Linking Performance and Rewards:

- Does it ever work?

- Is HE importing a failed model?

Duncan Brown, Head of HR Consultancy, IES

19.11.15

IES for ECC

Copyright © 2015 IES

Duncan Brown Duncan leads the HR Consultancy and Research work at IES, a

leading independent research-based charity which supports

improvement in HR and employment practice.

He has more than 25 years' experience in HR consulting &

research with Aon Hewitt, PwC and Towers Perrin. He spent

5 years as Assistant Director General at CIPD.

His clients have included major companies such as National

Grid and Lloyds Banking Group, public sector bodies such as

the Cabinet Office and National Health Service, universities

such as Southampton and City, and not-for-profits such as

Cancer Research and the United Nations.

Duncan is a leading commentator on HR, publishing many

articles and books. His last book was on HR effectiveness.

He has participated on Government taskforces concerned

with fair pay, engagement, pensions and human capital

reporting. He advises a number of remuneration committees

Human Resources magazine placed him in its listing of the

top 5 most influential thinkers in UK HR.

Duncan has an MA from Cambridge University, an MBA from

the London Business School and is a Fellow of the CIPD.He is

a Visiting Fellow at Kingston University.

Read his blogs at:

http://www.employment-studies.co.uk/news-press/ies-reflects

http://www.cipd.co.uk/pm/members/duncanbrown9000272/defa

ult.aspx

About IES

Leading independent centre of research and consultancy in employment policy and HR practice

Not for profit, established in 1969

c40 multidisciplinary staff

The IES HR Network: Organisational membership

Collaborative research

Conferences and seminars

Networking

Recent projects Re- designing senior reward and recognition strategy for an English university Review and re-design of the KSF performance management system in the NHS Evaluating the success of the government’s apprenticeship growth programme Surveying the career intentions of university leavers Reviewing and evaluating youth unemployment initiatives in the EU University success sharing plan design Looking at options of HR service structure in an expanding FE college Development programme for an HR team in a local authority

Reward Priorities: PRP or else?! (Source: Aon Hewitt)

Priority / Rank

Rewarding & Motivating high performers 1

Ensuring pay/incentives are tied to performance

2

Retention of key staff

3

Getting the most from Total Reward

4

Staff engagement/ morale

5

The top employer reward priority has been to better motivate and reward high

performers, along with delivering a better return on the total reward investment and

latterly, addressing general employee disengagement.

Hmmm…..Executive performance-related pay?

(The High Pay Centre)

Are we returning to the same (tired) old

debate? Still a controversial issue:

“Reports of a further move (in the public sector) towards a messy system of individual performance-related pay will damage morale - already at a low ebb - undermine team working, and do nothing to improve services”

Frances O’Grady

“Majority of public sector employees have reservations about performance related pay” CIPD,

7

PRP and Bonus Schemes: do they work?

There is evidence that high performing companies make greater use of

performance pay, for example from the major WERS study (1999).

Research also suggests that profit sharing & share schemes are associated with high

organisation performance, ‘the John Lewis model’.

The evidence on executive bonus plans is much more contradictory.

The SSRB summarised common problems as being:

- Poor performance management and objective setting;

- An unclear justification and rationale;

- The small size of opportunities and payments.

Burgess and Metcalfe’s(2007) review of PRP in the public sector paints a mixed

picture, with evidence that incentives have positively affected behaviour and

performance in some settings, including education and health.

There is evidence that knowledge workers prefer pay to be based on performance,

and that the public, although generally critical of senior public sector pay, believe

that it should be based on performance.

Armstrong and Brown (2010) conclude there is no universally successful PRP, no

“best practice, only best fit”. PRP’s success is highly situational-specific.

But research certainly highlights some of the

problems

•Working too well: over concentration on short-term results eg City

•Not working: a lack of differentiation in a low pay inflation environment,

lack of payment in recession;

• The sceptre of ‘best’ practice;

• A confusion of objectives;

- a means of addressing market issues;

- rewarding the wrong performance

• Lack of strategic integration;

• Poor implementation/process;

“our manager seems uncomfortable in the meetings, like he’s going

through the motions and it’s a relief to get it over with”.

Employee, UK Company

• Bad design.

8

16

9

Theory has also fallen short: Rewarding

performance models

1. The Behaviouralist

Performance > reward/punishment

“Money doesn’t motivate…undermines

intrinsic motivation” Alfie Kohn

2. Expectancy theory

Effort > performance > reward

“Inter-branch differentials in bonus payments tend to create

motivational problems” Nisar

“The ingenuity of the average worker is sufficient to outwit any system of control devised by management” Mcgregor

1

0

PRP and Variable Pay and Bonus Schemes

for senior staff in Universities ¾ of institutions have some form of performance or contribution-related pay in place

(UCEA). Participation in PRP is more common at more senior levels.

In the UCEA survey, total cash levels are 2.4% higher than base pay levels at the median

The main approaches would appear to be:

- The award of additional increments or cash

- The award of discretionary, honoraria-type lump sum

- The use of private sector style annual executive bonuses

Around half have the facility to use annual bonuses, far fewer have paid out in the past 3

years

Two universities have introduced annual all-employee success sharing plans, with

common payment levels earned for all staff according to overall university performance.

Barriers to the wider use of executive bonus plans include often weak poor performance

management, the wide-ranging agenda beyond a profit-focused mission, academic

scepticism and negative external perceptions.

1

1

First Lesson: The new PRP: Engagement

replacing carrot and stick

HR/Reward

Policies and

Practice

PEOPLE

Ability

Motivation

Opportunity

A

G

E

M

E

N

T

Engagement

Satisfaction

High

Performance

The ‘Big Idea’

M

A

N

Aon Hewitt Consulting / November 2011

1

2 12

The use of mixed approaches in pay progression

76% use a combination approach: Increments/pay for service 20% Pay for individual performance 88% Pay for skill/competence 51% Pay for org. performance 45%

Differentials have been widening between high and average performers, from 1.5 – 2x to 2 – 3 x

We are also seeing a shift from using base pay to using more variable pay to reward individual performance

Pay for

performance

Pay for skill/

competence

Paying for

contribution

Past Future

Lesson 3: PRP problems are process problems

45%

35%

28%

27%

25%

Ineffective

communications

Lack of support

systems, eg market

data

Poor performance

management

System does not match

with organisation

needs

Lack of management

skills/support

Figures are % of participants changing their base pay systems 1

3

Main objectives for HEI’s CRP schemes

20

4 2 2

0

5

15

10

20

45

41

40

36

35

30

25

Pay for individual contribution / performance

Reward / retain best performers

Focus employees on institutional

objectives

Increase / broaden

employee

competencies / skills

Improve employee

productivity

Other

Nu

mb

er

of

HE

Is (

n=

42)

Main factors limiting the effectiveness of CRP

schemes

28

25

19

17

9

7

7

4

0 5 25 30

Unwillingness of line managers to differentiate performance

Lack of good performance management practice

Lack of employee understanding / awareness

Weak or diluted links between contribution and pay

Complex administration

Insufficient budget to reward contribution effectively

Results not justifying effort

Other

Number of HEIs (n=42)

10 15 20

15

Addressing the management

“A good manager who appreciates the work done,

makes all the difference”

“ The normal distribution curse”

Simple objectives and design

Heavy development

Heavy moderation

Managers key role in

communications

HR and systems support

Managers struggling with complicated,

imposed formal HR systems with very

limited discretion to generate motivation and commitment

HR

1

6

Managers using informal, social rewards

Conclusions: If you are going to use

PRP…

1

7

• US research study (Ryan, Mims and Koestner): high financial rewards decrease intrinsic motivation in a high control culture but increase it in a high communications culture

• Money and Graham: performance pay highly motivating for US employees but not in Japan

• US research study (Ellis and Haftel): does money/performance pay motivate?

• matched samples of pharmaceutical and high tech companies

• results: neither approach more or less successful

• conclusion: success relates to the intensity of application

• UK research (Bowey): what form of PRP is most effective

• success bore no correlation to scheme design

clarity/understanding of objectives

effort put into related initiatives: pm, teambuilding etc

level of staff involvement/communication

1

8

Key questions for you

Policy and desire

- Do we want/need to relate reward and performance?

- Where does it sit in our list of reward priorities?

- Do we want financial incentives or rewards?

Practice and design

- Do we reward performance through base pay, variable pay, non financial reward or other means

- Do we emphasis collective or individual performance?

- Do we use different approaches for different parts/groups in the organisation?

Process and delivery

- Can we manage the practice as planned?

- How well do our managers manage performance and rewards, how can we improve that?

- How do we balance fairness and consistency with necessary flexibility in awards

Copyright © 2015 IES