Reward Management Closing Growing SayDo Gap

8/14/2019 Reward Management Closing Growing SayDo Gap

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Reward Management:Closing a Growing Say/Do Gap

Reward Challenges and Changes Survey Report


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2 | Reward Challenges and Changes Survey Report

Its no surprise, then, that a reward

strategy that helps an organization

attract and retain key talent and most

important motivate them to drive

business growth, has enormous power.

For the last 12 years, Towers Perrin has

surveyed pay and performance practicesto track how well organizations are adapt-

ing their reward programs to a dynamic

business environment and fast-changing

corporate strategies. Our surveys each

one more global in reach provide a

rolling four-year view of process and

program design trends and concerns

and underscore the increasing difficulty

companies experience in synchronizing

their reward practices with their strategic

and talent priorities.

Our research shows that the challenge

of getting the reward equation right is

more formidable than ever. A decade

of radical change on the business front

has spanned the period of the Internet

boom, bust and, now, reboom; the

increasing globalization of business,

capital and labor markets; and cyclesof growth and recession, among other

developments. However, as our findings

clearly illustrate, reward strategies and

structures have not kept pace with these

market and business forces. Respondents

report only modest or superficial changes

in the reward and performance manage-

ment practices they are putting in place

to support their new business and people

management models.

Broadly, the key findings show:

A preoccupation with tactics versus

strategy, particularly in terms of true

alignment with business needs.

Companies are not reaching for the

large-scale strategies that will make

significant difference in organization

performance. Theyre not effectively

segmenting rewards, truly differenti

ating performance, identifying their

high performers and key talent pool

or customizing rewards to meet their

specific talent and performance goal

Instead, they are focused on tactics

that are not likely to produce signifi

cant results: incremental changes in

variable pay plans and eligibility for

incentives, shortened or lengthened

pay communication cycles, changes

in the rating scale for performance

management, and implementation o

new technology. This very focus on

tactics tweaking programs yea

in and year out may be the chief

obstacle to truly effective and effi-

cient program design and delivery.

Executive Summary

The evolution in views on how employees create value, fuel corporate growth and drive

competitive advantage has had an enormous impact on business success in the last decade.

Today, the lions share of corporate value nearly three-quarters by some estimates comes

from an organizations people and their ideas, innovation and performance. Put another way,

competitive advantage is increasingly being achieved through investments in people and skills

rather than expenditures of capital for physical assets.

About This Survey

The 2007 Towers Perrin reward challenges and changes survey, Reward Management: Closing a

Growing Say/Do Gap, 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 respondents 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.


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Continued use of pay as a blunt instru-

ment of behavior change. Pay remains

HRs instrument of choice for driving

behavioral changes and achieving tal-

ent management goals, but it is not

fully delivering for a variety of reasons.

Paramount among them is evidence

that pay can only go so far in truly

engaging people. As our global stud-

ies of employees have repeatedly

shown, pay is critical in attracting

people to a company and position,

but is markedly less important in

retaining people and engaging them

in their work. Exhibit 1, which shows

the results of our most recent study

of the global workforce covering

close to 90,000 employees across

18 countries makes this very clear.

It highlights the aspects of the work

environment that have the most

impact on employee engagement,

virtually all of which center on the

more intangible and nonmonetary ele-

ments of the workplace. It confirms

that people bring their head, heart

and hands to their work with full

commitment and true discretionary

effort (the essence of engagement)

when they feel valued (especially by

leadership), connect with a broader

vision and see opportunities to learn,

contribute more and advance their

careers. Compensation alone does

not satisfy those needs.

Rather, compensation is most effec-

tive when its blended with an array

of related workplace programs that

collectively help people understand

their role, their contribution and the

value they can bring. Compensation

can act as a driver of decision makin

and behavior when companies have

the courage to direct a significantly

larger share of it to mission-critical

and high-performing talent. Unfortu

nately, few companies adequately

differentiate and reward top talent,

which further compromises the effe

tiveness of compensation as a drive

of valued behavior.

Insufficient focus on the human sid

of performance management. Most of

us know intuitively that the traditiona

task-based, compliance-focused

approach to performance manageme

has yielded little sustainable succes

EXHIBIT 1

Top Global Drivers of Engagement

1. Senior management sincerely interested i

employee well-being

2. Improved my skills and capabilities over

the last year

3. Organizations reputation for social

responsibility4. Input into decision making in my departme

5. Organization quickly resolves customer

concerns

6. Set high personal standards

7. Have excellent career advancement

opportunities

8. Enjoy challenging work assignments that

broaden skills

9. Good relationship with supervisor

10. Organization encourages innovative think

Towers Perrin 2007 2008 Global Workforce Study

Getting the reward equation right is

more formidable than ever.

Our data show that companies are not:

creating the large-scale

compensation strategies that can

help drive enhanced performance

effectively segmenting rewards

and differentiating performance

identifying key talent pools.

Companies must have the courage

to earmark a significant percentage

of their compensation budget for

high performers and key talent.


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Respondents to our reward surveys have

consistently cited retaining top talent

as the most critical objective for reward

programs and, as Exhibit 2(page 6)

shows, this year is no different. Whats

notable in our current findings, however,

is that attracting talent to the organiza-

tion a goal closely related to retention

is rising in importance as a reward

objective, while cost control is dropping

down the scale. These changes are not

surprising given companies recent shift

from cost management to growth as

a primary business strategy. A growth

imperative, coupled with deepening

talent and skill shortages, has made

executives more aware of the need to

develop a full pipeline of strong candi-

dates and create or sustain a high-

performance culture.

High-performer and customized reward

programs have generated interest for

their potential to increase employee

engagement and contributions to

results. But, since our last survey, few

organizations have made the kind of

changes to these programs that would

convey an increased commitment to

them. In fact, as our findings show,

changes to date remain informal and

limited, suggesting that in many organi-

zations these programs remain more

about style than substance.

There are some positive developments

however. Many organizations have take

the important first step of identifying

their high performers, and the majorit

(76%) have implemented programs

aimed at recognizing and rewarding

them. But the way organizations are

delivering these programs may limit

their effectiveness.

HIGH-PERFORMER PROGRAMS

REMAIN LARGELY INFORMAL

AND INEFFECTIVE

Only a quarter of respondents set asid

additional funds for their high perform

ers, for instance and, of those, half

designate less than 1% of their merit

budgets to the programs. In addition,

companies are not setting pay differen

tiation levels high enough to clearly

signal to top performers that they are

unique and that their contributions are

important to the organizations succes

Shortchanging Retention Potential: High-Performer and

Customization Programs Highlight Risks of Tactical Focus

Retention of top talent remains a

key priority.

Attracting the right people is rising

in importance.

Many organizations have taken the first

step: identifying high performers.

But they have not made significant

strategic changes to their reward and

performance management programs.


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EXHIBIT 2

Key Reward Strategy Objectives: Past, Present and Future

% of respondents

Rewardand retain the best performers

Achieve/maintain market competitiveness

Attract key talent to the organization

Link pay to the organizations key success factors

Ensure internal equity

Improve employee understanding of the value of the rewardpackage

Reduce/control labor costs

Be recognizedas an employer of choice

Manage rewards on a total rewards basis

Increase employees productivity

Prior focus: 2003 2006 Current focus Future focus: 2007 2010

0% 20% 40% 60% 80% 10

76

73

68

47

59

47

55

57

59

60

54

51

18

32

15

17

30

31

19

28

19

3525

38

32

25

37

22

25

22


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In our consulting, weve observed that

the most successful companies take

pains to provide very significant salary

increases and bonuses to high perform-

ers generally between two and three

times the average increase and they

set incentive differentiation between

two and three times that of the average

performer. Yet, as Exhibit 3shows,

salary and incentive differentiation at

most companies hasnt moved much

over the years, and remains at 1.4 to

1.5 times that of the average performer.

USING PROMOTIONS TO REWARD

PERFORMANCE

Another positive note is that companies

are increasingly rewarding high perform-

ers with promotions and training the

nonmonetary elements that employees

value most. As our series of Global

Workforce Surveys has shown, these

so-called relational rewards have far

more influence on engagement and

motivation than pure financial rewards

Their increased use also suggests a

greater appreciation for a truly integrate

total rewards perspective.

Tempering this positive shift, however

is the fact that the percentage of com

panies using nonfinancial rewards hasn

changed significantly since our last su

vey. Clearly, the companies that get i

continue to take a holistic view and

provide the right rewards in the right

ways. But our data suggest that many

still havent made that leap from siloe

reward management to viewing all

aspects of the workplace and employ-ment relationship as an integrated

package of rewards.

0% 10% 20% 30% 40

EXHIBIT 3

Differentiation for High-Performing Employees

% of respondents

Very significant differentiation over 1.9 times that for average performer

Significant differentiation between 1.5 and 1.9 times

Some differentiation between 1.4 and 1.5 times

Little differentiation between 1.2 and 1.4 times

No differentiation

Dont know

14

26

32

16

6

7

Companies continue to struggle with

effective salary differentiation for

high performers

but they are providing them with highly

valued rewards, like additional promotion

and training.

Companies need to make the move

to a truly holistic approach to reward

management combining salary,

bonus, training and development, and

other monetary and nonmonetary

rewards into an integrated package.


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Whats more, despite the value employ-

ees attach to them, promotions are not

always the most appropriate way to

reward performance. Both the survey

findings and our own experience suggest

that promotions are not given out as

judiciously as they should be, especially

when they involve people management

roles. Managing employees especially

in a performance-focused organization

requires a combination of skills that

encompasses rational, emotional and

empathetic capabilities. Not every top

performer is equipped with the leader-

ship and communication skills to explain

performance goals and coach, to help

employees see how their actions affect

business outcomes and set goals

accordingly, or to evaluate performance

accurately and fairly.

The dissatisfaction our employee

respondents regularly express regarding

managers effectiveness also suggests

that promotion may not always be the

right reward for every high performer.

Some companies recognize that steps

up a career ladder dont always have to

lead to people management roles. These

companies take a broader view of career

progression and incorporate additional

career paths as alternatives to the tradi-

tional managerial track, and are finding

innovative ways to use promotions as

rewards.

Career frameworks that provide organi

zations direction for staffing, recruitin

and selection can help ensure the appr

priate spend of development budgets

so that professional development and

training can be tailored to the needs o

specific roles, levels and expertise. Th

benefits employee development while

ensuring that the individuals stepping

into people management roles are pre

pared for the demands of the job.

CUSTOMIZATION NOT TAKING HOLD

Customized rewards (i.e., specific

reward structures for specific roles) ar

another much discussed means of dis

tinguishing valuable contributions to

the business. But, like high-performer

programs, they are more talked about

than practiced.

The majority of respondents customize

rewards only for the sales function,

despite the advantages such an approac

can yield in retaining and engaging

scarce or critical skill groups. We know

from past research that organizations

want to know how they can better leve

age the roles most critical to executing

their strategies. Respondents to our

2003 survey, for example, told us that

they would increase their emphasis on

customer service and innovation to

create competitive advantage and fuel

growth. But despite this focus on peopl

dependent business strategies, few

companies have customized rewards

for the roles most responsible for the

success of these strategies.

Promotions may not always be the best

way to reward performance especially

if a promotion requires people manage-

ment skills and the candidate is weak in

that area.

Formal career frameworks can help

companies take a broader view of career

progression, both by incorporating

additional career paths and better

focusing training and professional

development efforts.

Most respondents still customize rewards

(develop specific reward structures for

specific roles) only for the sales function.


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The failure of customization to spread

broadly may reflect a lack of tools to

ensure success. In our view, few organi-

zations have the capability to identify

the contributions of different segments

of the workforce, the right metrics to

assess and reward such contributions,

or the change management skills to

manage the cultural implications of

moving to a more segmented approach.

These issues are tremendously challeng-

ing, to be sure; they bring additional

complexity as well as concerns about

fairness and equity to program design

and implementation. But failure to

address them prevents organizations

from realizing the full potential of

rewards as a management tool for

shaping behavior.

Segmentation is key. Our 2007 Global

Workforce Studyshows that the value

employees place on various rewards dif-

fers markedly by age group, culture and

individual, even within a single company.

As a result, identical reward program

investments can produce very different

employee behaviors and levels of per-

formance and engagement. So organi-

zations need to understand not only

which roles are driving the organizations

business strategy, but also which rewards

will motivate and engage the individuals

in those roles an increasingly difficult

proposition given the growing diversity

of todays workforce.

And then theres the delivery issue. Whe

more and more companies operations

are far flung, how can they offer pack-

ages that reflect individual preference

within a globally consistent strategy?

And how can HR ensure that everyone

understands the program and sees its

value without significantly increasi

the cost of delivery? Part of the answe

lies in a more sophisticated understand

ing of what drives employee behavior

in key areas, and how to evaluate and

assess the trade-offs of reward program

decisions and choices (see Total

Rewards Optimization: A Balancing Act

page 10).

Few organizations have the tools and

metrics to accurately identify and assess

the contributions of the various segments

of their workforce

but that knowledge is critical toimproving performance. Organizations

need to understand:

which roles drive the business strategy

which rewards motivate the people in

those roles.


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Total Rewards Optimization: A Balancing Act

One of the biggest challenges companies face is ensuring that their investment in rewards

often the single largest portion of their total labor spend is achieving desired goals in terms

of performance, engagement, retention and a host of related objectives. Given todays diverse

workforce, few organizations can safely assume they know what it will actually take to elicit higher

performance and contribution from employees.

Indeed, one of the most consistent themes weve seen in our research is that the rewards

employees value the most are often the least costly. Assuming pay and benefits are fair and

competitive, its frequently the case that a company can engage someone more fully with a

stretch assignment, high-visibility project or training opportunity than a pay raise.

The challenge comes in determining just what will make a difference to employees. One of the

most powerful tools to elicit this information is something called Total Rewards Optimization

(TRO), which uses a rigorous analytical process originally developed for consumer marketing

to pinpoint meaningful buyer preferences. In the work environment, TRO lets employees make

trade-offs among different reward components and enables employers to test how various

changes in the reward program would affect behavioral variables like engagement, retention

or performance. The findings help identify which rewards are most valued by which employeesand the probable impact of a shift in the program in terms of the desired variables.

The TRO process also analyzes the costs of various reward components and combines this

information with the results of the above analysis to define the efficient frontier for an

organizations investment that is, the optimal allocation of the overall reward investment

to maximize value for spend.

TRO provides insight into such key questions as:

Whats the best level of total investment in employees?

Whats the optimal allocation of that investment across the reward program to maximize

desired employee behaviors?

How do the answers vary across and within targeted segments of the employee population?

More important, TRO provides assurance that the reward changes being implemented are those

that align with organizational cost goals, employee preferences and, most critically, desired

employee behaviors.

The rewards employees value most are

often the least costly

but, given todays diverse workforce,

companies cant assume they know what

employees want or what will elicit higher

performance.

By asking employees to identify and

rank reward preferences, a Total Rewards

Optimization approach can pinpoint

rewards that will have the greatest impact.


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Reward Challenges and Changes Survey Report |

With each of our surveys, weve seen

companies placing larger numbers of

employees in variable pay programs to

help lower their fixed costs and reward

employees in line with their actual

contributions to results. As Exhibit 4

shows, organizations rely on a broad

array of plans that typically vary by

organizational level.

Taking a Blunt Instrument to a Surgical Process:

Companies Miss the Mark on Pay and Miss the Opportunity

to Encourage Meaningful Change

EXHIBIT 4

Prevalence of Variable Pay Plans

% of respondents

Tiered incentive

Organization-wide or other cash profit sharing or incentive

Individual incentive

Project incentive

Team incentive

Gain sharing

Other

None

Executive Management/professional Nonmanagement

0% 10% 20% 30% 40% 50

47

47

26

41

38

33

34

35

25

7

14

12

6

10

12

4

5

6

5

5

4

5

7

20


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But our results suggest this broad brush-

stroke approach is undermining the

effectiveness of variable pay. Because

these programs arent customized to

specific roles and contributions, theyre

not encouraging the desired behaviors

or helping employees connect their day-

to-day actions with business outcomes.

Nor does it appear current programs are

providing significant control over reward

payouts either.

A VIEW TO SUCCESS REQUIRES A

CLEAR LINE OF SIGHT

More than three-quarters of responding

organizations have changed their variable

pay programs in the past three years,

and nearly half expect to implement

more changes in the near future.

Surprisingly, the most common shift

is using company-wide performance as

a metric. Yet, because few employees

have a clear line of sight between their

actions and company performance, this

strategy is not likely to motivate them.

What this approach does, in essence,

is shift additional risk to employees by

tying more of their total pay to organi-

zational results without giving them any

real control over those results.

As Exhibit 5shows, respondents clear

understand that incentives are not a

one-size-fits-all proposition. They are

using a variety of plans and see clear

distinctions between plan types in term

of objectives and what those plans su

port. Interestingly, though, theyve mad

virtually no shifts in their mix of plans

over the past four years. They also know

based on their own success ratings

shown in Exhibit 6(page 14), that the

most effective programs are those tha

give employees the clearest line of sig

from their actions to business goals to

rewards. Note, for instance, that projec

based incentives get high marks while

the others particularly company-wid

incentives show much room for

improvement.

To enhance the effectiveness of any

incentive, companies must invest signi

cantly in improving managers coachin

abilities and employees business literac

skills. Both employees and their man-

agers need to understand how their

individual activities relate to these

company-wide metrics so they make

the day-to-day decisions that contribu

to business success. And while some

respondents say they have begun traini

and skill development efforts to foster

enhanced business literacy, many of

these efforts appear insufficient to ensu

the right skill base, and are not integrate

into the broader reward system.

Variable pay programs need to be tailored

to specific roles and contributions to drive

desired behaviors.

Employees need to understand how

their day-to-day actions affect company

performance

and how they can control the results.


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Those deficiencies are reflected in the

results highlighted in Exhibit 7(page 15).

Clearly, companies have some work ahead

to improve employees understanding

of how their performance impacts the

business. According to our respondents,

just 12% of rank-and-file workers pos-

sess this understanding to some degree,

while 42% have little or no understand-

ing at all. More surprising still, respon-

dents feel that only 9% of managers

and professionals demonstrate a com-

plete understanding of the link between

their performance and business results.

So its no wonder that their coaching

abilities are in question. Without full

understanding of how their actions

impact business outcomes, they cant

function as effective performance

coaches to their teams.

SHIFTING RISK WITHOUT CONTROL

IS A HIGH-STAKES GAMBLE

In addition to investing in business lit

eracy efforts, companies also need to

ensure that employees better understan

the link between performance and pay

Specifically, they need to understand

the increased risk inherent in variable

pay plans, as well as the consequence

of their decisions in light of those risk

EXHIBIT 6Success of Variable Pay Plans

% of respondents

Project incentive

2007

2003

Tiered incentive

2007

2003

Organization-wide

20072003

Individual incentive

2007

2003

Team incentive

2007

2003

Gain sharing

2007

2003

Significant success in achieving goal Some success in achieving goal No success observed

0% 20% 40% 60% 80% 100

40 55 4

41 53

36 57

26 67

35 58

28 59 1

32 64

27 66

28 66

35 58

23 70

19 72

KEY POINTS Companies clearly understand that

incentives are not one size fits-all.

The most effective incentive programs

clearly link employee actions to business

goals to rewards.

Most companies use a mix of plans toachieve results.


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Companies have to clearly communicate

all the scenarios that could come into

play as a result of employees participa-

tion in variable pay plans and provide

employees with the opportunity to

manage this risk.

In other words, as companies attemptto lower fixed costs by tying reward

expenditures to performance, the

importance of employee control and

autonomy is being elevated. To transfer

more risk to employees without demoti-

vating them, organizations have to give

them the autonomy and tools to meet

the challenge of pay for performance.

Its fundamental in concept, but our

findings suggest organizations continu

to struggle with putting the control fea-

tures into practice. And if employees

arent given the organizational resources

to manage greater pay risk, the result

can be an outright shift of costs to

employees. That, in turn, can quickly

lead to attrition or a workforce unwillin

to expend the discretionary effort that

brings long-term gains.

EXHIBIT 7

How Well Employees Understand the Impact of Their Performance on Business Results

% of respondents

EXECUTIVE

2007

Complete Strong Average level Low/no level

understanding understanding of understanding of understanding

2%

52%39%

7%

MANAGEMENT/PROFESSIONAL

2007

9%5%

51%

35%

NONMANAGEMENT

2007

45%

42%

12%

Only 12% of nonmanagement employees

have a strong understanding of how their

performance affects the business.

Only 59% of management and professional

staff have a complete or strong under-

standing of that link which calls their

coaching abilities into question.


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Performance management is another

area subject to significant changes.

Fully 90% of respondents reported

changes in this area in the last three

years, and a virtually identical percentage

expect to make more changes in the next

three years. Close to the top of the list

is adopting new technology (Exhibit 8,

page 17), typically to automate more

aspects of the process and enable

employees and managers to self serve

online, whether in setting goals, rating

performance or completing required

evaluations.

But technology is no substitute for the

human interaction thats at the core of

truly effective performance management.

In our experience, even manager train-ing in this area is often more about

learning to use a computerized system

than it is about learning how to coach

people or address performance problems.

And perhaps thats not surprising, given

that its far easier to deal with perfor-

mance management as a high-tech

activity than as a high-touch process.

MANAGERS STILL A WEAK LINK IN

THE REWARD CHAIN

The emphasis on technology appears

somewhat shortsighted in light of our

findings. As Exhibit 9(page 18) shows,

respondents see managers as posing the

most significant obstacle to successful

performance management. They believe

that managers are often unwilling to ta

the time to thoroughly evaluate emplo

ees and are ill equipped to coach and

develop their direct reports. Employee

have similar views. According to our la

est Global Workforce Survey, only half o

the nearly 90,000 global respondents

believe their manager provides perfor-

mance goals that are challenging but

achievable, while just 48% feel their

manager handles performance reviews

fairly and effectively. In a similar vein

only 43% say their manager effectivel

coaches and builds employee strengths

And a mere 36% agree managers hand

poor performers well.

While technology has enabled manage

to increase efficiency, it does little morethan streamline certain tasks. And

those tasks, while important, are mere

a means to facilitating that critical dia

logue between managers and employee

about expectations, contributions and

performance. By treating performance

management as a high-tech activity

rather than a high-touch process, organ

zations are missing the opportunity to

connect with employees and forge stron

links between individual performance,

organizational performance and reward

In short, technology becomes the tail

wagging the dog.

Insufficient Focus on Human Elements of Reward Programs

Can Impede Behavioral and Performance Goals

More companies have adopted new

compensation and performance manage-

ment technology especially employee

and manager self-service applications

but technology cannot take the place of

the human interaction thats at the core of

effective performance management.

Our respondents say managers are illequipped to adequately coach employees

or handle performance problems.


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Thats not to say technology isnt needed.

It can be a very powerful tool for sup-

porting the performance management

process. Some leading companies, for

example, are creating technology-based

linkage frameworks that allow employees

across the organization to measure their

progress against key operational goals.

These systems are valuable for relieving

overtaxed managers from some of their

administrative duties and allowing them

more time to focus on coaching and

mentoring. But the bedrock of any

effective performance management

system is the manager who helps

employees set goals, evaluates their

progress against those goals, and regu-

larly motivates and coaches them.

EXHIBIT 8

Changes to Performance Management Process: Proposed vs. Actual Changes

% of respondents

Providing more coachingdevelopment for managers

Adding competency areas

Linking the performance appraisal cycle and salary review cycle

Introducing line-of-sight process into goal setting

Incorporatingadvanced technology

Increasing the link to salary

Calibrating ratings across departments or teams

Focusing more on career development

Incorporating team and individual results

Adding/including rating scales

Planned to change Have changed in Considering changing in

between 2003-2006 past three years next three years

0% 10% 20% 30% 40% 5

46

41

42

31

32

21

14

32

14

23

30

22

41

30

38

25

29

19

24

27

21

39

26

35

1922

16

9

21

7


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EXHIBIT 9

Performance Management Challenges

% of respondents

Managers unwilling to take time to thoroughly evaluate employees

2007

2003

Lack of funds to reward high performers2007

2003

Managers have not receivedadequate training on how to be an effective coach

2007

2003

Managers are not adequately rewarded/recognized for managingperformance

2007

2003

Employee mistrust of performance evaluation rating

2007

2003

Lack of useful technology

2007

2003

Insufficient development opportunities

2007

2003

Too difficult to administer

2007

2003

Managers have too many employees to evaluate

2007

2003

Insufficient support from top management

2007

2003

Significant challenge Some challenge Not a challenge

0% 20% 40% 60% 80% 100

27 55 1

34 55 1

27 36 3

33 39 2

25 56 1

29 55 1

20 49 3

29 47 2

20 52 2

18 54 2

20 39 4

18 54 2

17 49 3

18 51 3

12 46 4

16 45 3

11 50 3

12 50 3

10 34 5

16 33 5

Technology allows managers to streamline

administrative duties and focus on coach-

ing and mentoring, assuming they have

the skills and information to do these

critical things.


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Its important for organizations to

acknowledge the critical role managers

play in the reward delivery and perfor-

mance improvement process and then

equip them to effectively fulfill it.

Employees ability to gain line of sight,

understand how their roles support

broader organizational goals and how

their day-to-day actions affect longer-

term business outcomes come directly

from conversations with managers

and not from electronic charts of per-

formance protocols or other technology

applications (see Linking Employee

Actions to Drivers of Value for the

Business, page 22).

However, as Exhibit 10shows, only a

fifth of respondents think their perfor-

mance management programs adequate

equip managers to identify, develop a

reward high and low performers, and

theres little evidence they plan to

address this issue in the future. The

percentage of respondents who said

they will focus on coaching in the nex

three years has not changed since our

last survey, a finding that once again

highlights misalignment between HRs

actions and its strategic intentions.

0% 20% 40% 60% 80% 100

EXHIBIT 10

Effectiveness of Performance Management Systems% of respondents

Communicating the organizations mission, vision and values

Improving link to business results

Equipping managers to identify, developand reward high performers, anddeal with low performers

Providing managers and employees with appropriate information

Increasing employee involvement/commitment

Differentiating employee performance based on role and business contribution

Helping employees see how their activities/decisions affect business results

Giving employees more control over their contribution

Extremely/very effective Effective Not/somewhat effective

21 33 4

20 37 4

20 38 4

18 46 3

16 40 4

15 41 4

14 31 5

14 36 5

Managers play a critical role in the

success of reward and performance

management:

in talking to their reports about their

roles in the organizations success

in coaching and mentoring

in helping employees choose appropriate

training and development opportunities

in setting expectations regarding

rewards.


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COMMUNICATIONS STILL ROTE

AND INEFFECTIVE

Our Global Workforce Survey and other

research have found that employees are

growing increasingly skeptical of pay-for-

performance models, and question the

fairness of performance evaluations and

incentive and bonus practices. In light

of those findings and respondents

belief that managers are not skilled in

performance management one would

expect to see companies giving managers

more guidance in making pay for per-

formance understandable to employees.

Yet a mere 18% of respondents think

their companies provide managers or

employees with sufficient and appro-

priate information to effectively manage

reward and performance programs.

While respondents tell us they are giving

managers additional information about

the organizations pay guidelines and

policies, salary structures and merit

budgets, that alone wont help managers

guide their teams toward adopting the

behaviors that will drive growth for the

organization and produce the desired

rewards for the employee.

In our experience, successful companie

accomplish these more nuanced and

complex aims through tactics ranging

from face-to-face communications wit

employees (as opposed to mass print

and e-mail communications), consiste

mentoring and coaching efforts, and

more rigorous performance managemen

systems. In addition, some companies

are evaluating more critically their

managers ability to conduct these

activities, giving special attention to

managers skills at conducting face-to

face conversations.

For example, some companies now

screen for these capabilities as they

consider candidates for managerial

positions. Others are making employeeconversations a discrete part of man-

agers job descriptions, then measurin

both the frequency and effectiveness

their dialogues with employees.

HRs focus, then, should be on designin

a performance management framewor

that integrates all the people manage-

ment and reward processes into a

comprehensive and seamless experienc

for the employee. Our data do indicatethat companies are increasingly linkin

performance management to other

processes (Exhibit 11)but, to date, th

links are not consistent, nor are they

being consistently applied over time.

Only 18% of respondents believe their

companies give managers the information

needed to manage reward and perfor-

mance programs.

To drive the right employee behaviors,

managers need a range of strategies and

tactics:

face-to-face meetings

mentoring and coaching programs

rigorous performance management

segmented reward programs.


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EXHIBIT 11

How Performance Management Links to Other Programs

% of respondents

Determines salary increase

Assists in career management/planning

Identifies development and training opportunities

Assists in succession planning

Determines promotions

Determines the individual component of the incentive program

Determines eligibility for variable pay

Is a threshold for incentive awardpayouts

Determines eligibility for long-term/stock awards

Other

Dont know

It doesnt link to any other programs

2007 2003

0% 20% 40% 60% 80% 100

71

70

67

62

67

67

46

46

44

36

29

30

24

22

4

4

16

17

3

2

2

2

59

48 HRs imperative is designing a holistic

rewards and performance management

program that is seamless to the employee

and gives managers the support they need.


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HR arguably has more power, insight and

tools for balancing employees needs

with organizational priorities and cost

goals than ever before. So whats

required to strike a fair balance between

these often competing needs? In our

view, companies need to overcome

three hurdles:

HR and senior corporate management

need to agree on the role of rewards

in driving performance. Despite the

lessons of the current business cli-

mate, senior management at many

companies continues to view people

as a cost, not as an asset or a strate-

gic investment. As a result, HR may

still be under a strong cost-cutting

mandate.

HR and senior corporate management

need to have a formal method for

measuring the return on investment

(ROI) of reward programs. ROI is a

common measure to support capital

and marketing expenditures and

legitimize, in the eyes of executive

and board leadership, the payoff for

any proposed cost outlay. HR needs

financial data and fluency to make

a rigorous case for investment in

talent strategies. Otherwise, it will

continue to be limited to relatively

low-budget, piecemeal activity, such

as shifting more fixed compensation

costs to a variable structure.

Senior corporate management needs

to clearly support HRs transition

from a tactical to a strategic role. O

long-term outsourcing research show

that companies outsource HR func-

tions for two reasons: to reduce cos

and to free HR to focus on more

strategic issues. And while our out-

sourcing data show that companies

do save money, there has been little

or no change in HR time spent on

bigger-picture rewards and compen-

sation design. This suggests the

problem lies not just in freeing HR

from administrivia, but in definin

a new role and providing the trainin

support and structure to enable the

shift to a strategic partner role.

Linking Employee Actions to Drivers of Value for the Business

Whats Getting in HRs Way?

Managers cant provide employees with a line of sight between action

and business outcome if they themselves dont have a clear, big-picture

view. We work with companies to help build this view using a proprietary

value driver methodology that deconstructs an organizations finan-

cial drivers of value into component actions to define how workers

contribute financial value.

We start by clarifying broad organizational strategy and then define the

success factors critical to realizing that strategic aim. We then identify

the business drivers underlying those success factors (e.g., increasing

sales and customer loyalty, improving operational efficiency, and devel-

oping employee skills and abilities). This in turn supports the develop-

ment of value trees for each key business driver, which serve as the

starting points for developing performance goals for departments, teams

and individuals. They can also form the basis for performance-based

compensation as well as learning and development programs.

Individual employees are given specific performance targets that link

directly to key branches of the value tree. For example, a sales managers

performance might be measured against the total revenue generated

in a quarter, while a customer service departments success might be

gauged by customer satisfaction levels.

The managers role is to ensure that employees understand the perfor-

mance metrics and the connection between their day-to-day actions and

the organizations overall success. Managers must also be capable of

fairly and accurately evaluating each employees performance against

his or her goals no easy task, given the extent to which individual

employee goals can vary in degree of stretch and business impact.

However, it is the very precision inherent in this process that ensures

genuine alignment among corporate, functional, team and individual

performance goals.


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At the end of the day, our survey findings

suggest the current approach to reward

design and delivery, no matter how well

intentioned, is unlikely to yield desired

results. Breaking free from the cycle of

incremental tweaks and adjustments to

existing programs requires new thinking

focused on discontinuous change

that is, big, bold systemic change that

represents a radical departure from the

past and supports strategic vision for

the future.

Like any evolving entity, an organization

becomes what it rewards. At present,

too many companies fail to grasp the

connection between poor performance

and a misaligned reward strategy.

In an era of accelerated business change,

most organizations review their strategic

objectives every three to five years

at least to keep pace with shifting

competitive and market dynamics. But

how often are they reviewing their reward

strategies to ensure that theyre in sync

with new business goals? Over the 12

years that weve been surveying compa-

nies on reward challenges and change,

most have probably changed businessstrategies two or three times yet, as our

surveys indicate, reward strategies have

stayed essentially the same.

Once a new strategy has been develope

the organization needs to design, impl

ment and communicate rewards in way

that address employees sense of fairne

and their need to understand the deal

Employee engagement throughout the

world is very low 21% according to

our 2007 Global Workforce Survey

and mistrust of the fairness and accura

of pay-for-performance programs is pe

vasive. Whats more, as organizations

implement the bold new approaches

that will help them break the current

rewards mold, they will also be asking

employees who are already weary and

increasingly wary of compensation and

benefit changes to withstand yet anothe

round of them. The pressure will be

on HR to show that the organization is

aware of the impact such changes hav

on the basic employment contract and

that it is committed to providing the

tools, resources and management that

can help employees make those

changes work for them.

The Road Map to Success

Senior management needs to shift its view

of employees from seeing them as a cost

to seeing them as an investment.

HR must move from the tactical to

the strategic and from incremental

to significant change in rewards and

performance management and

thereby define a new role for itself.


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Its a risky proposition, but the odds

of success can be highly favorable if

organizations identify required changes

in terms of desired business outcomes

and employee needs, and sequence

those changes based on a thorough

analysis of:

the efficiency they can bring to pro-

cesses and systems, especially in terms

of managing reward expenditures

the effectiveness of revamped pro-

grams and practices in promoting

desired behaviors and actions on the

part of employees

the strategic relevance they will have

in meeting the specific goals of the

business over the long term.

In practice, HR needs to make a great

commitment to knowing the business

and its employees, and revamping

rewards accordingly. That means, for

example, genuinely customizing reward

to a more segmented workforce to ensu

that every high-potential employee is

motivated to support business outcome

It also means optimizing rewards so tha

they arrive at a time and in a form

that ensures employees can make the

connection between their actions and

the outcome. And it means personalizin

the experience by making the employee

manager relationship the foundation o

the performance management process

Toward an Effective Reward Strategy

Connect with the business strategy to create a high-performing culture. An organization

becomes what it rewards and too many companies fail to grasp the connection between poor

performance and a misaligned reward strategy.

Support the employment brand. Organizations need to design, implement and communi-

cate rewards in a way that addresses employees sense of fairness and their need to clearly

understand the deal.

Generate maximum return on the rewardprogram investment. Given the size of rewardbudgets today, organizations cant afford to make investment decisions without a very clear

understanding of the return they want on the investment and the level of investment most

likely to generate that desired return. Increasingly, organizations are defining return in terms

of the employee behaviors they want to promote, such as retention or engagement. And theyre

using a variety of sophisticated, analytic tools to evaluate the extent to which a current or

proposed program will deliver that return. What they often discover in this process is that theyre

overspending in some areas or underspending in others, relative to what they want to accom-

plish with the program. Tools like Towers Perrins Total Rewards Optimization help identify a

so-called efficient frontier the point at which required spend aligns with desired return

to balance the efficiency, effectiveness and impact of reward programs.

The goal: Break the link between poor

performance and a misaligned reward

strategy, and forge a link between

organizational goals and individual

employee performance:

Define the deal.

Communicate.

Keep it fair.

Review it to ensure its always in sync

with evolving business goals.


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Finally, future changes to programs

need to reflect a reward system of inter-

locking elements that work in tandem.

Determining competitive pay rates and

developing the right pay structure are

undeniably part of that system, but

achieving true behavior change demands

much more. Thats why the role of the

manager is so critical.

Managers need to know how to deliver

critical pay and performance messages.

They need to be able to decipher the

organization and its business for employ-

ees and help them understand what

theyre working for and why. They must

help employees know what, exactly, they

need to do to make a difference to the

business and their own reward pack-ages. And managers need to act as

performance coaches, building business

literacy and increasing line of sight so

their employees can see a clear link

between the strategic goals of the busi-

ness and their role in advancing them.

Finally, they need to provide regular, fair

feedback and effective empowerment

so employees can sustain and increase

their contributions to the organization.

CLOSING THE GAP BY BUILDING

BRIDGES

As our survey results show, organization

reward and performance management

programs have not kept pace with the

changes in market and business force

However, the good news is that respon

dents also recognize that many of the

programs are not where they should b

and are taking or will soon take

steps to bridge the gap. In our consult

ing experience, there are several key

actions employers should consider to

bring their reward and performance

management programs into alignment

with their business objectives.

Clarify Your Strategy. In large measure,

reward and performance managementprogram is dependent on the goals of

the organization and the challenges it

faces in achieving those goals. A com

pany focused on new product develop

ment will have different performance

needs than one with a customer servic

strategy. A company with a pipeline of

new talent will structure its program

differently from one competing for ta

ent. When HR partners with both top

management and line management tounderstand goals and issues, a high-

impact reward and performance strategy

begins to emerge.

HR must thoroughly understand the

business and employees before it makes

bold program changes:

to ensure optimal outcomes

to make the most of available rewards

to help managers personalize the

reward and performance management

experience for employees.


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Identify Critical Roles and Top Performers

and Reward Them. High performers

and those in mission-critical roles are

the people you do not want to lose

and the very people your competition

would like to hire away from you.

Retaining top talent is less expensive

and more efficient than constantly

searching for and training replacements.

So it makes sense to structure a reward

program that recognizes top performers

and provides them with variable rewards

that are significantly higher than those

received by average performers. While

some of these rewards are monetary,

others can include additional training

and development opportunities, the

chance to work in another country, or

stretch assignments. Be aware, however,

that promotion to people manager may

not be a good option. Not all top per-

formers make good people managers,

and you may end up turning a top per-

former into a mediocre manager.

Train Managers to Manage Performance.

For a performance and reward program

to be effective, managers must be able

to understand the program and commu-

nicate it to their employees. Specifically,they need training to understand the

concept of line of sight: linking

employee actions directly to the goals

of the company. Managers also play a

critical role in helping employees set

annual goals based on that line of sight

and discussing in detail how employees

are performing against those goals.

Coaching employees to improve per-

formance, helping them gain a degree

of business literacy and working with

them to develop a career path are also

important managerial skills and the

usually require training for managers t

get them right.

Understand Which Reward Elements

Drive Employees By Segment. As

the employee population grows more

diverse and complex, understanding

what motivates an individual employee

or segment of employees becomes

critical to driving engagement. A Total

Rewards Optimization approach, whic

helps companies determine the best

mix of rewards both across the organi-

zation and among specific employeegroups, can help management make

the most of its budget and may

uncover some new and surprising

reward options.

Use Technology But Understand Its

Limitations. Relatively new tools such

as manager and employee self-service

portals can help companies streamline

their reward and performance programs

but an overreliance on them can actual

cost an organization employee goodwi

Technology is not a substitute for face

to-face interaction with a well-trained

manager who can help an employee

understand his or her current role in

the organization, how it relates to the

organizations overall goals, and how h

or she can best manage both day-to-d

performance and career options.


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ABOUT TOWERS PERRIN

Towers Perrin is a global professional services firm that helps organization

around the world optimize performance through effective people, risk and

financial management. The firm provides innovative solutions to client

issues in the areas of human resource strategy, design and management;

actuarial and management consulting to the financial services industry; an

reinsurance intermediary services.

The firm has served large organizations in both the private and public sec-

tors for over 70 years. Our clients include three-quarters of the worlds 500

largest companies and three-quarters of the 1000 U.S. companie

The Human Capital Group of Towers Perrin provides global human resourc

consulting and related services that help organizations effectively manage

their investment in people. We offer our clients services in areas such as

employee benefits, compensation, communication, change management,

employee research and the delivery of HR services.

Fortune


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Reward Management Closing Growing SayDo Gap

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