Human Capital (September 2010) Reap What You Sow-ROI On Reward
reap what you sow:
ROI on reward?
Fortune's World's Most Admired Companies understand how to
get a better return on every dollar spent on reward.
By Simran Oberoi
ontrary to popular thinking, it's not just company. The right reward structure helps align reward
how much you reward your staff that programs with both business and employee needs: it
matters. Rather, it is what you reward them enables organizations to make decisions such as defining
for and how you measure the results of where and how to change the reward programs, where
this investment. the best investment (e.g. benefits and variable pay)
Many remain caught in the twin challenges should be made, and which implementation issues to
of escalating remuneration costs without corresponding address first. More importantly, it gives management
improvements in revenue and shortage of skilled talent. the confidence that the structure is affordable.
With salary costs being anywhere from 20% to 70% In February 2010, Hay Group released a global
of total costs, organizations must maximize their report on "The Changing Face of Reward", covering
reward investment, rather than treat it as cost. A well- face-to-face interviews with senior HR specialists from
designed reward program is one that accomplishes over 230 companies in 29 countries, which collectively
three objectives: manage more than 4.7 million people and generate
● sends the right message annual revenue of approximately US$4.5 trillion.
● keeps employees' focus on what makes the As they recover from the recessionary year,
difference organizations are approaching 2010 and 2011 with
● provides the appropriate cost control mechanisms caution. Global revenue growth will be difficult and
Benchmarking outcomes against business objectives hence the focus on cost containment and performance
can provide valuable insights that help determine improvement remains intense.
whether higher salaries or increased headcounts are In contrast with the past attitude of "growth at any
justified. cost", organizations now want to scrutinize how their
employee spend is yielding results and whether these
Defining investment results are in line with organizational strategy.
Before we proceed further, let us define "investment"
in our context. Typically, this would be defined as the Vital signs
sum of: There are four key aspects that play a vital role in ROI
● People-related monetary costs such as total measurement and must form an essential part of an
remuneration (base, variable pay, allowances, benefits) organization's reward architecture:
● Non-monetary costs (recruitment, welfare, training. 1) Variable pay: This component is the most strongly
What this captures is the reward structure of your tied to the bottom line of your organization. Linking
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bonuses to medium and long-term targets supports performers. According to a Hay Group - WorldatWork
organization performance, drives the message of research, the best incentivizing effect comes from
individual performance accountability and creates a paying the top performers at least twice the salary
sense of ownership within employees. This enables increase.
organizations to clearly measure ROI. Companies on 4) Performance metrics: Emphasizing on financial
Fortune magazine's World's Most Admired Companies metrics only, or to a large extent, can result in
lists are not only paying 5% less for top talent; they are employees becoming focused on short-term financial
also achieving stronger ROI through effective gain without considering risks to long-term sustainability
performance management and efficient use of bonuses. or organization strategy. It is imperative to recognize
Incentive pay should not be confused with profit the need for a balance between financial, operational,
sharing plans based on the organization's overall customer and human capital measures. Therefore
performance. Incentive pay should be tied to the unique Indian organizations need to re-look at their
combination of individual, team, and corporate goals. performance-based reward strategies in order to drive
2) Benefits: In India, it would be foolhardy to ignore higher levels of organizational output and performance.
benefits when measuring ROI as it can account for as Also, employees need to be provided with time to
much as 40 per cent of reward costs. Hence deriving internalize their assessment criteria and understand
the monetized values of benefits is essential. the link of performance to reward.
Organizations are shifting towards the mindset that
their high performers will only stay with them if their Back to the future of reward
salary was externally competitive not only on aspects Organizations should consistently examine the
like Base, but also in terms of Benefits and Total performance metrics used to assess the return on its
Remuneration. compensation investment. A balance of quantitative
3) Differentiated reward: Differentiated reward for and qualitative bottomline performance , productivity,
the top performers and high potentials are critical to behavioral and perception measures are among the
the survival of any organization. High performance metrics that can help companies evaluate the
should result from differentiating rewards to employees. effectiveness of their compensation ROI.
Hay Group's research into the reward strategies of
Fortune's World's Most Admired Companies has shown How can this be done in practice?
that the best organizations carefully target their use of The first step is to confirm the business strategy and
differentiated reward and pay their best performing clarify that company vision and employee remuneration
staff twice as much as their average performing messages are aligned. Are we performing above or
employees. There is no doubt that rewarding good below average? How is our current remuneration
performance is the way forward for today's programs supporting that performance? Do all
organizations, but differentiating top talent from average employees see a clear connection between organization
performers is the first step towards higher returns. performance and their pay levels?
Therefore, another measure of any successful The critical message is your ROI on reward has
performance pay plan is the differentiation in base improved if your increase in profits is higher than your
salary increases doled out to low, average and high increase in reward spend.
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Let's also look at how global
reward trends will affect the way
we measure reward ROI:
Fixed versus variable pay
In the past year, cost
containment has been the major
issue for many organizations, in
all regions and sectors. Most
have already cut employment
costs as much as they can
restructuring, pay freezes and
restrictions to internal
investments. The focus for most
has now turned to the
rationalization of business and
management processes. This has
led to organizations analyzing
their reward processes to
develop an approach for
optimization of pay.
Increasingly, organizations have started shifted their moderates excess and reduces risk.
balance to variable pay since the first question they ask Apart from HR, CEOs and compensation
themselves post recession, related to reward is - How committees are also looking not only at benchmarked
much of this expenditure is flexible? levels of remuneration for top talent, but increasingly
The best organizations utilize variable pay not purely they are also examining the total cost of their pay bills
as a cash flow tool but as a support mechanism for against their competitors, and asking the question: are
their performance management strategy. Variable pay we paying too much?
can be short-term or long-term incentives based on Therefore, reward programs need to deliver a clear
the nature and the level of the role. With variable pay return on investment. Hence the HR and the senior
policies in place and the mechanics agreed upon, management need to clarify what they expect their
businesses can focus on measuring the effectiveness of reward programs to deliver - whether it is engagement,
these policies in order to capture ROI. retention, performance on critical success factors, or
In terms of fixed pay, organizations can ensure that some other measure.
they make an investment where the returns are
measurable against employee performance. Therefore Total remuneration approach
instead of providing an inflationary or purely market Non-monetary financial rewards such as benefits that
based salary increase, which is often perceived as an cover pension plans, insurance, company car etc, often
entitlement, they may choose to provide a merit-based represent a significant portion of an organization's total
increase that recognizes past performance and drive fixed remuneration costs, but very few employers
future performance. understand the total value of their packages.
Inclusion of ROI as a key metric on HR Scorecards Hence this is an area which organizations need to
Along with other HR metrics like attrition, employee further develop so as to get the most from their reward
engagement scores, ROI should be an important part programs. Therefore there is expected to be an
of the HR Scorecard. HR should be provided with increasing trend in terms of managing pay holistically
clear accountability of tracking the effectiveness of all at a total remuneration level (as against managing
tangible and intangible reward programs periodically reward elements separately and independently).
and the perceived value of these programs by Many organizations are looking to measure and
employees. communicate the total value of their reward package
It is also essential for HR to ensure line managers to their employees. The need to have greater visibility
fully understand the programs and can lead in over total reward spend also means organizations are
implementing them. In this manner, HR supports the looking more at total remuneration rather than just
top executive team in demonstrating the behaviors total cash. In conjunction to looking at total reward,
that are stimulated by an organization's reward and the best organizations typically develop a plan that
incentive programs are aligned with the long-term ensures that the core messages are clearly
interests of all its stakeholders. Hay Group terms this communicated and reinforced frequently; using total
'responsible reward' and, at its best, it is a strategy that reward statements, and engaging line managers, early
builds a spirit of partnership to sustain the business, and often.
30 ■ September 2010 www.humancapitalonline.com ■
The reward risk audit today feel effective in his job. Over one in three feel
Managing risk is an inherent element of reward. But detached and will only do the bare minimum to meet
this has not always been clearly communicated or job requirements. Another one-third feel frustrated -
understood. Compensation committees have evolved they feel engaged but are hamstrung by company
to overseeing not only compensation of directors but procedures or badly designed job scopes. The rest
also reviewing variable pay arrangements across the have given up.
organization, particularly from the perspective of risk. The alarming thing is if nothing is done, the
However, an overly risk-averse approach to reward frustrated employees will quickly become ineffective
can be just as damaging to performance as an or leave. Now that the talent-go-round has begun again,
unmanaged and unrecognized risk. Hence several our nation is full of "at-risk" employees whom have
organizations have started identifying the top risks lost their motivation to strive for the firm and are
associated with rewarding people. Assessment of risks seriously contemplating leaving. They feel overworked,
inherent in bonus schemes is also becoming more under-rewarded and that they are owed a "sweat debt"
frequent. Good design and targeting of bonus plans after the tough two years.
remove the inherent risks from the plan right from the Why is engagement so important? While CEOs make
beginning. promises about what their organization can deliver to
customers, shareholders and other stakeholders, it is
the employees who keep these promises on their behalf.
In order to achieve better ROI, organizations must be Beyond engagement
able to retain their top performers. By definition, these
And yet engagement alone is not enough. Organizations
employees attract the investment in time and money.
must also look at enabling these high performers to
As India's economic recovery gathers pace, the
succeed - by removing unnecessary bureaucracy, weak
hiring frenzy has restarted. People are no longer afraid
systems and conflicting pressures. After all, no one
to leave their jobs. It is therefore critical to identify
likes to be set up to fail.
talent and have the right strategy for their retention.
What is the bottom-line impact? Hay Group
For the purposes of this discussion, let us focus on
research shows that companies that engage and enable
a rising demographic in India as we evolve into a
their employees outperformed their industry peers on
service and knowledge-based economy - the knowledge
revenue growth by 4.5 times. In
worker. This is particularly relevant in industries such
terms of profitability, such companies exceeded
as information and communication technology,
industry averages in terms of five-year Return on Assets,
biotechnology and pharmaceuticals.
Return on Investment and Return on Equity by 40% to
There is a macabre tale about a legendary
60%. This level of performance is not to be sniffed at,
blacksmith, Weyland, which captures the relationship
in any sort of economic climate.
between the professional and the organisation.
And the good news is, changing an organization's
Weyland's skills were so valuable and so rare that his
internal processes and systems are within the company's
masters severed his hamstrings to prevent him from
control, unlike the vagaries of market forces.
Like Weyland, today's knowledge workers provide
deep technical skills honed through experience. More
The cost of doing nothing
In conclusion, while our economy has suffered less
importantly, they use their discretion and judgment to
than many others, there has nonetheless been a marked
develop unique solutions - a legal position, the right
change in the outlook of employees and employers.
place to drill for oil, the diagnosis of an illness or the
The opportunistic, job-hopping Indian employees of
maximum load of a bridge. Corporate strategy may
recent times are realizing that they cannot sustain that
even rest upon their professional opinions.
trajectory, with its corresponding lack of opportunities
Look around your company today. You will notice
for learning and development.
that knowledge workers tend to be highly intelligent,
Employers are also finding themselves under
resourceful and independent employees. They enjoy
examination from candidates who are looking for long-
accelerated career paths, like to be consulted and resist
term career prospects. Recruitment discussions are
traditional command-and-control structures. They
moving away from the boom-time focus on "how much
know they have specialized knowledge and skills and
money?" and "when will I get an increase?" to "what
are in hot demand. Consequently, they are a difficult
is the business plan?" and "will I succeed here?"
lot to manage and retain. (However, we do not
This, I believe, are positive signs that our workforce
recommend cutting their hamstrings as a retention
is maturing and it is thus critical to get our reward ROI
up to speed to capture this development for the benefit
Hence organizations are investing considerable
of all stakeholders. HC
amounts of money, benefits and resources in developing
and retaining them. But are getting the corresponding
return in productivity and performance?
According to Hay Group's employee research, only Simran Oberoi is Asia Pacific Chemicals Sector Leader and India Oil and Gas
one out of every five employees in your workforce Sector Lead, Hay Group India.
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