposed best practices and were asked

to assess their applicability and criticality for a successful people management system.

3.1 The Future of People Management (PM)

A PM strategy for the future must start by answering the question what sort of people will the organisation

need? Once answered, the strategy to meet these needs can be established. The study results (Table 1)

reveal the people attributes that organisations seek for future success.

The results clearly indicate the importance of customer orientation and team skills, which have both become

almost standard requirements this decade. However, the survey does reveal that participants view attributes

like being creative, flexible, and ambitious as far more important than being loyal to the company or

compliant with policies. Similar results were revealed in a study performed by Harvard Business Review

(Carnall, 1997), which compared required attributes from organisational employees (managers and others) in

1980s and 1990s. Figure 2 shows a summary of this studys results.

Attribute % of study participants who strongly agree / agree

Customer oriented 97Co-operative (Team players) 85.6Flexible 70.4Creative 67.2Multiskilled 60.6Ambitious (Stretch goals) 50.8Self disciplined 37.7Loyal 13.1Compliant with policies 13.1

Table 1 - Employee attributes required for future performance excellence study results

All of these findings suggest that, although the statement so often articulated the most important resource of

this business is its people is increasingly meaningful, not merely as rhetoric but also in practice, the type of

people that todays organisations require, and are dealing with, today and tomorrow, are different from a

decade ago. Thus, if organisations depend more and more on fewer people and if the loyalty of those people

can no longer be assumed but rather must be earned and retained, then clearly they need to be concerned

about how they utilise them, develop them and resource them and about the opportunities for rewards,

promotion and success which they provide (Carnall, 1997). This is a shift of focus that evolved in the 90s. It

occurred because within todays turbulent market place, the people (employees) themselves, their


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expectations, and the organisations expectations of them have all changed. As a consequence, the old

traditional, personnel and HRM tools and methods also need rejuvenating and are not capable of achieving

the required future success.

Figure 2 - Changes in required attributes in employees (1980-1990) (Carnall, 1997).

In the following sections, best practices for PM are proposed, assessed, and tested. However, it must be

stressed that these proposals form a guiding framework only, as there is no single right way to solve human

resource issues. What works in one organisation may be quite inappropriate for another. The complexity of

managing people matches the complexity of human nature.

3.2 Reward, recognition, and Appraisal Best Practices

For the purpose of the study, the practices proposed were considered validated as best practices if 75% of

the respondents either agreed or strongly agreed with the statement and none strongly disagreed. The

reasoning behind this choice of 75% point was that the concepts being proposed by the framework were

exploratory in nature. They were practices suggested for future success, and have only been applied by

pioneers (best performers in their fields), or suggested in the literature to date. Thus they would be new to

most organisations questioned, and would present a change from the norm. If 75% agreed that they are best

practices and none disagreed, then it could be concluded that most of the remaining respondents do not hold

any strong opinions (for or against) probably due of lack of experience with the idea. This would be

sufficient grounds upon which to conclude that such a practice would have positive outcomes when properly

applied in an organisation (i.e. best practice). A literature review on related studies (Loomba and

Jonanessen, 1997) (APQC, 1999)(APQC, 1996)(APQC, 1997)(DTI, 1995)(Ashton, 1998) has revealed

similar approaches, and demonstrated that there is no clear cut-off point. In determining the best practices in

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Well educated Creative

Ambitious Loyalty


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their studies, The Industrial Society (1996), and the American Productivity and Quality Centre APQC,

1999)(APQC, 1996)(DTI, 1995)APQC, 1997) defined them as practices that received the highest approval

from study participants.

4. Reward and recognition

A reward system can be described as any conscious intervention or series of interventions within an

organisation aimed at encouraging or reinforcing required behaviours, or which compensate people for

taking particular actions. (Oram and Wellins, 1995). Reward strategies are not only about money, they are

about both tangible and intangible forms of reward. Financial rewards include short term incentives made up

from salary and bonuses while long term incentives include profit sharing, share ownership and stock

options. These rewards are not commonly regarded as motivational in the long term but when they are not

perceived to be fair, they can become demotivating agents (Cane, 1996). Employee benefits include

insurance cover, pension schemes and sick pay, while fringe benefits include cars, holidays, and company

discounts. Non-financial benefits are more complex and include motivational aspects that are largely

intrinsic (derived from the job itself) and are mainly self generated in that people seek the type of work that

satisfies them, and can be enhanced by management through giving greater responsibility, development, job

design, policies and practices (Cane, 1996). Reward used to be generally about paying people the least that

an organisation could get away with. Now that organisations are looking for employees to be involved and

to continue innovating, reward systems need rejuvenating (Littlefield, 1996). In such a competitive

knowledge based environment, the organisations best chances for attracting and retaining the best people lie

in its ability to deliver the best value compensation package to them. Compensation packages must be

tailored to individual needs and cater for all intrinsic and extrinsic rewards. In an effort to propose the best

practices for a reward and recognition system, the first aspect of designing such a system is to involve the

employees that it affects in its design.


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Proposed best practice - Employees must participate in designing the reward system

Figure 3 - Employee participation in reward system design study results

A 77.4% approval amongst study participants rates this as a best practice. Thus, each organisation should

consider its culture carefully and consult staff before embarking on a new reward strategy. However, the

method of participation though is very crucial and not enough work as been done to tackle this issue.

Clearly, it varies form one organisation to the other, and is very organisational culture dependent. Cases

revealed that some organisations form committees of employees who design the whole system subject to

management negotiation and approval. Others design the system and solicit employee feedback.

Proposed best practice Pay-out plans should be subject to improvement as market and product strategieschange

Figure 4 - Market based reward strategies study results

The agreement shown in Figure 4 confirmed this as a best practice, and a crucial one. Reward systems

should be subject to monitoring and improvement with changing market conditions, for better or worse. This

is the only way that both employees and management would view it as fair. Saturn Corporation (Cane,

1996) devised a Risk and Reward programme made up of base pay, risk pay, and reward pay. Base pay is

lower than market rate, that is the risk part, but team members can, with reward pay, earn considerably more

than market rate. Because employees are prepared to take the risk in return for a genuine share of the

profitability of the organisation, both sides feel it is fair. The secret of success in such an adaptive system is

0 20 40 60 80 100

Strongly agree / agree

Neither agree of disagree

Disagree

Strongly disagree

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Disagree

Strongly disagree


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true and open communication. Galaxo-Wellcome (Littlefield, 1996) is moving towards a reward system that,

while taking market rates into account, pays people according to their level of competence. The firm is

aiming to introduce a system where about 85% of pay is fixed, leaving 15% for a bonus based on output.

Experts (Willetts, 1999) predict that compensation, in the future, will be comprised of variable parts, for

example team bonuses, that may total 40% of income.

As for the detailed design of the reward system, there are several successful approaches being used by

todays successful organisations (Oram and Wellins, 1995), and the model suggested a combination as

follows:

1. Pay for performance50.4% of the study participants agreed with this concept (Figure 5), which is a good sign that awareness of

this theory is spreading. Druker (1992) and Kanter (1989) argued that the nature of new management

practices and the role of knowledge workers means managers and knowledge workers may insist on a

growing share of corporate profits.

Statement - Managers and knowledge workers in the future will insist on a growing share of corporate

profits

Figure 5 Employee demands on corporate gain study results

With the overall trends of increase in knowledge workers (Chase, 1997), it is believed that the above

statement is an inevitable result. Employees rationalise that if a company cannot afford to treat them as

family anymore, then at least it ought to treat them as business partners.

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Disagree

Strongly disagree


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Proposed best practice - Organisational profit must be shared between the company and employees.

Figure 6 Sharing organisational profit with employees study results

80.5% of the study participants agreed thus validating this best practice. The idea of sharing corporate profit

is the characterisation of the new employee-organisation relationship discussed earlier. Dana Mead

Corporation (Quinn, 1996) believe that what motivates today is more shares in corporate gains. Such

programmes are on the rise and are sound business investments and are self funding. However, there are

many levels to this profit sharing and each organisation must tailor the system to its culture and

environment. Some organisations have seasonal variations and to this date, many employees agree to share

profits but are reluctant to share losses. A massive cultural change is required. Rank Xerox (Oram and

Wellins, 1995) have a system of rewards linked to business performance, with a growing proportion of

variable pay. Pay is increasingly linked to achievement of corporate priorities, with a significant bonus for

customer satisfaction paid to all staff, managers were rewarded on return on assets, and employee

satisfaction results also contributed.

The most successful form of pay for performance is gainsharing (Imberman, 1996). This is a group bonus

plan aimed at modifying employee behaviour. The entire organisation work force-as a unit- is involved in an

effort to exceed past performance. If successful, the gain is translated into cash and shared between the

company and the employees. Normally, the work force receives 50 percent of the gain in bonuses, and the

company receives an equal share in cost savings. This is gainsharing in its simplest form. Research

(Imberman, 1996) revealed that this idea gave better results than employee involvement, quality circles,

quality of work life, suggestion boxes or suggestion systems, profit sharing, labour management committees,

Employees Share Ownership Plans (ESOP), job enrichment, information sharing, or TQM. In 1994, Crains

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Disagree

Strongly disagree


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Chicago Business (Imberman, 1996) published a chart summarising the experience of 110 plant managers

with their gainsharing programmes. 93% reported highly favourable results in productivity improvement.

A milder form of gainsharing is ESOP, which are explicitly backed by the new Labour Government in the

UK (Van de Vliet, 1996) and are expected to grow in acceptance especially as they are backed by tax

provisions from the government. ESOP is essentially a trust that acquires shares in a company for the benefit

of its employees. However, for employee share ownership to make a difference to company performance, it

must combined with open-book, participatory management. This needs a shift to empowered teams and

intensive communication. Still the whole process has to be thought through very carefully. Companies need

to consider just how much of the equity employees should hold directly, and they constantly need to create

new ways of making it attractive for them to hold on to these shares, otherwise employees might find the

temptation to sell out irresistible (Van de Vliet, 1996).

2. Skill based pay

Proposed best practice - Part of the reward should be payment for the number, type, or depth of the skills

that people developed

Figure 7 Skill based pay study results

Another practice that is confirmed as best (78.8% approval). This system is known under various names like

knowledge pay, skill-based pay and multi-skill based system, where pay increases are in line with the

number skills acquired or developed. In practice the pay is determined by the variety of skills acquired or by

the number of jobs that an employee is able to master with the underlying intent to encourage employees to

acquire new skills, new knowledge, and increased versatility. More than 50% of Fortune 500 companies use

skill based pay for at least some employees (Stivers and Joyce, 1997). This is indicative that companies

believe there is a linkage between employee knowledge and competitive position. There are three forms of

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Disagree

Strongly disagree


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skill development: vertical (upstream or downstream knowledge like acquiring more technical skills in a

function or even acquiring management skills), horizontal (most frequently used and aim to offer the

employees the possibility of acquiring a multitude of very diverse skills that are relatively alike in terms of

degree of difficulty), and specialised (enable employees to acquire knowledge in a more narrow field of

activities e.g. engineering). The skill based pay system increases functional flexibility enabling the company

to counteract the effects of absenteeism, personnel turnover and capacity management. Moreover it is one of

the most appropriate means of blending pay and total quality (Stivers and Joyce, 1997). Finally, the system

offers employees more opportunities for growth and personal development and can reinforce the feelings of

personal advancement and self-worth. However, it is dependent upon high access to training opportunities

and the organisation needs to consider how to manage redundant skills. Moreover, it is generally not suitable

for knowledge related jobs such as those in management. Toshiba (Kelada, 1997) applied skill based pay

structure for its manufacturing and support operatives, e.g. those in the factory, in the stores, and in the

offices. Management and professional employees were dealt with more along the lines of broadbanding.

3. Broad banding

Proposed best practice - Seniority and length of service should not be the basis for promotion

Figure 8 Traditional promotion merits study results

78% agreed with this statement thus confirming the broadbanding system as a best practice. The traditional

ladder of seniority is no longer relevant to re-engineered organisations with multi-skilled, cross-functional

teams. Supervisors and managers are not necessarily worth more to the company than specialists and

professionals, and broadbanding can redress these inequalities (Brown, 1997).

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Disagree

Strongly disagree


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Proposed best practice - Promotion must be based on role specifications or competency levels

Figure 9 Competency based promotion study results

Again, 76.8% agreed with this practice and confirmed it as best. This emphasised the need for a

broadbanding system, especially for knowledge workers. At Volkswagen UK (Crainer, 1997), the principle

is that people are paid for what they can influence, at Glaxo-Wellcome (Brown, 1997), progress will be

based on the demonstration of competencies rather than as a result of time in the grade. Competencies are

about what the people do and how they behave, and the only behaviour that counts is that which delivers

results. Competency is ultimately about performance.

In general, broadbanding (Brown, 1997) collapses a large number of hierarchical tiers and grades into a few

bands often with very wide salary ranges, but it is not just about salary levels, it encompasses job evaluation,

training and development, and almost always involves radical rethinking of how roles are described and

what an individual employee can potentially offer the organisation. The aim is to encourage team-working

and lateral career development over formal job grading. An essential feature is that pay rises are not

dependent on promotion to a higher band, individuals can progress within their band, with pay rises for

expanded roles or for new competencies (not to be confused with qualifications). In practice this means

devolving responsibility for pay decisions to line managers who are supposedly better placed to monitor and

evaluate their people than the HR department, which requires massive training for these managers.

Broadbanding also makes more use of market data to track rates of pay outside the organisation and then

uses this information to position individuals within bands. There are no hard and fast rules to broadbanding,

it is a concept rather than a rubric and can be applied as management sees fit. Citibank (Brown, 1997) has

introduced it for everyone except senior managers, while BP uses it only for its top 100 managers. The key

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Disagree

Strongly disagree


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to its effective installation is proper communication which means comprehensive consultation with

employees, and making the mechanics of the system very clear. Having broad bands in the same level will

give employees unrealistic expectations which must be managed to avoid disappointment. The broad bands

can be specified in terms of role specifications or levels of competency instead of traditional grades derived

from qualifications, experience, length of service, and degree of responsibility (Brown, 1997).

One of the great risks of broadbanding is that it appears to restrict the career opportunities for many

employees, as there are many people whose scope for advancement is limited. There is always a need for

people to do basic jobs which will render them always at the bottom of the pay band which is neither good

nor morale. For this reason many organisations do not apply this broadbanding system to low-level manual

or clerical jobs.

5. Appraisal and feedback

Proposed best practice - Appraisal should focus on individual development and performance assessment

Figure 10 Appraisal aims study results

This proposed practice deals with the aims of appraisal and suggests realigning traditional appraisal from

pure performance assessment (to determine pay), to personnel development. 88.5% of the study participants

agreed with this proposed shift and confirmed this concept as a best practice. Thus, there is a need for a new

form of appraisal that takes the developmental approach. The first point to consider is the complete removal

of the element of financial reward from the process. The principles of a developmental attitude include

(Cane, 1996):

1. Develop human factors not financial targets to remove the competitive aspect from within the

organisation and replace it with co-operation which will eliminate fear.

2. Link to business needs.

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Disagree

Strongly disagree


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3. Run by team leaders or line managers who are in daily contact and observe the work of the employee.

The personnel department can not be responsible for giving constructive feedback to a member of the

staff from other peoples written comments

4. Open and participative

5. Single status - the appraisal process should include all staff (including management).

6. On-going and informal.

The whole appraisal system should be embraced as part of a wider system of performance management.

This means that it must embrace issues such as personal development and career planning. From the

organisations point of view, the programme gives it the opportunity to liberate the potential of its

employees, while the employees gain insights into what they can and can not do, where their career can go

and how they can direct it (Crainer, 1997).

Proposed best practice - The appraisal process should involve the employee, external customer, peers, and

the team leader

Figure 11 360 degrees appraisal study results

76.8% agreed with this best practice and thus the annual appraisal should be re-invented to take the views of

equals, subordinates, and customers as well as those of the direct supervisor. The traditional form of

appraisal (one hour with the manager per year) was bureaucratic and did not actually improve performance

(Crainer, 1997). The people that should be involved in the appraisal are the employees, peers, and the team

leader, this is sometimes referred to as the 360 degree approach. All the people involved are asked to

complete appraisal forms and send them to the PM function. The appraisal, to motivate and develop, will use

two basic indicators: achievement against objectives, and achievement in skill and competency acquisition.

Everyone receives the results in writing with statistics on their performance, strengths, areas for

improvement, and some comments. Crucially, the process is anonymous (Crainer, 1997).

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Disagree


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Traditionally, appraisals fell within the HR domain. Now, the PM function will be active in designing the

appraisal process, take responsibility for training appraisers, the kind of questions asked, how people are

measured and what the processes are seeking to achieve. It will act in a supporting role but the emphasis will

be on working in partnership. Appraisals will be seen as a management tool which should be used by line

managers (Covey, 1997).

6. Conclusions

The study has identified several concepts and approaches relating to people reward, recognition and

appraisal that leading organisations (and supporting literature) consider to be best practices. These practices

included pay for performance, 360 degrees appraisal, interactive reward structures, and so on. There is no on

single best practice system or formula for organisations to follow and implement. What the study has

provided are well proven best practices that represent the pieces to a puzzle. Each organisation should take

the appropriate ones and build their own picture that drives them and their people to excellence. The only

constant in all the practices proposed is the emerging theme of people involvement. Organisations must

learn to hand power down to the people who do the work and involve them in setting the reward schemes on

a win-win basis, involve them in the organisational profits, and involve them in the appraisal and feedback

system. This formula, coupled, with a shared vision towards the overall benefit of the organisation and its

people is the true path for future performance excellence.


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A Reward_ Recognition_ and Appraisal System for Future Competitiveness

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