The evolving role of the Reward function

I ntroduction

Summary of findings

1

Th ere is l ittl e doub t th at th e w orl d of w ork is l ik el y to b e dif f erent in th e f uture and som e of th e core f eatures are starting to emerge. Predictions suggest the integration of new tech nol og y, ch ang ing em p l oyee dem og rap h ic rep resentation and an uncertain econom ic environm ent w il l al l im p act on h ow em p l oyees are m anag ed and rew arded.

There are pressures from multiple sources on Reward functions to adapt processes and approaches for the future. Legislation l ik e g ender p ay rep orting req uires interp retation, anal ysis, a narrative to exp l ain th e resul ts and p ossib l e interventions f rom across HR and beyond to improve any gap. Reward functions are b eing ask ed to l ead al l of th ese in m any org anisations.

Reward leaders must also scan the environment to assess w h eth er new trends and ap p roach es can im p rove th eir b usinesses. O ne exam p l e is p erf orm ance m anag em ent w h ich h as b een a p reval ent top ic in th e m edia recentl y w ith som e org anisations p ub l ical l y rem oving rating s w h il e oth ers h ig h l ig h t the problems that removal may cause. The Reward function is of ten at th e h eart of th e p erf orm ance m anag em ent p rocess and as a resul t m ust tak e a l ead rol e in review ing ap p roach es and recom m ending ch ang es.

Our Future of Reward survey took the pulse on these subjects and other hot topics in reward during July - October 2016. The survey investigated how Reward functions are responding to ch ang ing p ressures and w h at im p act th is is h aving on th e ef f ectiveness of rew ard p rog ram m es. Th e survey w as completed by HR and Reward leaders across 61 organisations f rom a w ide rang e of sectors w ith a com b ined em p l oyee base of c850,000 (a breakdown of respondents by sector is provided at the end of the report).

Th e resul ts sh ow th e traditional tenets of rew ard m anag em ent such as control l ing costs and del ivering return on investm ent rem ain a core f ocus, b ut new external p ressures are b roadening the role of the Reward function. Legislation on a range of issues is one of th ese p ressures in addition to oth ers incl uding external commentary on hot topics in HR. These include the need to m odernise ap p roach es to p erf orm ance m anag em ent or devel op an em p l oyer b rand to com p ete f or tal ent.

We believe there is an opportunity for Reward functions to p l ay a p ivotal rol e in sh ap ing th e f uture of w ork – b ut th is m ay req uire ch ang es f or som e team s to p osition th em sel ves to ef f ectivel y contrib ute. E nsuring th at rew ard p rog ram m es m eet the immediate needs of today as well as being fit for the future m ust b e a top p riority al ong side ensuring th at l ine m anag ers can deliver programmes effectively. Successful organisations w il l address th ese rew ard ch al l eng es in conj unction w ith current h ot top ics and l eg isl ative drivers.

This report provides detailed findings from the survey along with key considerations for Reward leaders to ensure their f unctions add m axim um val ue to th e b usiness.

Th e f uture of rew ard survey

2The evolving role of the Reward function

O u r s u r v e y f o c u s e d o n f o u r s u b j e c t a r e a s s e l e c t e d b a s e d o n p r e v a i l i n g t o p i c s o f c o m m e n t a n d d e b a t e w i t h c o m p a n i e s w e a d v i s e p l u s b r o a d e r m a r k e t t r e n d s a n d d r i v e r s :

Reward s trategy

Given the range of influences on reward, how are strategies being reviewed and which influences are taking priority?

I m p act of regulation

Reward continues to be subject to new legislation including gender pay reporting, the living wage, the apprenticeship levy and pension allowance cap in 2016/17. Which of these is having the most significant impact and how are organisations responding?

E m p loy er b rand

C om m unicating th e total ity of th e em p l oym ent of f er h as al so attracted considerab l e attention in th e m edia as org anisations in com p etitive tal ent m ark ets l ook to l everag e and sell the benefits of their particular offer. What are organisations doing in this space, and what do they consider to be their employee brand differentiator?

P erform ance m anagem ent

Performance management has perhaps been the hottest topic in the HR space over recent years. A number of large, well known organisations have publically removed p erf orm ance rating s. H ow ever, studies sug g est th is m ay b e a neg ative step . W h at are organisations doing in this space and do their actions match the commentary?

3

Detailed findings

4The evolving role of the Reward function

G overnance and legis lationTh ere is increasing p ressure and f ocus on b el ow b oard rew ard governance, and Reward teams will be required to ensure adherence to regulations. Gender pay gap reporting is cited as th e reg ul atory ch ang e exp ected to h ave th e g reatest im p act on organisations. This is perhaps surprising given that the final

Th e resul ts indicate th e im p act of l eg isl ation real l y is a m ixed p icture and, dep ending on th e org anisation, th e dem ands w il l b e different. Given the range of issues targeted by legislation, Reward l eaders need to b e b oth p rep ared and continual l y h oriz on- scanning f or f uture devel op m ents, esp ecial l y as m ore eq ual ity and executive rem uneration l eg isl ation is w idel y anticip ated.

How do the following regulatory developments rank in terms of potential impact upon your organisation over the next 18 months?

Answer Options Most impactful Least impactful

Apprenticeship levy 28% 28%

Gender pay gap reporting 31% 13%

Living wage 18% 21%

Pension allowance cap 16% 15%

Reward strategy influences Managing cost and driving employee performance remain the core focus of Reward leaders. However, the external environment is generating new demands. Attention is turning to opportunities offered by digitisation and automation in addition to established factors such as the impact of changing workforce demographics. Many of these factors are of course intertwined; for example, the EU ref erendum resul t is im p acting tal ent attraction and retention in certain sectors.

Top reward s trategy factors with p lans in p lace

Em p l o y e e p e r f o r m a n c e

B u s i n e s s s t r a t e g y

A t t r a c t i o n , e n g a g e m e n t a n d r e t e n t i o n

Influencing employee b e h a v i o u r s

M a n a g i n g c o s t / R O I

Top reward strategy factors influencing future p lans

3 6 % w il l p l an f or dig itisation

5 6 % will plan for EU ref erendum uncertainty

4 1 % w il l p l an f or ch ang ing w ork f orce dem og rap h ics

“We will be reviewing our entire benefit proposition in light of changing demographics,

market trends and digitisation”

M a r k e t / s e c t o r t r e n d s

8 3 %

8 0 %

7 9 %

7 5 %

7 1 %

7 2 %

reg ul ations h ad not b een p ub l ish ed at th e tim e of com p l eting th e survey and th at oth er l eg isl ation l ik e th e l iving w ag e and apprenticeship levy are likely to make a more significant financial im p act in th e near term .

Th e increased b urden of l eg isl ation al so creates m ore th an j ust operational demands to ensure compliance. At the same time, the associated w ork to address th e org anisational ch ang e th at th e legislation may seek to promote is less clearly defined. Reward l eaders are req uired to l ead interventions to ef f ect l ong - term m eaning f ul ch ang e and com m unicate th is in a com p el l ing w ay. Gender pay gap reporting is a good example of this and represents new territory for some Reward functions.

Performance management and th e im p act of rew ard

5

P erform ance m anagem entThe results reflect the commentary in popular media and trade p ub l ications – p erf orm ance m anag em ent is a m uch deb ated f ocus area. Th is ap p arent need to re- f ocus em p l oyee ef f orts is p erh ap s unsurp rising as org anisations anticip ate th e need f or new w ays of w ork ing in th e f uture, b ut is al so b eing influenced by a widespread sense of dissatisfaction with b ureaucratic ap p roach es w h ich m any com m entators b el ieve are not adding val ue.

Th e resul ts p aint a conf used p icture. Th e m aj ority of resp ondents rep ort th at th eir current ap p roach is suited to th eir b usiness needs b ut th ey p l an to review it noneth el ess. Th is m ay b e a reaction to increased interest at b oard l evel . F or exam p l e, resp ondents cited review ing p erf orm ance m anag em ent in resp onse to th eir C h ief E xecutive directing th em to do so af ter th ey read p ub l ish ed articl es on th e sub j ect.

In fact, 45% of respondents are planning to review pay for p erf orm ance l ink s in th e near f uture. Th e verb atim com m ents w ere sp l it b etw een org anisations w h ose p l ans w ere b ased on an ob j ective to sh arp en dif f erentiation of rew ard b ased on performance (some form of rating is clearly the easiest way of doing this) and those who were considering moving aw ay f rom p erf orm ance rating s entirel y. H ow ever, onl y one resp ondent org anisation h ad rem oved rating s.

Most strikingly, a clear line management capability theme em erg ed. V ery f ew resp ondents rep orted cap ab il ity to b e consistentl y g reat or ab ove averag e. Th is is an interesting finding especially for those organisations who are currently considering w h eth er to rem ove rating s in f avour of m ore reg ul ar and tim el y f eedb ack f or em p l oyees f rom l ine m anag ers. To m ak e th is w ork th ese org anisations w il l need to do m ore th an sim p l y rem ove th eir rating ap p roach . Th ey w il l need to b e sure th at th eir l ine m anag ers w il l b e p roactive in g iving f eedb ack and p ossess th e cap ab il ity to h ave th ose conversations – especially the difficult ones - effectively.

Overall, the results indicate that there is not a one size fits all ap p roach and rem oving rating s m ay b e ap p rop riate f or som e organisations but not others. Any changes must be suitable f or th e b usiness in q uestion and th e needs of its w ork f orce at th e tim e.

I m p act of reward s trategyTh e q uestion p osed b y th ese resul ts is w h eth er rew ard strateg ies are b eing neg l ected b ecause of com p eting p riorities, or w h eth er th ey sim p l y need review b ecause of th e ch ang ing external environm ent.

In our view, the results suggest that Reward functions have a uniq ue op p ortunity to m ak e th e m ost of th eir b roadening rol es and do m ore to im p rove b usiness p erf orm ance and drive th e b eh aviours th at org anisations need in a ch ang ing environm ent.

I n order to ach ieve th is it m ay b e necessary to th ink differently about Reward operating models to ensure competing requirements are addressed effectively. A potential risk of Reward’s broadening role is that it becomes reactive to external influences when capacity needs to be f ocussed on im p roving underl ying rew ard p rog ram m es.

w e r e p l a n n i n g t o r e v i e w a p p r o a c h e s i n t h e n e a r f u t u r e

5 9 % o f o r g a n i s a t i o n s a r e l o o k i n g a t r e v i e w i n g p a y f o r p e r f o r m a n c e l i n k s i n t h e n e a r f u t u r e

4 5 %

could not confirm r e w a r d w a s d r i v i n g t h e r i g h t b e h a v i o u r s f r o m e m p l o y e e s

4 5 % s t a t e d r e w a r d w a s n o t p e r c e i v e d a s a s t r a t e g i c f u n c t i o n c a p a b l e o f d r i v i n g b u s i n e s s p e r f o r m a n c e

7 4 % 4 8 % s t a t e d t h e i r o r g a n i s a t i o n d i d n o t h a v e a 3 - 5 y e a r w o r k f o r c e p l a n

Reward s trategy

P erform ance m anagem ent

6The evolving role of the Reward function

8 5 % o f r e s p o n d e n t s r a t e d l i n e m a n a g e m e n t c a p a b i l i t y o n p e r f o r m a n c e m a n a g e m e n t a s a v e r a g e , p a t c h y o r p o o r

7

E m p l oyer b rand

8The evolving role of the Reward function

Almost half of respondents indicated that they have reviewed em p l oyer b randing activity recentl y or w il l do in th e near f uture. Th e resul ts indicate th at th e m aj ority of org anisations do not h ave an em p l oyer b rand w h ich is w el l understood across al l areas of th eir b usiness. F or m any, an em p l oyer b rand m ay ef f ectivel y b e a recruitm ent p rop osition f or a p art of th eir b usiness and stop s short of maximising its potential benefits as a more broadly based proposition about the benefits of working for that organisation.

Th is f ocus on em p l oyer b randing p resents b oth op p ortunities and risk s. W h en ask ed to describ e th e k ey dif f erentiators of em p l oyer b rand, very f ew resp ondents p rovided inf orm ation on ch aracteristics w h ich w ere g enuinel y uniq ue or dif f erentiating , p ref erring instead to outl ine f eatures of th eir rew ard p ack ag e such as ‘ our total rew ard of f er’ or inf orm ation ab out th eir m ark et p osition e. g . , ‘ w e are an industry l eader’ . Th is sug g ests th at th ere m ay b e a l ack of understanding in som e org anisations ab out th e op p ortunity to g o b oth deep er and b roader w ith em p l oyer b randing to create a true strateg ic dif f erentiator in tal ent attraction.

2 7 %

4 3 %

5 %

1 7 %

8 %

W el l understood across al l areas

Understood within certain p op ul ations

w ith in th e w ork f orce

O nl y understood b y senior m anag em ent

Most could not articul ate it

D on’ t k now

However, many respondents were not satisfied that their underl ying rew ard strateg ies w ere driving th e correct b eh aviours or th at th ere w as a cl ear view of th e k ind of workforce they needed in the next three to five years. Ensuring al ig nm ent b etw een th e b rand th at is com m unicated and th e real ity of th e em p l oyee exp erience is, th eref ore, a ch al l eng e f or th ese org anisations, and cal l s into q uestion w h eth er real return on investm ent can b e real ised f rom devel op ing a b rand th at is not f ul l y al ig ned w ith rew ard and th e w ider needs of th e b usiness and its em p l oyees.

Th e em erg ence of social m edia p l atf orm s w h ich g ath er data ab out th e em p l oyee exp erience coul d b e seen to erode an org anisation’ s direct control over its b rand. Th is is esp ecial l y true if , as sug g ested b y our survey resul ts, th ere is not a cl earl y defined and widely articulated sense of brand and identity within an org anisation.

4 6 %

r e s p o n d e n t s s t a t e d t h e y h a v e r e c e n t l y r e v i e w e d o r p l a n t o r e v i e w t h e i r e m p l o y e r b r a n d i n t h e n e x t 1 2 m o n t h s

9

C oncl usionsThe onus is growing on Reward functions to take the lead on current ch al l eng es and to m anag e com p l iance w ith new reg ul ations and l eg isl ation. Th is is a real op p ortunity f or Reward functions to take the lead on shaping the future of w ork and p erh ap s exp l ains w h y m any com m entators are suggesting the HR Directors of the future will increasingly have a background in reward. In order for Reward leaders to p l ay a m ore p rom inent rol e, th e nature of th e f unction may need to evolve. Reward will increasingly need to lead ef f ectivel y on b roader p eop l e strateg ies in addition to m anag ing its traditional activity b ase.

Reward leaders will need to be confident in their advice and ap p roach and ensure th eir f unctions and ap p roach es are set up ef f ectivel y to deal w ith new ch al l eng es. I ncreasing l y th ey w il l need to p l ay a k ey rol e in m anag ing exp ectations around th e b usiness ab out w h ich initiatives w il l del iver val ue and w h y, in th e context of th eir individual b usiness strateg y.

K ey cons iderations from the res earch

► A refocusing of Reward operating models to ensure rol es and cap ab il ities del iver traditional rew ard activities ef f ectivel y w h il st al so l eading on b roader p eop l e issues

► Reward leaders must play an ever more assertive and p roactive rol e, w ith th e ab il ity to m anag e expectations and influence at all levels, especially on th e op p ortunities and risk s of p revail ing ch al l eng es

► Reward leaders need to lead debate around changes to core p rocesses l ik e p erf orm ance m anag em ent to ensure they are appropriate for their organisation; this sh oul d b e th e p rim ary test, not ‘ w h at are oth ers doing ’

► Underlying reward strategies are important drivers of business performance. These must be addressed first b ef ore m oving to f ar reach ing and com p l ex p roj ects such as ch ang ing p erf orm ance m anag em ent or devel op ing an em p l oyer b rand

B reak down of s urvey res p ondents b y s ector

Automotive and Transp ortation

9 %

1 7 %

5 %

8 %

7 %5 %2 %

2 %1 5 %

8 %

1 9 %

3 %

C onsum er Products and

Retail

Government and Public Sector

H osp ital ity and C onstruction

Life ScienceMedia and

E ntertainm ent

Power and

Utilities

Real E state

Tech nol og y

O th er

Mining and Metals

Oil and Gas

1 0The evolving role of the Reward function

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