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Why Reward for Performance Fails to Deliver

September 13, 2017 • STRATEGY & MANAGEMENT, Talent Management, Finance & Economics

By Jonathan Trevor

Blind conformity can be very dangerous especially when it comes to managing your company’s talent. In this article, the author elaborates on why and how reward for performance fails to deliver its objectives, how there is no one size fits all when it comes to employee reward, and why alignment to strategic priorities is key to organisation effectiveness.

 

Few executives in the firms I work with are completely happy about how they reward their people. Attracting valuable talent, engaging staff and securing positive behaviour remains as challenging as ever. Worse still, reward is often blamed for misdirected employee effort, dysfunctional behaviour, disengagement and energy sapping conflict. These firms, like the clear majority across industry, reward their people based on performance.

For decades, a plethora of books, articles and consultants’ reports have espoused the bottom-line benefits of rewarding for performance – such as using individual bonuses or merit based pay increases – to align employees’ financial interests to those of their employer. Firms have rushed to embrace the unitarist logic of reward (also referred to as pay, compensation or remuneration) for performance for all sections of the workforce, and not just executives. A 2013 survey of more than 350 publicly traded companies in the US revealed that all (99%) use some form of short-term incentive (bonus) plan for their broad-based employee population.1 The proportion of UK organisations in 2013 operating performance-related financial reward, incentive and recognition schemes was 77% in private sector services and as high as 92% in very large and multi-national organisations.2 The consultancy, Willis Towers Watson, puts the figure even higher, with 94% of organisations using some form of annual bonus or short-term cash incentive.3 Individual performance is the most important criterion for determining base pay progression for the majority (74%) of companies, and individual bonuses the most prevalent form of financial incentive (66%), in the latest survey (2017) of UK reward management practice by the Chartered Institute of Personnel and Development.4 Reward is no longer simply the cost of hiring necessary labour, as it once was. It is a management tool for securing strategically valuable employee outcomes by attracting key talent, fostering desirable behaviour and maximising employee and firm financial performance. Reward for performance is the dominant logic of how firms remunerate their people in the contemporary workplace.

Reward is no longer simply the cost of hiring necessary labour, as it once was. It is a management tool for securing strategically valuable employee outcomes by attracting key talent, fostering desirable behaviour and maximising employee and firm financial performance.

Armies of consultants and career remuneration managers are employed to ensure reward for performance does exactly what it says on the tin. But does it? Reward for performance has become associated with bad business in recent years. Banking bonuses have been routinely blamed in the media for the excessive risk taking that precipitated the global financial crisis. Investors and the public alike continue to heap scorn on dramatic increases in executive pay despite lack of commensurate increase in firm performance. In these economically austere times, high value bonus awards are instantly front-page news amidst cries of corporate greed. Governments and regulators have moved to place caps on the value financial incentives awarded to staff to curb reckless behaviour, implying in the process that companies (banks especially) can’t be trusted to manage their own remuneration arrangements responsibly.5 Within research literature, establishing a positive link between company performance and the deployment of performance based reward practices remain elusive. Doubt over the benefits of reward for performance is growing.6 Many call for the decoupling of performance and reward altogether.7 Rewarding performance, it seems, is risky business – there are significant economic, social and reputation risks to getting it wrong. Why are attempts to reward for performance not delivering expected results? What could firms do differently to de-risk their reward practices and manage them better for strategic value in future?



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About the Author

Jonathan Trevor is Associate Professor of Management Practice at Saïd Business School, University of Oxford. His principal research, teaching and consulting interests are the linkage between strategic and organisational priorities and the development of capabilities that give organisations a distinctive competitive edge.

 

References

1. Incentive Reward Practices Survey, 2013, WorldatWork and Deloitte Consulting LLP
2. Chartered Institute of Personnel and Development, 2013 Annual Reward Survey of UK Industry
3. Towers Watson (2014), UK HR Consultant’s Survey
4. CIPD (2017) Reward Management Survey. London: Chartered Institute of Personnel and Development
5. Slater, S (2013), “Barclays rejigs pay to counter EU bonus clampdown”, Reuters, November
6. Culbert, Samuel A. 2010. Get Rid of the Performance Review!: How Companies Can Stop Intimidating, Start Managing — and Focus on What Really Matters.New York: Business Plus.
7. DiDonato, T (2014), “Stop Basing Pay on Performance Reviews”, Harvard Business Review,January
8. These data were collected in the period 2002-2007, prior to the global financial crisis of 2007-2008. The period was characterised by strong economic performance and relative market stability. Whilst the findings are not representative of practice since 2008, a period of unprecedented economic uncertainty, they provide a valuable illustration for the future marketplace as confidence improves and firms again look to use reward to drive performance maximisation.
9. Lawler, E. E. (1990), Strategic Reward. New York: Jossey-Bass.
10. Schuler, R. and Jackson, S. (1987). “Linking competitive strategies with HRM practices”. Academy of Management Executive, 1 (3): 209–13.
11. Two remuneration consultancies were retained as the annual survey administrator during the term of the research. Both were large international firms headquartered in the United States.
12. Meyer, J. and Rowan, B. (1991). “Institutionalized organizations: formal structure as myth and ceremony”. in W. Powell and P. DiMaggio (eds), The New Institutionalism in organizational analysis.Chicago: University of Chicago Press.
13.Trevor, J (2011) Can Reward Be Strategic?, Palgrave Macmillan, London
14. Trevor, J & Varcoe, B (2017), “How Aligned Is Your Organization”, Harvard Business Review, February
15. Heckscher, C., Donellon, A. and Applegate L. M. (1994), The Post-Bureaucratic Organization: New Perspectives on Organizational Change, Thousand Oaks, EUA, Sage.
16. Barney, J. (1996). The resource-based Theory of the Firm. Organization Science, 7 (5): p. 469.
17. Chesbrough, H, and Appleyard, M. M. (2007). “Open Innovation and Strategy”, California Management Review, 50 (Fall), 57-76.
18. Fishenden, J. and Thompson, M. (2013) “Digital government, open architecture, and innovation: why public sector IT will never be the same again.” Journal of Public Administration Research and Theory, 23(4): 977-1004 (DOI: 10.1093/jopart/mus022)
19. Williamson, P. J. & De Meyer, A., 2012, “Ecosystem Advantage: How to Successfully Harness the Power of Partners” in California Management Review, Vol 55, No. 1 (Fall) ), 24-46.
20. Miles, R, Miles, G, Snow, C, Blomqvist, K and Rocha, H (2009), “The I-Form Organization”, California Management Review, Vol. 51, No.4, (Summer), 61-76.
21. Sidhu,I. (2010), Doing Both: How Cisco Captures Today’s Profit and Drives Tomorrow’s Growth, FT Press, New Jersey

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