Broadbanding increases flexibility at Tesco

CASE STUDY

Broadbanding increases flexibility at Tesco

Tesco is expanding rapidly, it is opening more stores, using different store formats, and operating overseas. But its 22-grade pay structure and job evaluation processes were inflexible, inhibited career development and did not provide a sufficient link between pay and performance. According to a new case study by e-reward.co.uk, the company’ s response has been to introduce a broadbanded pay structure which gives line managers more discretion over how they develop and pay their staff.

Tesco is also moving towards total reward, introducing some flexibility in its benefit provision and underpinning its values with a company-wide recognition scheme.

Tesco company profile
Employees	200,000
Location	Central departments in Welwyn Garden City and Cheshunt. Stores throughout the UK. Tesco also operates in nine other countries.
Business activities	1,000 stores, three-quarters of which are in the UK. Also recently diversified into personal finance and health supplements.
Interviewee	e-reward.co.uk interviewed Richard Sullivan, Tesco's group reward manager.

Issue

In the late 1990s there was a perception at Tesco that the existing reward system had broken down. It did not provide a clear link between pay and performance, nor did it recognise the contribution of jobs to the business. It also did nothing to encourage individuals to develop in the way the company wished. Everyone wanted to manage big stores whereas the company wanted good managers to take on the challenge of building stores up, managing difficult locations, or starting up overseas operations.

What's more, the job evaluation scheme encouraged individuals to try to inflate their jobs to achieve more points and thus higher salaries, while the job evaluation panel worked slowly and bureaucratically so the process was very drawn out. It was concluded that job evaluation added no value to the business and was contrary to the company’ s preferred way of doing things.

Why broadbanding?

So what considerations led Tesco to introduce its new broadbanded structure? The company told e-reward.co.uk that it wanted:

Introduction of broadbanding

As a first step, the use of the analytical job evaluation scheme was discontinued in 1998. Job slotting - a non-analytical method of matching jobs - was introduced instead, and in January 2000 work began on designing a broadbanded pay system.

The new arrangements were implemented for 5,000 central and distribution staff in July 2001, and it is planned to apply the system to the vast store staff workforce at a later date. Most non-managerial store staff will stay outside the broadbanded pay scales since fairness and consistency, rather than contribution, are considered the most important attributes of their pay arrangements.

Tesco’ s new framework for reward

	From	To
Grades	Organisation structure built around multiple grading systems (22 grades) with artificial grade divisions which hinder movement around the business.	A single grading system with six clearly defined levels of work - offering simplicity and greater flexibility of movement within the business.
Pay	Narrow pay ranges, with pay managed around minimum, maximum and market rates.	Broad bands - maximum of each band at least 100% above the minimum - offering more flexibility to manage pay around individual contribution. Market data to provide pay reference points.
	Inconsistent methods to reward: l sustained high performance within a role l rapidly developing performers l moves to other roles.	Fair and transparent methods using: l continuity payments l stretch payments l consistent guidelines for promotional/development increases.
Benefits	Company provided benefits with limited flexibility.	Increased choice and value for staff and the ability to convert more benefits to cash ( monetisation ). Better use of scale to stretch rewards.

Guidelines for managers

With just six work levels, the new Tesco structure provides line managers with much greater flexibility to manage the career development and pay of their teams.

The company is working with the Equal Opportunities Commission and has set up systems to audit for equal pay. To ensure that pay awards are fair and consistent, detailed guidelines have been issued to all line and human resource managers to help them manage pay within the new work levels.

Using broad bands to manage pay: the learning points from Tesco

If you decide that there is a need for broadbanding, how can you ensure that you avoid some of the stumbling blocks associated with this approach? Richard Sullivan, Tesco’ s group reward manager, recommends managers keep in mind these 12 guiding principles:

1. Don’ t underestimate the old culture — it will take time to change it.

2. Deal with the move to broadbanding as a conversion rather than a new initiative, to minimise change issues.

3. Be prepared to challenge any return to the old ways.

4. Management capability is key to communicating issues.

5. Deal with cost issues before changing to broad bands.

6. If broad bands are not used for all staff, explain why carefully.

7. Consider equal pay issues.

8. Use market data, but ensure that it is credible before making it public.

9. Allow at least nine months to move to broadbanding.

10. Employee communication is key to having the new system understood.

11. Don’ t have less than five layers across the business in a broadband system.

12. Obtain managers’ input when designing the new process this will help them explain it to others and will increase their commitment to it.

Verdict

Tesco does not use pay to motivate staff. It wants pay to reward performance and contribution and to be seen as fair. But the objective of its new broadbanded structure was to have the flexibility to reward rather than to penalise staff when they developed their careers horizontally, and also to reward good performers who do not want to move jobs. Tesco is confident that the new approach has been successful.

What you will find in this e-reward.co.uk case study

Spread across 27 pages (7,000 words), this in-depth case study examines the challenges Tesco faced when it introduced broadbanding. The main areas covered are as follows:

1. Pressures for change at Tesco l desire for flexibility l problems with job evaluations l benefits and challenges of previous narrow grading system

2. Reward goals l reward principles l reward strategy l Tesco's purpose and values

3. Why broadbanding?

4. Previous reward system

5. Introduction of broadbanding l timescales l communication

6. Design of new pay structure l number of bands l allocating roles to bands l width of bands l overlap between bands l band structure

7. Pay progression l performance appraisals l progressing pay

8. Career development

9. Guidelines for managers l controlling costs l achieving equity and consistency

10. Benefits package

11. Total reward

12. Recognition programmes

13. Share schemes

14. Problems and lessons learnt

15. The verdict

A final word

Want to know more?

Title: "Broadbanding increases flexibility at Tesco", E-research, issue no. 6, December 2002, published by e-reward.co.uk.

Availability: A single subscription (11 issues) costs just £200 a year. If you would like to subscribe, simply email your name, company, address, telephone and email details to Paul Thompson: paul@e-reward.couk. Please specify the number of subscriptions that you require. We will then invoice you.

Or click on "Research Reports" on the left-hand navigation panel of the e-reward.co.uk web site and complete the online booking form.

For more information about this monthly series jump to . . .

www.e-reward-data.co.uk/content/ResearchReports.asp

PDF format

The research reports are emailed to you in pdf (Portable document format) files which can only be opened using Acrobat Reader software. You can download this free of charge from the Adobe web site . . .

www.adobe.com/products/acrobat/readstep.html

Posted 9 January 2003