Editor's Note: We are back with the final installment in our guest post series. Parts II and III of this series summarize key themes in a new major article: Gerald E. Ledford, Jr., 2014, The changing landscape of employee rewards: Observations and prescriptions. Organizational Dynamics, 43, 168-179. See the full article for a more detailed discussion and citations.
Part 1 of this series argued that employee compensation has become a stagnant field. Part 2 asked how and why employee rewards have changed over the past 35 years. Part 3 offers the author’s recommendations for employee rewards in the next era. Here, I offer five prescriptions that represent a call to action on employee rewards.
1. Business leaders must lead on employee rewards. Since the recession of 2001, business leaders have made cost control their primary goal for rewards. This is weak strategy. Business leaders need to think more deeply about how rewards can be used to provide competitive advantage. This means thinking about how rewards can reinforce business strategy, structure, and the desired culture. Historically, business leaders have created many rewards innovations. Examples include gainsharing, skill-based pay, profit sharing, broad-based employee stock ownership, and the Silicon Valley model.
By contrast, consultants excel at packaging, selling, and diffusing “best practices,” that is the innovations of others, while rewards professionals are best at developing and implementing detailed designs. The profession is naturally conservative; the core technology of market pricing encourages an overemphasis on what others are doing. Also, pay is an emotional issue, and few rewards professionals have the organizational standing to enact changes that may be initially unpopular or difficult.
2. Rewards design needs an investment perspective. It is surprising that rewards are so rarely considered an investment. Executives would never spend billions in technology or materials without demanding creative thinking about the optimal choices as well as rates of return. Such questions are asked far too rarely about rewards. Taking an investment perspective might liberate thinking about options. Sometimes the best investment for a given employee population is the cheapest, and sometimes it is the most expensive; it depends on the design options and rates of return.
3. Reverse the benefits revolution. Benefits have grown steadily as a percentage of total employee rewards, and they now represent 30% of total rewards cost. Organizations would be more effective and employees would be more engaged if at least half of benefits dollars were converted into cash, especially incentive opportunities. Why?
First, benefits go to all, regardless of performance. When benefits represent 30% of total employee rewards and performance incentives are about 1%, management claims of pay for performance are laughable. Second, most employees strongly prefer cash to benefits. Why fight this? This is especially true for younger employees who are about to become the dominant employee group. Third, meeting social needs is not what business does best or should necessarily do at all. Companies should focus on performance, not becoming the employee’s doctor, investment advisor, fitness instructor, lawyer, chef, and social director.
4. Increase investment in pay for skill and knowledge. Skill-based pay is underused for developing employee capabilities in an era that demands continual learning and development. Two modifications to typical plans may encourage greater use. First, plans should focus on technical skills specific to employees’ work. Typical corporate competency systems are too generic and nebulous to have compelling business value. Second, bonus pay systems deserve far wider use, because they are nimble and less burdensome to administer than base pay systems.
5. Increase pay for performance. Almost every employee should be part of an incentive plan that has a payout opportunity of 10% of base pay. In most organizations, only managers and sales have high levels of pay for performance today. Contrary to the popular claims, research overwhelming shows that incentives usually increase performance and do not have negative effects. However, incentives are difficult to design, implement and maintain. Although this discourages many companies from using incentives, it should be considered a reason to use them. Companies gain competitive advantage by accomplishing difficult things that are hard to copy. Employee incentives fit that bill.
What would be the impact of changing rewards in these directions? Consider two companies that are similar except for their employee rewards programs (but they have the same total rewards cost). Company A has a conventional reward system, while Company B implements the changes recommended here. It allocates 15% of total rewards for benefits, 10% on average for employee incentives, and 5% for reinforcing skill development.
Which company do you think would be more likely to attract and retain talented, performance-oriented employees? Which company would have higher rewards satisfaction, employee engagement, involvement in the business, and dedication to meeting customer needs? Which would make a better investment? Company B would win on all of these criteria.
What are we waiting for?
Gerry Ledford is Senior Research Scientist at the Center for Effective Organizations, Marshall School of Business, University of Southern California. Much of his professional work focuses on employee reward systems. He returned to the Center for Effective Organizations in 2012; he was a key contributor there from 1982-1998. From 1998 to 2003, he held leadership positions at Sibson Consulting. Since 2004, he has been President of Ledford Consulting Network LLC. He received a Ph.D. and M.A. in Psychology from the University of Michigan. Gerry has authored over 100 articles and ten books and he frequently speaks at professional events.
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