reap what you sow:
                     ROI on reward?
 Fortune's World's Most Admired Companie...

bonuses to medium and long-term targets supports             performers. According to a Hay Group - Wor...

   Let's also look at how global
reward trends will affect the way
we measure reward ROI:

Fixed versus...

The reward risk audit                                        today feel effective in his job. Over one...
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Human Capital (September 2010) Reap What You Sow-ROI On Reward


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Human Capital (September 2010) Reap What You Sow-ROI On Reward

  1. 1. REWARD MANAGEMENT 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 C 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 ariable pay: What this captures is the reward structure of your tied to the bottom line of your organization. Linking 28 ■ September 2010 ■
  2. 2. REWARD MANAGEMENT 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. ■ September 2010 ■ 29
  3. 3. REWARD MANAGEMENT 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 through redundancies, restructuring, pay freezes and restrictions to internal investments. The focus for most has now turned to the centralization and 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 ■
  4. 4. REWARD MANAGEMENT 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. Engaging employees 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. leaving. 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 measure!). 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. ■ September 2010 ■ 31