Reward in a changing landscape

What are we going to cover?

• The changing nature of work

• The changing workforce

• Society’s Voice

• Regulatory impact

• Reward – the traditional model

• Reward and Engagement

• Reward – a new model

The changing nature of work

We are becoming a talent economy

• 50 years ago, 72% of top 50 US companies involved in control and use of natural resources• c. 1960, the Rise of the talent Economy began• Whereas in the 50 years to 1960, the number of creative roles increased by only 3 percentage points (to

16%), in the 50 years that followed to 2010, they doubled to 33% • By 2013, only 20% relied on ownership of natural resources and half of the top 50 US companies were

talent-based

HBR (Oct 2014), Martin RL

The Rise (and Likely Fall) of the Talent Economy

The ‘Hollowing out of Work’

Low pay Medium pay High pay

Department of Business, Innovation & Skills, Research Paper 134, Oct 2013

Hollowing out and the future of the Labour Market

The changing nature of work

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Baby Boomers – born 1946 to 1964

Generation X – born 1965 to 1982

Generation Y – born 1983 to 2000

Generation Z – born 2001 onwards

‘People, especially Gen Ys and Boomers, are looking for … a “remixed” set of rewards. Flexible working arrangements and the opportunity to give back to society trump the sheer size of the pay package”

HBR (July 2009), Hewlett, Sherbin & Sumberg

How Gen Y & Boomers will reshape your agenda

Age Demographic

The changing workforce

Society’s Voice

Society’s Voice

Shareholder Spring

The High Pay Centre welcomed the show of strength from investors over remuneration, confirming

‘The negative publicity for companies like [X] and [Y] creates real pressure to bring pay back to fairer, more proportionate levels’

Shareholder vote on pay requiring 50% vote in favour and is binding

Will this go even higher?

Society’s Voice

So why does executive pay get so much attention?

Society’s Voice

• Shareholder Spring

But…

Society’s Voice

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And …

Society’s Voice

Society’s Voice

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Maybe focus should be at other end of spectrum – protecting and providing for the lowest paid in society.

• Legislative

£6.50 ph

• £260 pw

• £13,520 pa• Social

The Living Wage

Stronger Regulation

European Regulation

Capital Requirements Directive III and IV

Alternative Investments Fund Managers Directive

Undertakings for the Collective Investment in Transferable Securities IV

Stronger Regulation

Pay-out Process Rules

Between 40% and 60% of variable pay should be deferred

Half of deferral should be deferred into shares of company or funds managed

Should be subject to clawback and malus

50% of immediately available variable should also be delivered in instruments with a retention period attaching

Salary cap introduced which limits variable pay to 1 x base salary (or up to 2 x with shareholder approval)

Reward – the traditional model

Reward – the traditional model

Maslow’s Hierarchy of Needs (1954)

Herzberg’s Two-Factor Theory (1964)

Money is just a hygiene factor and doesn’t engender true motivation

Adams’ Equity Theory (1963)

“A finding that employees are dissatisfied with pay is, in effect, a non-finding. It is to be expected. The key thing that the organization needs to focus on is whether employees are more dissatisfied with their pay than are employees in other organizations.”

Lawler (1990)

Reward – the traditional model

Does the traditional model work?

Extrinsic rewards can increase motivation / performance for uninteresting tasks

But increasing rewards decreased intrinsic motivation for interesting tasks

If the reward is tangible and foreseeable, intrinsic motivation decreases by 36%

Meta-analyis by Deci et al (1999)

For tasks that are creative, rather than mechanical, in nature …

… extrinsic rewards can actually reduce performance

Glucksberg (1962)

Reward – the traditional model

Does the traditional model work?

Rewards / incentives work when the task is simple or the answer is obvious

They don’t work when confronted with complex problems, where the data is uncertain, incomplete or ambiguous

And they need to be carefully thought through – so beware of what you incentivise!!

A quick Dilbert break

Reward & Engagement

Companies with engaged employees perform about 4 times better in financial terms (Watson Wyatt, 2009)

Companies with engagement scores in the top quartile performed on average 12% higher on customer advocacy, 18% higher on productivity, and 12% higher on profitability (Gallup, 2006)

Each engaged employee is worth about $5,000 pa in additional profit (Hewitt Associates, 2009)

Reward & Engagement

The link between pay and pay satisfaction is not strong (< 4.8%)

The link between pay and job satisfaction is even weaker (< 2%)

cited in Chamorro-Premuzic (2013, HBR Blog)

Gallup found no link between level of pay and employee engagement

Reward & Engagement

Reward & Engagement

Greenberg (1986) – looked at determinants of fairness in performance evaluations

Procedural fairness and Distributive Fairness

Folger & Konovsky (1989) – Perceived fairness in pay decisions

Distributive fairness more important in driving satisfaction with own outcomes

Procedural fairness more important in driving trust in the supervisor and commitment to the organisation

Reward – a new model

Dan Pink (2010)

DRIVE – the surprising truth about what motivates us

Reward – a new model

Intrinsic drive (the joy of the task) is powerful

Identifies two types – Type X and Type I

But intrinsic motivation / drive can be damaged by extrinsic motivators

The basic deal still has to be right (fair)

But, otherwise, classic reward structures and incentives don’t work for Type I

“People do work for money –

but they work even more for meaning in their lives.

In fact, they work to have fun”

Pfeffer (1998)

Reward – a new model

Take money off the table

Ensure internal and external fairness

Pay a little more than the market demands

Make your performance metrics wide-ranging

and make the upsides modest

Reward – a new model

Reward – a new model

What might all this look like?

Summary

There is more to motivation and engagement than pay and bonus

But we cannot ignore reward – it remains an important part of our toolkit

and It still needs to fair / equitable

Flexibility in reward structures (benefits) and approach to work may become even more important as we try to attract and retain talent in a changing environment

Find structures / approaches that give employees autonomy and reflect their values / needs

And – since nothing stays still – what works today may not work tomorrow…

Thank you