It is difficult to avoid the current focus on irresponsible reward in the banking industry. But, despite public opinion, bankers’ bonuses are not to blame for the breakdown of the global financial system. They were merely efficient tools of strategy, and it was the strategy itself – inappropriate borrowing practices – that was the problem.
Of course, incentive plans that focus on the short term, take no account of risk, and involve life-changing sums of money may have allowed dangerous strategies to proliferate unquestioned. Whatever the causes, every major institution will find its reward policies under intense scrutiny. Now is the time for firms to assess their reward policies for responsibility.
Responsible reward is not about ending performance-related pay or capping earnings. It involves aligning the behaviours stimulated by rewards and incentives with the long-term interests of all the organisation’s stakeholders.
This can be achieved by ensuring that rewards pay out over the timescale that the business value is created (probably by deferring bonuses). It is also important that there is an appropriate calculation of risk when assessing performance, that reward is linked to a range of performance measures and achieves a balance between individual, team and corporate performance.
Responsible reward should be competitive enough to help the business meet its goals, while holding individuals to account for their actions. It should encourage rational thinking by ensuring any fixed component is large enough to meet the essential financial needs of staff. It should not be so highly leveraged that a good year means staff need never work again, but a bad year puts their family onto the street.
Effective reward is often simple. But companies need to communicate it actively, effectively and repeatedly to recipients and stakeholders. A reward scheme’s differentials between the highest and least well-paid should be fully justified by impact, workload, intensity and personal risk.
Responsible reward is not just good PR. It makes sound business sense. It supports a sustainable business model, aids stakeholder management and builds the staff support needed to sustain companies through difficult times.
- Colin Evans, UK head of reward services, Hay Group