Corporate reward programs out of date

by 18 Sep 2007

REWARD AND performance management programs are not keeping pace with the demands facing businesses today, a global study has found.

Despite enormous shifts in the business landscape over the last decade –driven by increased competition, cost pressures, globalisation, aging populations, technology advances, and skill and labour shortages, to name just a few – most companies have made minimal changes, at best, in the design and delivery of their base pay, incentive and performance management programs.

As a result, current programs do not appear to be meeting talent and people management needs effectively, especially in an environment increasingly focused on attracting and retaining people at all levels in an organisation.

The study, which took in nearly 650 HR and compensation managers at mid-sized and large organisations across 21 countries, found a growing ‘say/do’ gap around reward design and delivery. Although many of those surveyed said their reward strategies were designed to retain and attract talent (73 per cent and 57 per cent, respectively), few of the actual tactics they reported were consistent with this stated focus.

The study also found that 43 per cent of companies’ performance management systems did not effectively link to business needs, while 42 per cent felt their systems did not effectively equip managers to identify, develop and reward high performers or deal with poor performers.

“These are critical strategic gaps that will ultimately derail the very purpose of performance management,” said Ravin Jesuthasan, managing principal and practice leader of Towers Perrin, which conducted the study.

“Getting the strategy right is a key first step in effective performance management and one that few companies appear to be paying enough attention to right now.

“On one hand, it’s encouraging to see that companies are emphasising performance and talent retention. On the other hand, what they’re doing to reward and improve performance is not particularly effective, or in line with overall business performance and strategy.”

More than three-quarters of companies have changed their variable pay programs in the past three years, and nearly half expect to implement more changes to variable pay and bonus programs in the near future.

Yet the most common shift is an increased emphasis on using company-wide performance as a metric (cited by 42 per cent of survey respondents) – a surprising focus given the relatively small number of employees who can materially influence corporate results, Jesuthasan said.

The study also found that 90 per cent of companies reported changes in how they conduct performance management over the last three years, and almost the same number expect to make more changes in the next three years.

He recommended the following steps for companies looking to revamp reward programs:

• Think big, bold change. Shake things up, but in a way that aligns with core business goals for performance, cost, talent management and employee engagement.

• Identify required changes in terms of desired business outcomes, and prioritise and sequence those changes based on an analysis of the efficiency, effectiveness and impact or strategic relevance they will have in meeting specific business goals.

• Place calculated and systematic bets on specific programs and segments of the workforce that align with business objectives and priorities. Avoid the ‘one size fits all’ approach to rewards because it lacks focus and can marginalise the ROI.

• Develop a balanced set of metrics that encompass the key outcomes needed, and measure results against those metrics, adjusting course over time as required.


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