Part III - Where Should We Take Employee Rewards in the Future?

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. 

Implications

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.

Image "Future" courtesy of graur razvan ionut/FreeDigitalPhotos.net

Comments

[Adam]

"Contrary to the popular claims, research overwhelming shows that incentives usually increase performance and do not have negative effects." can you cite the research you mention?

[Windsor Lewis]

I've really enjoyed this series of posts and looked forward to reading them each day. However, I'm struggling to understand what suggestion # 3 looks like in practice. How do we convert benefits dollars into cash? Do we reduce what the company pays for the health and dental insurance premiums? Do we stop offering health benefits altogether? Can you elaborate or offer an example of what this might look like? (Thanks!)

[Windsor Lewis]

Sorry one more thing... And please take my comment in the spirit of furthering the discussion as opposed to being nit-picky.

Suggestion #4 states, "bonus pay systems deserve far wider use, because they are nimble and less burdensome to administer than base pay systems."

Suggestion #5 goes on to say, "However, incentives are difficult to design, implement and maintain."

Those two statements seem to contradict each other - if you look at bonuses and incentives as two types of variable pay to support a pay-for-performance approach.

With 15 years of compensation experience under my belt I agree that incentives can be nimble and encourage certain employees to produce results, but they are far more difficult to administer than a base pay system. -From designing the plan, selling it, communicating it, measuring results, paying the incentive and then studying the effectiveness of plan - this takes a LOT of time and effort from multiple functional areas. (Not saying it's not worth the effort.) My experience is that it's actually quite rare for the average company to have an automated incentive management system; most are using spreadsheets to design and manage the incentive plans which introduces the risk of errors and need for rework. (Not receiving the correct bonus/incentive payout is a demotivating event; I've seen it firsthand.)

Pay-for-performance is a way to drive results, but it requires a considerable investment to do it well and therein lies the problem. How often do failed attempts turn into entitlement programs and what is the long-term opportunity cost of this?

Looking forward to someone adding to this discussion (whether they agree with me or not). It's a fascinating topic!

[Gerry Ledford]

Adam - For citations on this and other issues in the series, please see the original article in Organizational Dynamics. Every major review of the academic research during the past 30 years has reached this specific inclusion, by the way.

[Gerry Ledford]

Windsor - re first comment: A lot of work is needed to flesh out this idea. The most important thing is that companies not see this simply as a way to cut rewards costs by cutting benefits without offsetting cash/incentive outlays.

Different companies would have different answers. If it's my company, I have basic insurance coverage with employee options to buy more, limited matching in defined contribution retirement plans, and almost no work life benefits. But that is only one option.

[Gerry Ledford]

Windsor - on your second comment, base pay is easier to administer, and incentives for either performance or skill development are hard to get right. That is exactly why smart companies can gain conpetitive advantage from them. They are hard to copy.

[E. James (Jim) Brennan]

Agree that folks most value benefits they choose and purchase on their own. Shifting misdirected benefits dollars into incentives and other at-risk reward programs offers opportunities to innovate and lead rather than imitate benchmarks and snuggle comfortably into a followership position. (Yeah, not a real word but a valid clear concept, opposite of "leadership.")

Wonderfully true yet politically incorrect statement here: "...meeting social needs is not what business does best or should necessarily do at all." That needs to be repeated constantly! Thanks.

[Gerry Ledford]

Thanks, Jim - I always appreciate your thoughtful comments.

[Trevor Norcross]

Hi Gerry,
It all comes back to having a force strategy that is aligned with business objectives. Your approach is going to depend on the target workforce population.

The balance of total rewards does not always have to be a zero sum game if you can tie it to business results. I understand where you are coming from when you talk about benefits but there may be unintended consequences of reducing them hoping employees will figure it out. I believe Ann had a post a while ago talking about the unintended consequences of eliminating pension plans. The effect was that employees were less prepared for retirement which reduced the promotional opportunities for younger employees as older employees worked longer.

It is important that one size does not fit all and employees realize they have a choice.

Thanks for the series Gerry.

[Leon]

That series of articles was kind of disappointing. No new ideas and no innovative thoughts. Much of what was put forth was not evidenced based, IMHO. Base pay increases for skill acquisition died a long time ago, to everyone but the scholars at the Center for Effective Organizations who have their reputation staked on it.

Instead of taking Gerry's hollow advice where money rules, I would recommend that companies try to hire people who are conscientious, hard working, and have passion about their work.

[Gerry Ledford]

Leon: Base pay increases for skills did not die long ago, consulting firms just stopped talking about it. Today it is a standard pay system for whole professions, including IT and teaching. The WorldatWork 2012 Compensation Programs and Practices survey found that 70% of private sector firms used skill acquisition as a base pay increase criterion. Use is more broad than deep, but death hardly seems imminent.

I can assure you that the Center's reputation does not rest on skill-based pay. It is a small fraction of the work of the Center as a whole or any individual researcher there, including me. My colleagues such as Ed Lawler and John Boudreau will be amused to hear that someone thinks their reputation rests on skill-based pay.

The problem with hiring the type of people you describe is that they tend to be attracted to and remain with companies that follow my hollow advice. Money is certainly not the only thing they care about, but it matters a lot - especially to the best performers.

[Gerry Ledford]

Trevor - I agree with all your points. Thanks.

[E. James (Jim) Brennan]

Don't know what hole Leon crawled from to issue his hostile sneers, but I feel otherwise. These insightful observations about the past and clear recommendations about productive future options were quite comprehensive and reality-based.

Although a blog is not a forum for footnotes, any experienced compensation professional knows many enterprises still using base pay increases for a wide variety of purposes like rewarding the addition of KSAs. In the real world, no reinforcement element ever completely disappears; they tend to concatenate, accumulate and overlay. Nothing is ever simple, particularly not the challenge of retaining and continually engaging the kind of self-motivated enthusiastic workhorses every employer dreams of acquiring. ;-)

[Ann Bares]

Agree with Jim. Whether they agree or disagree, feel they've gained new lessons/insights or not, most of our readers are able to present their counterpoint or opposing argument in a more gracious and professional manner ... and for that we are grateful. The exceptions certainly do stand out.

And, as always, if a reader/commenter feels they have a valuable alternative point of view or insight to share - I invite them to submit a guest post so that we can all benefit. Leon?

I know I speak for most of us who write, read and visit the café in expressing my appreciation for Gerry's series -- and the time he invested in boiling down the key elements of his article to blog post length. No easy task that.

And finally, for anyone interested in a deeper dive into Gerry's points about incentives, please visit an earlier guest post he shared with the Café (Memo to Dan Pink and Friends: Incentives Do Not Undermine Employee Motivation), link noted below. The post includes a link to a related WorldatWork Journal article which offers an overview of the extensive literature on this topic.

http://www.compensationcafe.com/2013/05/memo-to-dan-pink-and-friends-incentives-do-not-undermine-employee-motivation.html

Thanks Gerry and all who are contributing to the great conversation here.

[Leon]

In line with Ann's editorial comments above, I would like to apologize to Mr. Ledford for the tone of my earlier postings on this topic. I owe him a big debt of gratitude for all of the work he has done to help us understand the field of employee compensation.