REWARD MANAGEMENT
US employers still rely on the "tried and true"
Bold predictions have been made by US reward gurus about the spread across corporate America of "new pay" practices such as competency pay and broadbanding. But a large-scale survey by Towers Perrin suggests that the level of change in US reward management practices is much less radical than previously thought and some of the key elements of the "new pay" are still very much a the margins of mainstream practice.
In large measure, the report appears to rebut the view that the US reward management scene has undergone dramatic change in recent years. Companies still rely on merit to deliver performance pay to most employees. Even salary structures are still fairly "traditional".
No fewer than three significant revelations emerge from the 721-company survey. The first concerns the extent of change in reward management in the USA. Far from experimenting with certain concepts that seemed "hot" only a few years ago — take, for example, competency-based pay and broadbanding — the growth of such innovative pay systems has been anything but spectacular. Instead, perhaps wary of prompting an exodus of key talent in a highly competitive marketplace, Towers Perrin observes that "companies see less risk in relying on the tried and true, at least in terms of pay structure and salary management."
Key findings
Use of broadbanding remains limited: "Despite predictions of increased use, the prevalence of broad bands in our current study is virtually identical to the prevalence data from our 1996 companion study."
Slow take-up of competency-related pay: "The prevalence of competency-based pay remains approximately the same (7%) today as it was in that prior study, indicating this 'trend' has cooled."
Nonetheless, some areas of the reward landscape across the Atlantic are undergoing more dramatic change. For the report's second revelation is that US companies now provide variable pay incentives to a much broader mix of employees, and even more significantly link incentive pay-outs to financial results. Says Towers Perrin: "This stems from the growing interest in creating a partnership with employees, instilling more of a sense of accountability and ownership, and sharing the financial outcome of both good and bad times."
The report's third revelation is that there is a stark contrast in the way high-performing companies approach certain aspects of pay design and delivery (see below). Indeed, Towers Perrin goes so far as to conclude: "The degree of commonality we found in a set of practices unique to a high-performing group suggests that pay design does have an influence on performance, and that getting the pay thing right is far from an academic issue."
Pay and the bottom line
Although variable pay is widespread in the United States and Canada — Towers Perrin reckons that about two-thirds of employers offer it in some form — there remains a huge question mark about its efficacy. Towers Perrin offers this sobering message: "One of the most disturbing findings of our study is that variable pay is not delivering on its promise."
When it comes to evaluating the effectiveness of any incentive plan, it is vital to consider the extent to which it helps the organisation deliver high performance. Towers Perrin asked respondents whether these programmes have significantly improved business results. It discovered that there is something of a turnaround in relative rankings: the top three practices for boosting performance — team incentives, gainsharing and project incentives — are the least commonly used.
Per cent of companies reporting incentive plan has significant impact on business results
| Team incentives | 31% |
| Gainsharing | 30% |
| Project incentives | 29% |
| Individual incentives | 20% |
| Tiered incentives | 19% |
| Organisation-wide incentives | 17% |
Source: Towers Perrin.
So, what do the programmes most cited for delivering results have in common? The answer is straightforward, according to the researchers at Towers Perrin: "They have the greatest line of sight between company objectives and an individual's daily actions." And the defining features of a successful incentive plan? "Ultimately, the type may matter less than how the plan is designed and communicated — and how this affects employees."
Three key themes emerged from the analysis of the most effective pay plans. Regardless of plan type, they:
improved individual performance
improved target performance in target areas
engaged employees effectively.
As Towers Perrin concludes: "The point is that almost any type of plan can deliver — if it's properly designed and if it's supported by business literacy, consistent communication, performance management and leadership involvement."
What high-performing companies do differently
One of the most telling discussions in the report involves a comparison of high-performing companies — defined as those with a total shareholder return in the top 25% of survey respondents over a three-year period — with their more mundane counterparts.
How, then do high-performing companies compare? Distilled down, here's what the experts at Towers Perrin found:
1 While they are no more likely to pitch their salaries above the average, they do tend to provide "higher-than-average total cash compensation".
2 They are more committed to sharing the results of strong financial performance with those deemed responsible delivering it via incentive compensation opportunities.
3 The top companies "seem to be leading the charge toward a more holistic and integrated view of rewards" — in other words, their focus is on not just the quantifiable elements like salary and benefits, but also the more intangible, non-cash rewards, such as career opportunities, learning and development, challenging work and a supportive culture.
4 Although there has been something of a backlash against merit pay in the USA, these elite organisations tend to link pay more closely to individual performance than their peers.
5 High-performing companies spend more time on the essential area of pay communication. In this context, they are more likely to measure managers' ability to communicate, as well as the success of reward communication.
6 These businesses also do much more to nurture the financial side of their relationships with employees by giving staff a direct stake in the success or otherwise of the business. They offer all recruits potentially lucrative stock options typically reserved only for the management elite elsewhere.
Key quotes from Towers Perrin
"What's immediately clear is that companies generally agree they're dealing well with the basics — things like ensuring internal equity, rewarding and developing high-performing employees, attracting needed talent and so on. But respondents' ratings in areas linked to cultural change — arguably, the goal of many of the innovations in the 1990s — fall dramatically."
"While there's no question that pay is, and will remain, a key component in the deal between employer and employee, it is not, on its own, sufficient to change behaviour or achieve the kind of performance breakthrough so many companies seek today."
"What our survey companies, like others, are discovering is that engaging people in the drive for improved business performance is a long-term change process that depends as much on such critical change drivers as senior management commitment, business literacy, measurement and open communication as it does on thoughtful pay design and implementation."
Want to know more?
Title: Compensation effectiveness survey: Is pay delivering on its promise?
Survey sample: the 24-page survey is based on information supplied by 721 organisations during May and June 1999. Three-quarters of the sample are US organisations and the remainder are Canadian. About a third of the sample employ fewer than 5,000 people and 28% of respondents come from organisations with more than 20,000 employees.
Business sectors: "participation came from all quarters of business".
Availability: contact your local Towers Perrin office. Visit Towers Perrin online at www.towers.com