I spend a lot of my time as a consultant and writer advocating taking a strategic position on reward before making changes. “Reward” is all the financially valuable elements received by employees in an organization – typically some combination of salary, bonuses and incentives, benefits, and stock. But what is reward strategy, and how do you get started? Here are some tips on how to think about reward strategy and how to make it happen.
In their book “Reward Management,” Michael Armstrong and Helen Murlis emphasize that a reward strategy encompasses the direction of reward, how initiatives should be integrated, and the priorities and pace at which they should be implemented. In “Reward Strategies: From Intent to Impact,” Duncan Brown writes, “Reward strategy is ultimately a way of thinking that you can apply to any reward issue arising in your organization, to see how you can create value from it.” Essentially, a reward strategy is an approach to reward based on a set of coherent principles in support of the organization’s aims. In each case, the reward strategy is not a written policy or philosophy; it is an approach or way of thinking. It may be articulated in writing to try to explain how the organization thinks about reward and what frames reward decisions.
In Lewis Carroll’s “Alice’s Adventures in Wonderland,” Alice asks the Cheshire cat which way she ought to go, but when the cat asks her where she wants to go, she says that she doesn’t care much. The cat replies, “Then it doesn’t matter which way you go.” The parallel to reward strategy is obvious: We need to have a sense of direction to enable us to develop reward strategies that are relevant, are meaningful and will help the organization. A sense of direction also helps us filter the opportunities that we come across that are likely to support or hinder our progress.
Reward can comprise up to 70 percent of an organization’s costs and carry messages about what is important. It follows that organizations need a reward strategy that both maximizes value and carries the right messages, which are consistent with what the organization says about its aims and culture. Reward can carry strong messages about what is important, such as long service or individual over team performance. The implicit messages reward carries are often missed by managers, and organizations often do not attach nearly enough importance to them.
Here are three steps that can help you get started with a reward strategy.
1. Work with finance to produce two pie charts: One should show your overall corporate costs divided by the main categories, such as employees, property and technology. The second should break down the employee costs by categories, such as annual salary bill, bonuses, benefits, and learning and development. What do these charts show you? For example, is the balance between learning and development and bonus spend likely to help achieve corporate goals?
2. Develop a simple reward framework, a simple one-page statement describing some of the organization’s beliefs and principles about reward. Typically, this framework covers:
- Reward compared with other work-related elements of the organization
- What internal equity means
- Market position
- The organization’s ability to pay/profitability
- The relationship between base pay and variable pay
- The organization’s position on benefits
- How the organization will communicate reward
- The relationship between recognition and reward
Your reward framework should reflect your desired position, not your current practice, which is often due to history rather than strategic intent. Work with your stakeholders on the statement, or, at least, engage with them on a draft to ensure you develop a framework that is meaningful and aligned with the company’s aims and culture.
3. Having developed a framework and looked at costs, analyze your current practice, and answer these questions:
- How does your practice stack up against the reward framework?
- What messages do each of the components of reward carry to your people?
- Are these messages in line with what is important, and are they consistent with the other messages you give?
- Are you getting value from the current spend?
Whatever approach you take, don’t go for “best practice,” which is often just what another organization happens to follow. Every business is different, so be confident and go for best fit – what’s important to your organization with its unique values, culture and approach.
Take an approach I call strategic pragmatism: Have a clear vision of what you want to change to align with and help achieve aims and reinforce culture, but do so in a pragmatic way, accepting that perfection can be the enemy of the good. This process is as much about change management as it is about the technical reward solutions you develop.