AUDITING COMMUNICATIONS ON REWARD SYSTEMS

Whoever is responsible for the reward system, and the messages which communications about them should convey, should regularly audit their quality, consistency and effectiveness. The key items that usually need looking at and the main questions to ask are:

• Job advertisements/recruitment literature/Web site job ads - do descriptions of the remuneration package do justice to what is on offer and what the organization is seeking to pay for?
• Offer letters/contracts - is as much attention paid to highlighting the attractiveness of all elements of the package as stating the bald elements of entitlements? Do they convey and confirm organizational values?
• Staff handbooks/intranet sections on specific reward elements - is layout clear and unambiguous and is the style one that will have immediacy and meaning to the groups of employees covered? Is the information sensibly grouped?
  (Do not use complicated language if most of the readers left school at 16, respond better to visual presentations and have reading habits that centre on the Sun andHello!. Remember that it is possible to describe share options without using arcane legal terminology and that if the way in which incentive measures are described is impenetrable this will hardly focus motivation.)
• Salary increase letters - do they properly thank people for their efforts and contribution? Is delivery made an occasion of and done personally?
• Policy changes - are these communicated to convey the logic and the benefits?
• Severance (retirement/redundancy) - is the approach perceived as caring and concerned? If not, what is the likely effect on remaining employees?
• Company videos communicating change - do these come across as sincere and provide helpful information or do they look hastily assembled and have too high a 'cringe factor' to be useful?

Regular employee research should be undertaken to understand employees' expectations and assess the impact of current reward arrangements. 

HOW TO COMMUNICATE - INDIVIDUAL INFORMATION

Individual members of staff will, of course, receive letters of appointment, which should tell them their grade and refer them to a staff handbook and/or site on the intranet which gives details of the grading and performance schemes. Whenever they are upgraded or promoted they should receive another letter congratulating them on the event and providing encouragement for the future. Considerable attention should be given to the wording of these letters to ensure that they come over as warm and sincere rather than cold and bureaucratic or, worse, patronizing. They should always be handed over personally by the manager to ensure that the opportunity to get needed messages across is taken.

Face to Face

The best way to communicate personal information is face to face. Employees should be seen regularly by their manager for discussions and coaching on their performance. Personal explanations should be given to them of the reasons for the employee's rate of salary progression or most recent increase. These meetings should focus on recognition and coaching as well as discuss what actions the employee has to take to progress faster or to get more next time.

Potential for promotion, lateral moves and salary progression in the longer term should also be discussed at these meetings. Ideally, employees should be given the opportunity to talk to their immediate supervisor's manager in order to get a broader view. People with strong potential should also meet a career planning adviser who can act as a mentor in discussing future career steps, the further training or experience they need and the glittering prizes that await them if they do really well.

Example of a total remuneration statement

Statement of Pay and Benefits for John Smith 

Smith Jones Ltd 1 April 2004

As part of our ongoing research into the competitiveness of Smith Jones Ltd's employee benefits, we have prepared this personal statement for you. Our company values relate to the link between performance and reward, and in line with this we wanted to show you how competitive your total benefits package is when compared with other companies. This statement summarizes your pay and the value of your personal benefits. Hay Group, a major provider of market salary and benefits information, have prepared this statement using information provided by Smith Jones and information from their comprehensive databases.

Your Total Package

The graph below shows how your total remuneration package is made up:

Pay and Benefits

Your basic annual salary as at 1 April 2004 is:	£ 30,000 p.a.
Other Cash Payment (such as shift payments or a substitution allowance):	£ 3,500 p.a.
Potential Bonus: (actual 2003 payment was £2,000)	£ 4,500 p.a.
Potential Earnings:	£38,500 p.a.

The table below sets out the cost to Smith Jones of the benefits you are entitled to receive, as valued by Hay:

Retirement, Death and Ill-health benefits:	£4,500 p.a.
Holidays:	£700 p.a.
Company Car:	£5,200 p.a.
Other Fringe Benefits (see below for more details):	£1,500 p.a.
Total Cost of Benefits:	£11,900 p.a.
Total Package Value:	£49,900 p.a.

Other Benefits included above:

• Meals at subsidized cost or lunch allowances;
• Gifts, awards, advice and counselling (including pre-retirement and financial counselling);
• Professional subscriptions, where relevant to job;
• Free products;
• Sports and social facilities;
• Personal and accident insurance;
• Private health care.

In addition, you are currently eligible to receive the following benefits, which have not been included in the above valuation: l

• Further education assistance, where relevant to job;
• Free car parking facilities;
• Site facilities.

Comparison with Other Employers

We have commissioned Hay Group to conduct an independent assessment of the benefits offered by us compared with other UK companies in our market sector. The chart below compares the benefits package provided by Smith Jones to those provided for similar jobs by other employers. The chart shows that the total benefits package provided by Smith Jones is higher than that provided by most other organizations.

The Market Practice on this graph is based on the typical (median) figures from the Hay database of companies in our market sector.

Conclusion

We hope this Statement aids your understanding of your Total Remuneration Package. If you have any questions regarding this statement, please contact the Human Resources department, on 0207 1555 1234.

Neville Graham
Human Resource Manager

Notes

The base salary figure shown above is your base salary as at 1 April 2004. However, the other figures are based on the payments achieved and benefits you were eligible to receive during the 2003 calendar year (1 January to 31 December). National Insurance Contributions payable by us on your behalf have been excluded.

Your package has been valued by Hay based on annual pension costs over an average career (using Hay's method) and using typical costs for other benefits (as advised by Hay). The figures (such as the one for Retirement, Death and Ill-health benefits) may therefore be different to information previously provided to you by Smith Jones Ltd.

Although there is no legal requirement in the UK for a minimum holiday allocation, employers typically offer a minimum of 20 days' leave (excluding bank holidays). This statement therefore values the amount paid for any holidays over this 20-day minimum.

Every effort has been made to ensure the accuracy of this statement as at 1 April 2004. If this statement is not consistent with your actual package, as outlined in your contract of employment, then the terms and conditions stated in that contract will prevail.

If you have joined Smith Jones within the last year, you may not have been eligible to receive all of the payments and benefits detailed above. However, it is expected that such benefits will be offered to you during 1998, subject to your performance as an employee of Smith Jones.

The valuation of your benefits (other than pay) is intended to illustrate the total value of your package and to allow comparisons with those provided by other employers; the figures should not be used for any other purpose. This statement does not take into account your individual family or financial circumstances or your health, and is not a recommendation for you to follow any particular course of action.

WHAT TO COMMUNICATE | Communicating the Benefits

The following is what you should communicate to staff in general and to individual employees.

Staff in General

1. The organization's salary policy: This will set out the principles followed in setting pay and benefit levels.
2. The pay and benefits structure: This will define the salary ranges for each grade and the benefits available, including details of the pension scheme and the approach to total rewards.
3. Methods of grading and regrading jobs: Where job evaluation exists, details will be given of the job evaluation scheme, including how evaluations are carried out and the right to appeal against gradings.
4. Salary progression: The method by which salaries are progressed within grades or individually.
5. Incentive/bonus schemes: Details of any incentive, bonus, profit- sharing or share purchase schemes including how bonuses or profit shares are calculated and distributed and the procedures for purchasing shares.
6. Reward systems and organizational change: How remuneration policy will be affected by mergers/take-overs, change in corporate direction and indeed the bad news of liquidation and closures.
   
   

Individual Employees

1. Job grade or job or career family: What this is and how it has been determined.
2. Salary progression: The limit to which their salary can go in their present grade and the means by which they can progress through the grade or pay bands, depending on performance or contribution.
3. Potential: Their potential for higher salaries following promotion, subject to meeting defined performance criteria and the availability of suitable positions. In other words, this information, plus that contained under the heading of salary progression, should create expectations of what staff can get and define the action or behaviour they have to do to get there.
4. Performance management: How performance and potential are focused, managed and assessed, including details of the criteria used, the method of assessment and the right of the employee to know what his or her assessment is and why it has taken that form.
5. Salary levels: The reasons for the level of reward they are getting or the salary increase at the last review and what the employee must do to get more.
6. Benefit statement: The value of the benefits the individual employee receives so that he or she appreciates the level of his or her total remuneration.
7. Total rewards: Wherever possible, it helps to outline what is in the 'value proposition' for employees - linked to organizational values.

In summary, the aim must be to manage the individual's expectations about the range of factors that affect his or her pay and avoid a situation where she or he is overly focused on one factor alone.

As Figure 1 illustrates, the right balance needs to be struck to ensure that everyone understands what affects their pay. In most organizations this tends to be:

• job/role size - grade/level in job family;
• pay markets - for the function by location/industry sector;
• individual performance - the performance, contribution and capability of the individual;
• ability to pay - the ability of the organization/sector to pay premium or closer to average rates of reward.

 

Figure 1: Get the balance right

WHY COMMUNICATE? | Communicating the Benefits

One of the prime objectives of the reward system should be to motivate people and so ensure their commitment. Hence the theme of paying for performance and contribution which has run throughout this book. But how can the system motivate if left to its own devices - if people are unsure why the system was developed, suspect that it is unfair, or are unsure about how their pay will be linked to performance, or what their future rewards are going to be as they take on greater responsibility? And how can the organization get any mileage out of its logical, equitable, competitive and even creative reward system, its high level of rewards or its generous employee benefits package if it does not tell its employees all about them?

Payment systems can sometimes demotivate even more effectively than they motivate, even if introduced with the best intentions. This is because they often seem to be unfair. Pay is perceived as being either inequitable or not commensurate with performance. Elliott Jacques called this the felt-fair principle. He suggested on the basis of extensive research that people feel their pay ought to be fair in relation to their personal contribution, to what other people are being paid within the organization, and to what is being paid by other organizations for similar jobs. If management wants to motivate its employees, these expectations must be satisfied. It is worth remembering that the most respected theory of motivation - the expectancy theory - states that it is what people expect to get, if it is worth having, which will motivate them most effectively, rather than what they have already got.

So it is important to motivate people by telling them that what they have got is worth having - if that is the case - and even more important to tell them what they can expect. This starts with the recruitment process and ends with the way in which retirement or indeed severance is handled. If they have been rewarded for doing well, that has to be communicated to them. If they are going to get higher rewards for doing even better in the future, that must also be communicated, but more clearly and attractively.

PAY PLANNING

In any pay system where progression rates vary according to performance there will be anomalies. These can arise when performance suddenly improves or gets worse and staff are either under-or over-paid because it is not possible, using the normal guidelines, to place them on the right curve immediately. In this situation these people would have to be treated individually and their salary increases adjusted to accelerate or decelerate their progression through the range, so bringing them back in line.

It is in these circumstances that managing reward processes requires judgement and a sensitive approach. Inevitably, this book has largely been about systems and procedures. But ultimately we are dealing with people who want and deserve to be treated as individuals, and this applies as equally to those who manage as to those who are being managed. Mechanistic systems of salary administration may make life easier for the personnel department but that is not the object of the exercise. No members of an organization can be really happy, well motivated and committed if they feel they are part of a machine which pays no attention to their individual needs.

Salary planning and administration must adopt the stance of thinking first of what is right for individuals in terms of their aptitudes, abilities, skills, performance and needs. Of course, this approach must always be tempered with the knowledge that the organization also has needs which demand satisfaction. But an integrated approach to reward management can optimize the needs of the organization and those of the individuals, and these should be seen as complementary, not opposed.

Salary planning therefore has to treat people as individuals who are pursuing a career. This means looking at how that career is developing and ensuring that the incentives and rewards for increasing competences and improving contribution and performance go hand in hand with progress within and through the organization.

CONTROL

Control over the implementation of pay policies generally and payroll costs in particular will be easier if it is based on:

• a clearly defined and understood pay structure;
• clearly defined pay review guidelines and budgets;
• well-defined procedures for grading jobs and fixing rates of pay;
• clear statements of the degree of authority managers have at each level to decide on rates of pay and increases;
• a personnel (HR) function which is capable of monitoring the implementation of pay policies and providing the information and guidance managers require and has the authority and resources (including computer software) to do so;
• a systematic process for monitoring the implementation of pay policies and costs against budgets.

These aspects of control have been covered elsewhere in this book, but there are three further features of a control system which need to be considered; namely, the control of grade drift, the problem of devolving authority to managers to develop 'ownership' of the reward management processes in their departments while still retaining control, and the provision of control information.

Control of Grade Drift

Grade drift - the tendency for people to be upgraded without a justifiable increase in their job size - can be controlled by the following methods:

• using a strong evaluation panel trained in the job measurement methodology on a formal basis and advised as necessary by an independent expert;
• insisting on rigorous comparisons with well-established benchmark jobs - the re-evaluation of such jobs should be a major exercise;
• ensuring that panels ask pertinent questions on any claims that an increase in responsibility justifies regrading - among these questions it is useful to ask, not only what the increased responsibilities are, but also how they have arisen and what effect this will have on another job if it has lost those responsibilities;
• requiring a sponsoring manager to provide supporting justification;
• resisting demands from managers for jobs to be regraded simply because of market rate pressures, difficulties in recruitment or threats to leave to get more money. If these concerns are genuine there are better ways of dealing with them than upgrading by, for example, reconsidering market stance policies, market rate premiums or creating special market groups. What must not be allowed to happen is upgrading someone simply in response to threats.
  
  

Developing Ownership Without Losing Control

We have frequently referred to the concept that line managers should take ownership of reward practice. This is an aspect of empowerment - devolving down the line the responsibility for making decisions on key management issues - and pay is definitely one of these issues.

Devolution does not mean abdication, and the following steps are required to ensure that freedom is exercised within the framework of generally understood guidelines on corporate pay policies and how they should be implemented:

• Discuss and agree with managers, team leaders and staff the key reward processes which will maintain standards throughout the organization - these will include processes for job evaluation, tracking market rates, performance management, performance rating and paying for performance, skill or competence.
• Ensure that all concerned thoroughly understand and appreciate the new freedoms and their associated responsibilities.
• Train managers and team leaders so that they have the level of knowledge required to make informed, business-led decisions about reward - the aim is to ensure that they are 'pay literate'.
• Develop computerized personnel information systems that reduce all the bureaucratic reporting which has been necessary in the past. As Clive Wright, then Manager, Corporate Remuneration, ICL, said at the Compensation Forum in January 1993:

  Recording and reviewing the key business numbers at the centre, without involvement of the line operations, is essential, if you want to convince people that empowerment and reduced bureaucracy is actually happening. As long as we keep asking people to send in reports, fill out forms, and sign off changes at detailed levels, no one will believe anything has really changed.

• Ensure that the central remuneration specialists change from a controlling to a guidance and support role.
• Spell out to all concerned that in providing this guidance and support the HR function has a duty to audit reward management processes departmentally to ensure that they are being used in the most effective way. It must be emphasized that the organization has every right to see that proper procedures are being followed and that, where appropriate, consistent policies are being applied.
• Ensure that managers understand and accept the principle that while they may have a fair degree of independence they are still interdependent with other operating units. They must therefore consider the implications of what they are doing on other parts of the business.
• Achieve, as far as possible, a reasonable balance between empowerment and control. The aim must be to give managers the maximum space and freedom to act. But it is still necessary to ensure that their actions do not contravene fundamental reward management policies and guidelines, or prejudice the overall impact of reward processes as a means of helping the organization as a whole to move forward in accordance with its strategic plans.
  
  

Pay Review Documentation

The pay review documentation for line managers is best dealt with by a spreadsheet. The information should consist of:

• name, job title and present salary of job holder;
• details of last pay increase - amount, date and reason;
• performance rating;
• proposed increase - amount and percentage.

The individual details on this spreadsheet should be totalled so that the percentage increase to payroll overall can be calculated and compared with the budgeted figure.

CONTROLLING PAYROLL COSTS

Pay Review Budgets

Pay review budgets for managers set out the overall increase in their payroll that they are allowed to recommend for their departments to cover the cost of competence and/or performance-related awards. This is the basic control mechanism, and managers should be required to keep strictly within their budgets and own the financial consequences of so doing.

In Bass Brewers, for example, control is exercised mainly through the pay review budget but managers are also expected to use their judgement in controlling progression by reference to a pay policy line based on market rate comparisons and the rates of pay for people carrying out similar jobs in their departments.

Review budgets restrict the scope for managers to make excessive awards leading to unjustifiable grade or band drift. But by themselves they will not prevent drift. Additional control is required by careful monitoring of the distribution of pay in grades or bands to ensure that anomalies and drift do not occur. Peer reviews or moderating processes can be used which enable out-of-line payments to be identified and thus provide for consistency. These involve getting groups of budget centre managers together to exchange information about their proposals and, if challenged by one of their colleagues, justify them. Such reviews should specifically check that the levels of pay for people in similar roles are consistent with the levels of competence and contribution demonstrated by them.

Some companies, such as Zeneca, give managers a pay review budget at the beginning of the year and get them to plan how they can use this most effectively to help them to achieve their business plans. For example, if a manager is controlling a number of key development projects, he or she might reserve some money for awards to project teams when they complete their project satisfactorily or at predefined milestones.

Pay review budgets are usually only concerned with performance or competence/skill-related awards. They may not therefore control the payroll costs arising from new appointments, transfers and promotions. Some companies set budgets which control increases arising from promotions and upgradings as well as variable pay. Others aim to achieve complete control through total payroll budgeting.

Total Payroll Budgeting

The problem with pay review budgets is that they do not control total payroll costs within departments. These are, of course, dependent on the number of people employed in different roles and their rates of pay. Payroll costs vary as a result of changes in those numbers and increases in pay arising from general and individual pay reviews; the amount of pay offered to new, promoted or transferred staff (which, if they replace existing staff, could be higher or lower than the rates paid to those replaced); and the extra pay earned by staff on promotion or upgrading.

A total payroll budget is based on present payroll costs adjusted for forecast changes in the number and mix of those employed in the budget centre and the forecast cost of general and individual pay increases. When budget centre managers are held accountable for their total payroll costs this means that they have to justify the numbers and types of staff they employ and any increases to payroll costs they believe are required to cover pay reviews, promotions and additional costs arising from recruitment or transfers.

When preparing their budgets, managers are issued with guidelines on what they should allow for general and individual pay review increases and they will be expected to keep within these guidelines when preparing the budget and conducting their pay review. If the financial performance of the organization means that more money can be made available to fund competence- or performance-related increases, then these budget guidelines may state the extent to which extra pay costs arising from such increases can be included in the budget.

When submitting their payroll budget proposals, budget centre managers can make out a case for an increase in their budget above the guidelines to cover anticipated extra staff, promotions or increases in responsibility (role enlargements). But they would have to justify these increases in added-value terms; in other words, they would have to prove that the income generated by these additions will exceed the cost of them. Increases must be self-financing. Conversely, if they are able to plan the maintenance or increase of present activity levels and outputs by reducing staff numbers, they can make out a case for using the extra cash thus released to fund competence-related, performance-related or career development increases. These can be used to reward staff for the additional contributions they deliver against rising expectations.

This approach means that some budget centre managers might have more cash than others to reward their staff. This could result in inequities unless the awards are fully justified. Such proposals would therefore need to be subjected to rigorous assessment. Subsequent rewards would also need to be monitored carefully. Payroll budgets can be flexed during the year in response to changes in activity levels or new projects. Many companies have interim reforecasts once or twice a year which require managers to review their original budget in the light of experience to date and amend it as necessary.

Control is exercised over budget expenditures by regular reports analysing variances, which budget managers may be required to explain and deal with.

This type of budgeting procedure can enable effective control to be maintained over payroll costs and restrain managers in a relatively unstructured pay system from overpaying staff. But full control still requires monitoring and peer review (moderating) processes.

The critical pay budgeting issue is the quality of understanding and ownership line managers have of their budgets. For many, this is an area where considerable support from personnel is still needed - a role in which the consultancy skills of HR professionals are increasingly called upon.