An effective pay policy depends on managing the risks associated with reward, says CIPD’s Charles Cotton
Given the current economic turmoil, the benefits industry may witness a shift in how reward professionals see the role of reward in the future. Rather than focusing on the potential and, in some instances, spurious advantages of getting reward right, attention may instead be focused on not getting it wrong.
Just as hospitals have been concentrating on hygiene to ensure patients do not leave them with a new infection, reward practitioners could focus on the hygiene aspects of reward by adopting a risk-management approach to ensure it does not inadvertently make the organisation sick.
The Chartered Institute of Personnel and Development defines risk management as a systematic and strategic approach that aims to ensure the potential upsides and downsides of particular courses of action are identified at the planning stage and are subsequently taken into account. Risk management in this sense is strategic because it requires standing back from day-to-day operations and asking “what if” questions designed to put a range of relevant data on the table. A total reward approach can be adopted, combining financial rewards with non-financial rewards.
The risks Broadly speaking, the risks of getting reward wrong are: failing to recruit and retain employees with the skills, attitudes, behaviours and performances that the organisation needs to be successful, and failing to engage them to exhibit discretionary behaviour.
It is difficult to be prescriptive about what employers should do because how they manage the risks associated with reward depends on their particular circumstances. However, there are some risks around pay that need to be managed to help reward practitioners reach appropriate solutions.
If base pay is too low, employers will have difficulty attracting the right people, but if it is too high, money is wasted. In some environments, this may have a negative impact on incentives. However, finding the “Goldilocks” zone where pay is just about right can be easier said than done. Pay surveys, local pay clubs and scanning recruitment pages can help, but these come with their own caveats. However, it is better to recognise these risks and try to manage them rather than ignore them.
When it comes to awarding pay rises, practitioners should examine what is being rewarded and why. This includes individual factors, such as performance, length of service or competencies, outside factors such as organisational performance, market rates and inflation, or a mixture of both factors. Employers should question whether these factors are appropriate to attracting, retaining and motivating individuals to exhibit the right skills, attitudes, behaviours and performances. If the answer is yes, then are the appropriate media being used to deliver the message and have line managers been given the appropriate skills and knowledge? Employers should also consider whether some, or all, of the pay rise should be consolidated into salary or awarded as a bonus. If the award is going to be non-consolidated, then the risks that need to be recognised and managed include long-term versus short-term, individual versus collective, input versus output, and so on. Again, there is no right answer, but employers should recognise they have to find an appropriate balance, which is constantly shifting.
If they are using variable pay, they should also identify which behaviours they want to encourage and which to discourage. What is their relationship to base pay? If base pay is too low or too high vis-‡-vis variable pay, it may lead to unintended consequences in certain environments.
But there is more to reward than pay, and it doesn’t matter if employers get pay right if they are not managing the other risks around the employment relationship.
Charles Cotton is reward adviser at the Chartered Institute of Personnel and Development (CIPD)
- The current economic turmoil may impact on how HR professionals see the role of reward in the future.
- Risk management is a strategic approach aimed at ensuring potential pros and cons of a particular course of action are identified at the planning stage.
- How risks associated with reward are managed will depend on circumstances.