Handbook of Human Resource Management Practice

requirements should also be noted. For example, these might include the development of a high performance culture, productivity improvements, the innovation and launch of new products or services, achieving better levels of service delivery to customers, or the extended use of IT or other forms of technology. Any proposed learning and training interventions should specify how they would contribute to the achievement of these strategic goals. A cost/benefit analysis is required that compares the benefits, expressed in quantified terms as far as possible, which will result from the learning activity. The business case has to convince management that there will be an acceptable return on the investment (ROI) in learning and training programmes. It can be difficult to produce realistic figures, although the attempt is worth making with the help of finance specialists. The case for investing in learning and development can refer to any of the following potential benefits: ● improve individual, team and corporate performance in terms of output, quality, speed and overall productivity; ● attract high-quality employees by offering them learning and development opportunities, increasing their levels of competence and enhancing their skills, thus enabling them to obtain more job satisfaction, to gain higher rewards and to progress within the organization; ● provide additional non-financial rewards (growth and career opportunities) as part of a total reward policy (see Chapter 42); ● improve operational flexibility by extending the range of skills possessed by employees (multiskilling); ● increase the commitment of employees by encouraging them to identify with the mission and objectives of the organization; ● help to manage change by increasing understanding of the reasons for change and providing people with the knowledge and skills they need to adjust to new situations; ● provide line managers with the skills required to manage and develop their people; ● help to develop a positive culture in the organization: one, for example, which is oriented towards performance improvement; ● provide higher levels of service to customers; ● minimize learning costs (reduce the length of learning curves). 608 ❚ Human resource development

DEVELOPING A LEARNING CULTURE A learning culture is one that promotes learning because it is recognized by top management, line managers and employees generally as an essential organizational process to which they are committed and in which they engage continuously. Reynolds (2004) describes a learning culture as a ‘growth medium’ that will ‘encourage employees to commit to a range of positive discretionary behaviours, including learning’ and which has the following characteristics: empowerment not supervision, self-managed learning not instruction, long-term capacity building not short-term fixes. It will encourage discretionary learning, which Sloman (2003a) believes takes place when individuals actively seek to acquire the knowledge and skills that promote the organization’s objectives. It is suggested by Reynolds (2004) that to create a learning culture it is necessary to develop organizational practices that raise commitment amongst employees and ‘give employees a sense of purpose in the workplace, grant employees opportunities to act upon their commitment, and offer practical support to learning’. He proposes the following steps: 1. Develop and share the vision – belief in a desired and emerging future. 2. Empower employees – provide ‘supported autonomy’; freedom for employees to manage their work within certain boundaries (policies and expected behaviours) but with support available as required. 3. Adopt a facilitative style of management in which responsibility for decisionmaking is ceded as far as possible to employees. 4. Provide employees with a supportive learning environment where learning capabilities can be discovered and applied, eg peer networks, supportive policies and systems, protected time for learning. 5. Use coaching techniques to draw out the talents of others by encouraging employees to identify options and seek their own solutions to problems. 6. Guide employees through their work challenges and provide them with time, resources and, crucially, feedback. 7. Recognize the importance of managers acting as role models: ‘The new way of thinking and behaving may be so different that you must see what it looks like before you can imagine yourself doing it. You must see the new behaviour and attitudes in others with whom you can identify’ (Schein, 1990). 8. Encourage networks – communities of practice. 9. Align systems to vision – get rid of bureaucratic systems that produce problems rather than facilitate work. Formulating and implementing learning and development strategies ❚ 609

IDENTIFYING LEARNING NEEDS All learning activities need to be based on an understanding of what needs to be done and why. The purpose of the activities must be defined and this is only possible if the learning needs of the organization and the groups and individuals within it have been identified and analysed. The basis of learning needs analysis Learning needs analysis is sometimes assumed to be concerned only with defining the gap between what is happening and what should happen, ie the difference between what people know and can do and what they should know and be able to do. This gap is what has to be filled by training. But this ‘deficiency’ model of training – only putting things right that have gone wrong – is limited. Learning is much more positive than that. It is more concerned with identifying and satisfying development needs – fitting people to take on extra responsibilities, increasing all-round competence, equipping people to deal with new work demands, multiskilling, and preparing people to take on higher levels of responsibility in the future. Areas for learning needs analysis Learning needs should be analysed, first, for the organization as a whole – corporate needs; second, for departments, teams, functions or occupations within the organization – group needs; and third, for individual employees – individual needs. These three areas are interconnected, as shown in Figure 41.1. The analysis of corporate needs will lead to the identification of learning needs in different departments or occupations, while these in turn will indicate what individual employees need to learn. The process operates in reverse. As the needs of individual employees are analysed separately, common needs emerge that can be dealt with on a group basis. The sum of group and individual needs will help to define corporate needs, although there may be some superordinate learning requirements that can be related only to the company as a whole to meet its business development needs – the whole learning plan may be greater than the sum of its parts. These areas of analysis are discussed below. Analysis of business and human resource plans Business and HR plans should indicate in general terms the types of skills and competencies that may be required in the future and the numbers of people with 610 ❚ Human resource development

those skills and competencies who will be needed. These broad indicators have to be translated into more specific plans that cover, for example, the outputs from training programmes of people with particular skills or a combination of skills (multiskilling). Surveys Special surveys may be carried out that analyse the information from a number of sources, eg performance reviews, to identify corporate and group learning and training needs. This information can be usefully supplemented by interviewing people to establish their views about what they need to learn. But they often find it difficult to articulate learning needs and it is best to lead with a discussion of the work they do and identify any areas where they believe that their performance and potential could be improved by a learning or training programme. An analysis should also be made of any areas where future changes in work processes, methods or job responsibilities are planned, and of any common gaps in skills or knowledge or weaknesses in performance that indicate a learning need. Further information should be derived from the evaluation of training, as described at the end of this chapter. Performance and development reviews Performance management processes, as described in Part VII of this book, should be a prime source of information about individual learning and development needs. The performance management approach to learning concentrates on the preparation of Formulating and implementing learning and development strategies ❚ 611 Corporate Group Individual Analysis of business plans Analysis of human resource plans Surveys Performance and development reviews Role analysis Learning specification Figure 41.1 Learning needs analysis – areas and methods

performance improvement programmes, personal development plans and learning contracts that lead to jointly determined action plans. The emphasis is on identifying learning needs for continuous development or to produce specific improvements in performance. Role analysis Role analysis is the basis for preparing role profiles that provide a framework for analysing and identifying learning needs. Role profiles set out the key result areas of the role but, importantly, also define the competencies required to perform the role. A good performance management process will ensure that role profiles are updated regularly and the performance review will be built round an analysis of the results achieved by reference to the key result areas and agreed objectives. The competency framework for the role is used to assess the level of competency displayed in achieving, or as the case may be, not achieving those results. An assessment can then be made of any learning required to develop levels of competency. Ideally, this should be a self-assessment by individuals, who should be given every encouragement to identify learning needs themselves. But these can be discussed with the individuals’ manager and agreement reached on how the learning needs should be met, by the individuals through self-managed learning, and/or with the help and support of their managers. The output of role analysis could be a learning specification, as illustrated in Figure 41.2. PLANNING AND IMPLEMENTING LEARNING AND DEVELOPMENT PROGRAMMES Every learning and development programme needs to be designed individually, and the design will continually evolve as new learning needs emerge, or when feedback indicates that changes are required. It is essential to consider carefully the objectives of the programme and to express these in the form of what behaviour is expected from those involved in the workplace (terminal behaviour). When planning a learning event, the process used should match the desired objectives for the event. The basis of learning and development programmes The planning and implementation of learning and development programmes is based on an understanding of learning needs. A training survey conducted in 2005 612 ❚ Human resource development

(CIPD, 2005e) produced the data set out below in response to the question, ‘Which skills does your organization need to develop in order to fulfil requirements in three years’ time?’ The respondents listed in order: 1. Management and leadership. 2. Communication. 3. Business skills. 4. Customer service. 5. Advanced technical skills. 6. Broader skill sets. 7. Coaching and mentoring. 8. Innovation. 9. IT skills. 10. Ability to adapt easily to change. Formulating and implementing learning and development strategies ❚ 613 LEARNING SPECIFICATION Role title: Product Manager Department: Marketing What the role holder must understand Learning outcomes Learning methods ● The product market ● Coaching: Marketing Manager and Advertising Manager ● The product specification ● Coaching: Operations Manager ● Market research availability ● Coaching: Market Research Manager ● Interpretation of marketing data ● Coaching: Market Research Manager ● Customer service requirements ● Customer Service Manager ● Techniques of product management ● Institute of Marketing courses What the role holder must be able to do Learning outcomes Learning methods ● Prepare product budget ● Coaching: Budget Accountant ● Prepare marketing plans ● Coaching: Mentor ● Conduct market reviews ● Coaching: Market Research Department ● Prepare marketing campaigns ● Read: Product Manager’s Manual ● Specify requirements for advertisers and ● Read: Product Manager’s Manual promotional material ● Liaise with advertising agents and creative ● Attachment to agency suppliers ● Analyse results of advertising campaigns ● Coaching: Mentor, read analyses ● Prepare marketing reports ● Read: previous reports, observe: marketing review meetings Figure 41.2 A learning specification

Account needs to be taken of the lessons that can be learnt from learning theory, especially those concerned with cognitive, experiential and social learning. These highlight the importance of providing people with the opportunity to learn for themselves, and emphasizes the importance of learning from experience and learning from other people. The concepts of self-directed learning and personal development planning are particularly important, but encouraging these processes needs to be reinforced by the provision of guidance and advice to learners, mainly from their line managers but also from learning specialists and through the provision by the organization of learning resource centres and e-learning programmes. Responsibility for the implementation of learning While individuals should be expected to take a considerable degree of responsibility for managing their own learning, they need the help and support of their line managers and the organization. Line managers have a key role in planning and facilitating learning by conducting performance and development reviews, agreeing learning contracts and personal development plans with their staff, and helping staff to implement those plans through the provision of learning opportunities and coaching. But they have to be encouraged to do this. They should understand that the promotion of learning is regarded as an important aspect of their responsibilities and that their performance in carrying it out will be assessed. They also need guidance on how they should carry out their developmental role. Responsibility for learning and development is being placed increasingly on managers and employees rather than training professionals. The latter are becoming learning facilitators rather than training providers or instructors. The direct role of training is becoming less important. As Stewart and Tansley (2002) point out, training specialists are focusing on learning processes, rather than the content of training courses. Carter et al (2003) argue that ‘The shifting organizational forms of training, coupled with multiple delivery methods, are not leading to a single new role for the trainer, but rather an array of different role demands.’ These roles include facilitator and change agent. As facilitators, learning and development specialists analyse learning needs and make proposals on how these can best be satisfied. They provide facilities such as learning resource centres and e-learning programmes, and plan and implement training interventions, often outsourcing training to external providers. Importantly, they provide guidance to line managers and help them to develop their skills in assessing development needs, personal development planning and coaching. Additionally, they are there to give advice and help to individuals on their learning plans. 614 ❚ Human resource development

Learning and development activities A balanced learning approach is required, making use of the various forms of learning and development referred to in Chapter 38. The aim should be to produce a coherent strategy that contains the plans for creating and maintaining a learning climate and developing and implementing complementary and mutually supportive learning activities such as coaching and mentoring. Details should be provided for each activity on its objectives, the methods to be used, its timing as part of a programme, how it is linked to other learning activities, who is responsible (emphasizing the role of individuals and their managers), and the business case for using it in terms of a cost/benefit assessment. The extent to which organizations use different approaches as revealed by a survey conducted in 2004 (IRS, 2004g) is shown in Table 41.1. EVALUATION OF LEARNING It is important to evaluate learning in order to assess its effectiveness in producing the outcomes specified when the activity was planned and to indicate where improvements or changes are required to make the training even more effective. As Tamkin et al (2002) suggest: Formulating and implementing learning and development strategies ❚ 615 Activity No of organizations using ‘regularly’ or ‘sometimes’ On-the-job induction 72 On-the-job skills updating 71 External conferences and workshops 70 Formal classroom training 67 Coaching 64 Mentoring 55 Off-the-job induction 49 Off-the-job skills updating 40 e-learning 35 Non-vocational training 22 Action learning sets 16 N = 79 Table 41.1 Use of learning activities (Source: IRS, 2004g)

Learning can be modelled as a chain of impact from the planning of learning to meet organizational or individual learning needs to the learning that takes place in a learning event, from learning to changed behaviour, and from changed behaviour to impact on others and the organization as a whole. It is at the planning stage that the basis upon which each category of learning event is to be evaluated should be determined. At the same time, it is necessary to consider how the information required for evaluation should be obtained and analysed. Approaches to the evaluation of learning have traditionally concentrated on the evaluation of training events as described below. But the trend is to concentrate more on the validation of the total learning process. Training evaluation defined The process of evaluating training has been defined by Hamblin (1974) as: ‘Any attempt to obtain information (feedback) on the effects of a training programme, and to assess the value of the training in the light of that information.’ Evaluation leads to control, which means deciding whether or not the training was worthwhile (preferably in cost/benefit terms) and what improvements are required to make it even more cost-effective. Evaluation is an integral feature of learning activities. In its crudest form, it is the comparison of objectives (criterion behaviour) with outcomes (terminal behaviour) to answer the question of how far the event has achieved its purpose. The setting of objectives and the establishment of methods of measuring results are, or should be, an essential part of the planning stage of any learning and development programme. Levels of evaluation Four levels of training evaluation have been suggested by Kirkpatrick (1994). Level 1. Reaction At this level, evaluation measures how those who participated in the training have reacted to it. In a sense, it is a measure of immediate customer satisfaction. Kirkpatrick suggests the following guidelines for evaluating reactions: ● determine what you want to find out; ● design a form that will quantify reactions; ● encourage written comments and suggestions; ● get 100 per cent immediate response; 616 ❚ Human resource development

● get honest responses; ● develop acceptable standards; ● measure reactions against standards, and take appropriate action; ● communicate reactions as appropriate. Research by Warr et al (1999) has shown that there is relatively little correlation between learner reactions and measures of training, or subsequent measures of changed behaviour. But as Tamkin et al (2002) point out, despite this, organizations are still keen to get reactions to training, and used with caution this can produce useful information on the extent to which learning objectives were perceived to be met and why. Level 2. Evaluating learning This level obtains information on the extent to which learning objectives have been attained. It will aim to find how much knowledge was acquired, what skills were developed or improved, and the extent to which attitudes have changed in the desired direction. So far as possible, the evaluation of learning should involve the use of tests before and after the programme – paper and pencil, oral or performance tests. Level 3. Evaluating behaviour This level evaluates the extent to which behaviour has changed as required when people attending the programme have returned to their jobs. The question to be answered is the extent to which knowledge, skills and attitudes have been transferred from the classroom to the workplace. Ideally, the evaluation should take place both before and after the training. Time should be allowed for the change in behaviour to take place. The evaluation needs to assess the extent to which specific learning objectives relating to changes in behaviour and the application of knowledge and skills have been achieved. Level 4. Evaluating results This is the ultimate level of evaluation and provides the basis for assessing the benefits of the training against its costs. The objective is to determine the added value of learning and development programmes – how they contribute to raising organizational performance significantly above its previous level. The evaluation has to be based on ‘before and after’ measures and has to determine the extent to which the fundamental objectives of the training have been achieved in areas such as increasing sales, raising productivity, reducing accidents or increasing customer satisfaction. Formulating and implementing learning and development strategies ❚ 617

Evaluating results is obviously easier when they can be quantified. However, it is not always easy to prove the contribution to improved results made by training as distinct from other factors and, as Kirkpatrick says: ‘Be satisfied with evidence, because proof is usually impossible to get.’ Perhaps the most powerful method of demonstrating that learning programmes pay is to measure the return on investment, as discussed below. Return on investment as a method of evaluation Return on investment (ROI) is advocated by some commentators as a means of assessing the overall impact of training on organizational performance. It is calculated as: Benefits from training (£) – costs of training (£) × 100 Costs of training (£) Kearns and Miller (1997) believe that only this sort of measure is useful in evaluating the overall impact of training. They argue that particular hard measures should be used to evaluate specific training; for example, if development aims to bring about greater awareness of customers then it should still be measured by the eventual effect on customer spend, customer satisfaction and number of customers. The pressure to produce financial justifications for any organizational activity, especially in areas such as learning and development, has increased the interest in ROI. The problem is that while it is easy to record the costs it is much harder to produce convincing financial assessments of the benefits. Kearns (2005a) provides a response to this concern: All business is about the art of speculation and the risk of the unknown. The trick here is not to try and work to a higher standard of credibility than anyone else in the organization. If accountants are prepared to guess about amortization costs or marketing directors to guess about market share why should a trainer not be prepared to have a guess at the potential benefits of training? He recommends the use of ‘a rule of thumb’ when using ROI to the effect that any training should improve the performance of trainees by at least 1 per cent. Thus if the return on sales training is being measured, the benefits could be calculated as 1 per cent of profit on sales. 618 ❚ Human resource development

Use of evaluation tools Research by The Industrial Society (2000) has shown that the Kirkpatrick model was used by 35 per cent of the 487 participants. Research by Twitchell et al (2000) found that many US organizations use levels 1 and 2 evaluations for at least some programmes, fewer than half even try level 3 and only a small percentage use level 4 evaluations. The number of respondents to the IRS 2004 training survey using different types of evaluation is shown in Table 41.2. Application of evaluation As Reid et al (2004) comment: ‘The more care that has been taken in the assessment of needs and the more precise the objectives, the greater will be the possibility of effective evaluation.’ This is the basis for conducting evaluation at various levels. Like the similar levels of evaluation suggested by Hamblin in 1976 (reactions, learning, job behaviour, impact on unit and organizational performance) the levels defined by Kirkpatrick are links in the chain. Training produces reactions, which lead Formulating and implementing learning and development strategies ❚ 619 Activity No of organizations using ‘regularly’ or ‘sometimes’ Immediate post-course questionnaire 74 Monitoring appraisal results 50 Observation of participants at work 49 Interviewing participants 48 Employee attitude surveys 44 Monitoring qualifications gained 42 Follow-up questionnaires 41 Monitoring test results 35 Survey line managers 34 Assessment of participant’s action plans 31 Evaluation framework/model 28 Customer surveys 28 Analysis of output/quality data 25 N = 79 Table 41.2 Use of evaluation tools (Source: IRS, 2004f)

to learning, which leads to changes in job behaviour, which lead to results at unit and organizational level. Trainees can react favourably to a course – they can enjoy the experience – but learn little or nothing. They can learn something, but cannot, or will not, or are not allowed to apply it. They apply it but it does no good within their own areas. It does some good in their function, but does not improve organizational effectiveness. Evaluation can take place at any level. In the Kirkpatrick scheme it is easier to start at level 1 and progress up with increasing difficulty to level 4. It could be argued that the only feedback from evaluation that matters is the result in terms of improved unit or organizational performance that training brings. But if this is hard to measure, training could still be justified in terms of any actual changes in behaviour that the programme was designed to produce. This is based on the assumption that the analysis of learning needs indicated that this behaviour is more than likely to deliver the desired results. Similarly, at the learning level, if a proper analysis of knowledge, skills and attitude requirements and their impact on behaviour has been conducted, it is reasonable to assume that if the knowledge, etc has been acquired, behaviour is likely to change appropriately. Finally, if all else fails, reactions are important in that they provide immediate feedback on the quality of training given (including the performance of the trainer), which can point the way to corrective action. 620 ❚ Human resource development

Rewarding people This part is concerned with the process of rewarding people in organizations. It starts in Chapter 42 with a general review of reward management, which includes descriptions of its application for directors and executives, sales staff and manual workers. This is followed in Chapter 43 with an examination of the concept of strategic reward. The rest of Part IX deals with the following aspects of reward management: Chapter 44 – Job evaluation Chapter 45 – Market rate analysis Chapter 46 – Grade and pay structures Chapter 46 – Contingent pay Chapter 47 – Employee benefits, pensions and allowances Chapter 48 – Managing reward systems Part IX

Reward management This chapter provides an overview of reward management. The concept of reward management, its strategic and detailed aims and its philosophy are discussed initially. Reference is also made to the economic factors that affect levels of pay. This is followed by descriptions of the elements of a reward management system and the concept of total reward. The chapter ends with descriptions of particular applications of reward management for directors and executives, sales staff and manual workers. REWARD MANAGEMENT DEFINED Reward management is concerned with the formulation and implementation of strategies and policies, the purposes of which are to reward people fairly, equitably and consistently in accordance with their value to the organization and thus help the organization to achieve its strategic goals. It deals with the design, implementation and maintenance of reward systems (reward processes, practices and procedures) that aim to meet the needs of both the organization and its stakeholders. 42

THE AIMS OF REWARD MANAGEMENT The aims of reward management are to: ● reward people according to what the organization values and wants to pay for; ● reward people for the value they create; ● reward the right things to convey the right message about what is important in terms of behaviours and outcomes; ● develop a performance culture; ● motivate people and obtain their commitment and engagement; ● help to attract and retain the high quality people the organization needs; ● create total reward processes that recognize the importance of both financial and non-financial rewards; ● develop a positive employment relationship and psychological contract; ● align reward practices with both business goals and employee values; as Brown (2001) emphasizes, the ‘alignment of your reward practices with employee values and needs is every bit as important as alignment with business goals, and critical to the realization of the latter’; ● operate fairly – people feel that they are treated justly in accordance with what is due to them because of their value to the organization: the ‘felt-fair’ principle of Jaques (1961); ● apply equitably – people are rewarded appropriately in relation to others within the organization, relativities between jobs are measured as objectively as possible and equal pay is provided for work of equal value; ● function consistently – decisions on pay do not vary arbitrarily and without due cause between different people or at different times; ● operate transparently – people understand how reward processes operate and how they are affected by them. THE PHILOSOPHY OF REWARD MANAGEMENT Reward management is based on a well-articulated philosophy – a set of beliefs and guiding principles that are consistent with the values of the organization and help to enact them. These include beliefs in the need to achieve fairness, equity, consistency and transparency in operating the reward system. The philosophy recognizes that if HRM is about investing in human capital from which a reasonable return is required, then it is proper to reward people differentially according to their contribution (ie the return on investment they generate). 624 ❚ Rewarding people

The philosophy of reward management recognizes that it must be strategic in the sense that it addresses longer-term issues relating to how people should be valued for what they do and what they achieve. Reward strategies and the processes that are required to implement them have to flow from the business strategy. Reward management adopts a ‘total reward’ approach, which emphasizes the importance of considering all aspects of reward as a coherent whole that is integrated with other HR initiatives designed to achieve the motivation, commitment, engagement and development of employees. This requires the integration of reward strategies with other HRM strategies, especially those concerning human resource development. Reward management is an integral part of an HRM approach to managing people. The philosophy will be affected by the business and HR strategies of the organization, the significance attached to reward matters by top management, and the internal and external environment of the organization. The external environment includes the levels of pay in the labour market (market rates) and it is helpful to be aware of the economic theories that explain how these levels are determined, as summarized in Table 42.1. THE ELEMENTS OF REWARD MANAGEMENT The elements of reward management are described below. Reward system A reward system consists of: ● Policies that provide guidelines on approaches to managing rewards. ● Practices that provide financial and non-financial rewards. ● Processes concerned with evaluating the relative size of jobs (job evaluation) and assessing individual performance (performance management). ● Procedures operated in order to maintain the system and to ensure that it operates efficiently and flexibly and provides value for money. Reward strategy Reward strategy sets out what the organization intends to do in the longer term to develop and implement reward policies, practices and processes that will further the achievement of its business goals. Reward management ❚ 625

626 ❚ Rewarding people Name of theory Summary of theory Practical significance The law of supply Other things being equal, if there is a Emphasizes the importance of and demand surplus of labour and supply exceeds labour market factors in the demand, pay levels go down; if affecting market rates. there is a scarcity of labour and demand exceeds the supply, pay goes up. Efficiency wage Firms will pay more than the market Organizations use efficiency theory rate because they believe that high wages theory (although they levels of pay will contribute to increases will not call it that) when they in productivity by motivating superior formulate pay policies which performance, attracting better candidates, place them as market leaders reducing labour turnover and persuading or at least above the average. workers that they are being treated fairly. This theory is also known as ‘the economy of high wages‘. Human capital A worker has a set of skills developed Employees and employers theory by education and training which each derive benefits from generates a stock of productive investment in creating human capital. capital. The level of pay should supply both parties with a reasonable return on that investment. Agency theory The owners of a firm (the principals) are A system of incentives to separate from the employees (the agents). motivate and reward This difference can create ‘agency costs’ acceptable behaviour. This because the agents may not be so process of ‘incentive alignment’ productive as the principals. The latter consists of paying for therefore have to devise ways of measurable results that are motivating and controlling the efforts deemed to be in the best of the former. interests of the owners. The effort bargain Workers aim to strike a bargain about the Management has to assess relationship between what they regard as what level and type of as reasonable contribution and what inducements it has to offer in their employer is prepared to offer to return for the contribution it elicit that contribution. requires from its workforce. Table 42.1 Economic theories explaining pay levels

Reward policies Reward policies address the following broad issues: ● the level of rewards, taking into account ‘market stance’, ie how internal rates of pay should compare with market rates, for example aligned to the median or the upper quartile rate; ● achieving equal pay; ● the relative importance attached to external competitiveness and internal equity; ● the approach to total reward; ● the scope for the use of contingent rewards related to performance, competence, contribution or skill; ● the role of line managers; ● transparency – the publication of information on reward structures and processes to employees. Total reward Total reward is the combination of financial and non-financial rewards available to employees. Total remuneration Total remuneration is the value of all cash payments (total earnings) and benefits received by employees. Base or basic pay The base rate is the amount of pay (the fixed salary or wage) that constitutes the rate for the job. It may be varied according to the grade of the job or, for manual workers, the level of skill required. Base pay will be influenced by internal and external relativities. The internal relativities may be measured by some form of job evaluation. External relativities are assessed by tracking market rates. Alternatively, levels of pay may be agreed through collective bargaining with trade unions or by reaching individual agreements. Base pay may be expressed as an annual, weekly or hourly rate. For manual workers this may be called a ‘time rate’ system of payment. Allowances for overtime, shift working, unsocial hours or increased cost of living in London or elsewhere may be added to base pay. The base rate may be adjusted to reflect increases in the cost of living or market rates by the organization, unilaterally or by agreement with a trade union. Reward management ❚ 627

Job evaluation Job evaluation is a systematic process for defining the relative worth or size of jobs within an organization in order to establish internal relativities and provide the basis for designing an equitable grade structure, grading jobs in the structure and managing relativities. It does not determine the level of pay directly. Job evaluation can be analytical or non-analytical. It is based on the analysis of jobs or roles, which leads to the production of job descriptions or role profiles. Job evaluation is described in Chapter 44. Market rate analysis Market rate analysis is the process of identifying the rates of pay in the labour market for comparable jobs to inform decisions on levels of pay within the organization. A policy decision may be made on how internal rates of pay should compare with external rates – an organization’s market stance. Market rate analysis is described in Chapter 45. Grade and pay structures Jobs may be placed in a graded structure according to their relative size. Pay levels in the structure are influenced by market rates. The pay structure may consist of pay ranges attached to grades, which provide scope for pay progression based on performance, competence, contribution or service. Alternatively, a ‘spot rate’ structure may be used for all or some jobs in which no provision is made for pay progression in a job. The various types of grade and pay structures are described in Chapter 46. Contingent pay Additional financial rewards may be provided that are related to performance, competence, contribution, skill or experience. These are referred to as ‘contingent pay’. Contingent payments may be added to base pay, ie ‘consolidated’. If such payments are not consolidated (ie paid as cash bonuses) they are described as ‘variable pay’. Contingent pay schemes are described in Chapter 47. Employee benefits Employee benefits include pensions, sick pay, insurance cover, company cars and a number of other ‘perks’ as described in Chapter 48. They comprise elements of remuneration additional to the various forms of cash pay and also include provisions for employees that are not strictly remuneration, such as annual holidays. 628 ❚ Rewarding people

Performance management Performance management processes (see Part VII) define individual performance and contribution expectations, assess performance against those expectations, provide for regular constructive feedback and result in agreed plans for performance improvement, learning and personal development. They are a means of providing non-financial motivation and may also inform contingent pay decisions. Non-financial rewards These are rewards that do not involve any direct payments and often arise from the work itself, for example, achievement, autonomy, recognition, scope to use and develop skills, training, career development opportunities and high quality leadership. The inter-relationships of these elements are shown in Figure 42.1. TOTAL REWARD The concept of total reward has emerged quite recently and is exerting considerable influence on reward management. This section of the chapter begins by defining what it means. The importance of the concept is then explained, and the section continues with an analysis of the components of total reward. It concludes with a description of how a total reward approach to reward management can be developed. Total reward defined As defined by Manus and Graham (2003), total reward ‘includes all types of rewards – indirect as well as direct, and intrinsic as well as extrinsic’. Each aspect of reward, namely base pay, contingent pay, employee benefits and non-financial rewards, which include intrinsic rewards from the work itself, are linked together and treated as an integrated and coherent whole. Total reward combines the impact of the two major categories of reward as defined below and illustrated in Figure 42.2: 1) transactional rewards – tangible rewards arising from transactions between the employer and employees concerning pay and benefits; and 2) relational rewards – intangible rewards concerned with learning and development and the work experience. A total reward approach is holistic: reliance is not placed on one or two reward mechanisms operating in isolation, and account is taken of every way in which people can be rewarded and obtain satisfaction through their work. The aim is to Reward management ❚ 629

maximize the combined impact of a wide range of reward initiatives on motivation, commitment and job engagement. As O’Neal (1998) has explained: ‘Total reward embraces everything that employees value in the employment relationship.’ 630 ❚ Rewarding people Job evaluation Grade and pay structure Market rate analysis Contingent pay Business and HR strategy Reward strategy Total remuneration Total reward Employee benefits Allowances Performance management Non-financial rewards Figure 42.1 Reward management: elements and interrelationships

An equally wide definition of total reward is offered by WorldatWork (2000) who state that total rewards are ‘all of the employer’s available tools that may be used to attract, retain, motivate and satisfy employees’. Thompson (2002) suggests that: Definitions of total reward typically encompass not only traditional, quantifiable elements like salary, variable pay and benefits, but also more intangible non-cash elements such as scope to achieve and exercise responsibility, career opportunities, learning and development, the intrinsic motivation provided by the work itself and the quality of working life provided by the organization. The conceptual basis of total rewards is that of configuration or ‘bundling’, so that different reward processes are interrelated, complementary and mutually reinforcing. Total reward strategies are vertically integrated with business strategies, but they are also horizontally integrated with other HR strategies to achieve internal consistency. Reward management ❚ 631 Transactional rewards Base pay Contingency pay Employee benefits Learning and development The work experience Relational rewards Total reward Total remuneration Non-financial/ intrinsic rewards Figure 42.2 The components of total reward

The significance of total reward Essentially, the notion of total reward says that there is more to rewarding people than throwing money at them. For O’Neal (1998), a total reward strategy is critical to addressing the issues created by recruitment and retention as well as providing a means of influencing behaviour: It can help create a work experience that meets the needs of employees and encourages them to contribute extra effort, by developing a deal that addresses a broad range of issues and by spending reward dollars where they will be most effective in addressing workers’ shifting values. Perhaps the most powerful argument for a total rewards approach was made by Pfeffer (1998): Creating a fun, challenging, and empowered work environment in which individuals are able to use their abilities to do meaningful jobs for which they are shown appreciation is likely to be a more certain way to enhance motivation and performance – even though creating such an environment may be more difficult and take more time than simply turning the reward lever. The benefits of a total reward approach are: ● Greater impact – the combined effect of the different types of rewards will make a deeper and longer-lasting impact on the motivation and commitment of people. ● Enhancing the employment relationship – the employment relationship created by a total reward approach makes the maximum use of relational as well as transactional rewards and will therefore appeal more to individuals. ● Flexibility to meet individual needs – as pointed out by Bloom and Milkovitch (1998): ‘Relational rewards may bind individuals more strongly to the organization because they can answer those special individual needs.’ ● Talent management – relational rewards help to deliver a positive psychological contract and this can serve as a differentiator in the recruitment market that is much more difficult to replicate than individual pay practices. The organization can become an ‘employer of choice’ and ‘a great place to work’, thus attracting and retaining the talented people it needs. 632 ❚ Rewarding people

MODEL OF TOTAL REWARD A model of total reward is shown in Figure 42.3. The upper two quadrants – pay and benefits – represent transactional rewards. These are financial in nature and are essential to recruit and retain staff but can be easily copied by competitors. By contrast, the relational (non-financial) rewards produced Reward management ❚ 633 Transactional (tangible) Communal Individual Relational (intangible) Figure 42.3 Model of total reward Pay Benefits ● base pay ● pensions ● contingent pay ● holidays ● cash bonuses ● health care ● long-term incentives ● other perks ● shares ● flexibility ● profit sharing Learning and development Work environment ● workplace learning and ● core values of the organization development ● leadership ● training ● employee voice ● performance management ● recognition ● career development ● achievement ● job design and role development (responsibility, autonomy, meaningful work, the scope to use and develop skills) ● quality of working life ● work/life balance ● talent management

by the lower two quadrants are essential to enhancing the value of the upper two quadrants. The real power, as Thompson (2002) states, comes when organizations combine relational and transactional rewards. REWARD MANAGEMENT FOR DIRECTORS AND EXECUTIVES Principles of corporate governance relating to remuneration of directors The key principles of corporate governance as it affects the remuneration of directors, which emerged from various reviews, namely the Cadbury, Greenbury and Hampel Reports, are as follows: ● Remuneration committees should consist exclusively of non-executive directors. Their purpose is to provide an independent basis for setting the salary levels and the rules covering incentives, share options, benefit entitlements and contract provisions for executive directors. Such committees are accountable to shareholders for the decisions they take and the non-executive directors who sit on them should have no personal financial interests at stake. They should be constituted as sub-committees of company boards and boards should elect both the chairman and the members. ● Remuneration committees must provide a remuneration package sufficient to attract, retain and motivate directors but should avoid paying more than is necessary. They should be sensitive to wider issues, eg pay and employment conditions elsewhere in the company. ● Remuneration committees should take a robust line on the payment of compensation where performance has been unsatisfactory. ● Performance-related elements should be designed to align the interests of directors and shareholders. ● Any new longer-term incentive arrangement should, preferably, replace existing executive share option plans, or at least form part of an integrated approach, which should be approved by shareholders. ● The pension consequences and associated costs to the company of increases in base salary should be considered. ● Notice or service contract periods should be set at, or reduced to, a year or less. However, in some cases periods of up to two years may be acceptable. 634 ❚ Rewarding people

Elements of directors’ and senior executives’ pay The main elements of directors’ and senior executives’ pay are basic pay, bonus or incentive schemes, share option and share ownership schemes. Basic pay Decisions on the base salary of directors and senior executives are usually founded on largely subjective views about the market worth of the individuals concerned. Remuneration on joining the company is commonly settled by negotiation, often subject to the approval of a remuneration committee. Reviews of base salaries are then undertaken by reference to market movements and success as measured by company performance. Decisions on base salary are important not only in themselves but also because the level may influence decisions on the pay of both senior and middle managers. Bonuses are expressed as a percentage of base salary, share options may be allocated as a declared multiple of basic pay and, commonly, pension will be a proportion of final salary. Bonus schemes Virtually all major employers in the UK (90 per cent according to recent surveys by organizations such as Monks and Hay) provide annual incentive (bonus) schemes for senior executives. Bonus schemes provide directors and executives with cash sums based on the measures of company and, frequently, individual performance. Typically, bonus payments are linked to achievement of profit and/or other financial targets and they are sometimes ‘capped’, ie a restriction is placed on the maximum amount payable. There may also be elements related to achieving specific goals and to individual performance. Share option schemes Many companies have share option schemes that give directors and executives the right to buy a block of shares on some future date at the share price ruling when the option was granted. They are a form of long-term incentive on the assumption that executives will be motivated to perform more effectively if they can anticipate a substantial capital gain when they sell their shares at a price above that prevailing when they took up the option. Executive restricted share schemes Under such schemes free shares are provisionally awarded to participants. These Reward management ❚ 635

shares do not belong to the executive until they are released or vested; hence they are ‘restricted’. The number of shares actually released to the executive at the end of a defined period (usually three or, less commonly, five years) will depend on performance over that period against specific targets. Thereafter there may be a further retention period when the shares must be held, although no further performance conditions apply. REWARD MANAGEMENT FOR SALES STAFF There are no hard-and-fast rules governing how sales representatives should be paid. It depends on the type of company, the products or services it offers its customers and the nature of the sales process – how sales are organized and made. The different methods are described in Table 42.2. PAYING MANUAL WORKERS The pay of manual workers takes the form of time rates, also known as day rates, day work, flat rates or hourly rates. Incentive payments by means of payment-by-results schemes may be made on top of a base rate. Time rates These provide workers with a predetermined rate for the actual hours they work. Time rates on their own are most commonly used when it is thought that it is impossible or undesirable to use a payment-by-results system, for example in maintenance work. From the viewpoint of employees, the advantage of time rates is that their earnings are predictable and steady and they do not have to engage in endless arguments with rate-fixers and supervisors about piece rate or time allowances. The argument against them is that they do not provide a direct incentive relating the reward to the effort or the results. Two ways of modifying the basic time rate approach are to adopt high day rates, as described below, or measured day work. Time rates may take the form of what are often called high day rates. These are higher than the minimum time rate and may contain a consolidated bonus rate element. The underlying assumption is that higher base rates will encourage greater effort without the problems created when operating an incentive scheme. High day rates are usually above the local market rates, to attract and retain workers. 636 ❚ Rewarding people

Reward management ❚ 637 Method Features Advantages Disadvantages When appropriate Salary only Straight salary, no Encourage No direct When commission or customer service motivation representing the bonus rather than high through money; company is more pressure selling; may attract important than deal with the under-achieving direct selling; problem of staff people who are staff have little who are working subsidized by influence on in a new or high achievers; sales volume (they unproductive increases fixed may simply be sales territory; costs of sales ‘order takers’); protects income because pay customer service when sales costs are not is all-important fluctuate for flexed with reasons beyond sales results the individual’s control Salary plus Basic salary plus Direct financial Relating pay to When it is commission cash commission motivation is the volume or believed that the calculated as a provided related value of sales is way to get more percentage of to what sales too crude an sales is to link sales volume or staff are there, approach and extra money to value to do may result in results but a base ie generate sales; staff going for salary is still but they are not volume by needed to attract entirely concentrating the many people dependent on on the easier to who want to be commission – sell products not assured of a they are those generating reasonable basic cushioned by high margins; salary which will their base salary may encourage not fluctuate but high-pressure who still aspire selling as in to increase that some financial salary by their services firms in own efforts the 1980s and 1990s Salary plus Basic salary plus Provide financial Do not have a When: flexibility bonus cash bonus motivation but clear line of in providing based on targets or sight between rewards is Table 42.2 Summary of payment and incentive arrangements for sales staff continued overleaf

638 ❚ Rewarding people Method Features Advantages Disadvantages When appropriate achieving and objectives can effort and reward; important; it is exceeding sales be flexed to may be complex felt that sales targets or quotas ensure that to administer; staff need to be and meeting particular sales sales motivated to other selling goals are representative focus on aspects objectives achieved, eg may find them of their work high margin hard to other than simply sales, customer understand and maximizing service resent the use of sales volume subjective judgements on performance other than sales Commission Only Provide a direct Lead to high- When: sales only commission financial pressure selling; performance based on a incentive; attract may attract the depends mainly percentage of high performing wrong sort of on selling ability sales volume or sales staff; ensure people who are and can be value is paid, that selling costs interested only measured by there is no basic vary directly with in making sales immediate sales salary sales; little direct and not results; staff are supervision customer service; not involved in required focus attention non-selling on high volume activities; rather than continuing profitability relationships with customers are relatively unimportant Additional Incentives, Utilize May be When it is non-cash prizes, cars, powerful difficult to believed that rewards recognition, non-financial administer; other methods of opportunities motivators do not payment need to to grow provide a be enhanced by direct providing incentive additional motivators Table 42.2 continued

Payment-by-result schemes Payment-by-result (PBR) schemes provide incentives to workers by relating their pay or, more usually, part of their pay to the number of items they produce or the time taken to do a certain amount of work. The main types of PBR or incentive schemes for individuals are piece work, work measured schemes, measured day work and performance-related pay. Team bonus schemes are an alternative to individual PBR and plant-wide schemes can produce bonuses that are paid instead of individual or team bonuses, or in addition to them. Each of these methods is described in Table 42.3 together with an assessment of their advantages and disadvantages for employers and employees, and when they are appropriate. Reward management ❚ 639 Table 42.3 Comparison of shopfloor payment-by-result schemes Select Main For employers For employees When features Advantages Disadvantages Advantages Disadvantages appropriate Piece Bonus directly Direct Lose control Predict and More difficult Fairly work related to motivation; over output; control to predict and limited output. simple, easy quality earnings in control application and to operate. problems. the short- earnings in the to work term; regulate longer-term; involving pace of work work may be unit themselves. stressful and production produce RSI. controlled by the person eg agriculture, garment manufacture. Work- Work Provides what Schemes are Appear to Ratings are For shortmeasured measurement appears to be a expensive, provide a still prone to cycle schemes used to ‘scientific’ time- more subjective repetitive determine method of consuming objective judgement work where standard relating and difficult method of and earnings changes in output levels reward to to run and relating pay can fluctuate the work over a period performance; can too easily to because of mix or or standard can produce degenerate performance; changes in design times for significant and cause employees work changes job/tasks; increases in wage drift can be requirements are bonus based productivity, because of involved in outside the infrequent, by reference to at least in loose rates. the rating control of down time performance the short-term. process to employees. is restricted, ratings ensure and compared fairness. managecontinued

640 ❚ Rewarding people Select Main For employers For employees When features Advantages Disadvantages Advantages Disadvantages appropriate with actual ment and performance supervision or time are capable saved. of managing and maintaining the scheme. Measured Pay fixed at a Employees are Performance High No Everyone day work high rate on under an targets can predictable opportunities must be the obligation to become easily earnings are for individuals totally understanding work at the attained norms provided. to be committed that a high specified level and may be rewarded to making it level of of difficult to in line with work; high performance performance. change. their own standards of against work- efforts. work measured measurestandards will ment are be essential; maintained. good control systems to identify shortfalls on targets. Perfor- Payments on Reward Measuring Opportunity Assessment As part of a mance top of base individual performance to be informing reward related rates are made contribution can be rewarded for performance harmonizapay related to without difficult; no own efforts pay decisions tion (shop individual resource to direct without may be biased, floor and assessments work incentive having to inconsistent staff) of measurement; provided. submit to a or programme; performance. relevant in high pressured unsupported as an technology PBR system. by evidence. alternative manufacturing. to work measured schemes or an enhancement of a high day rate system. Table 42.3 continued continued

Reward management ❚ 641 Select Main For employers For employees When features Advantages Disadvantages Advantages Disadvantages appropriate Group or Groups or Encourage Direct Bonuses can Depend on When team team teams are team incentive may be related effective work working is basis paid bonuses cooperation be limited; clearly to the measurement, important on the basis and effort; depends on joint efforts which is not and team of their not too good work of the group; always efforts performance individualized. measurement fluctuations available; can be as indicated or the in earnings individual accurately by work availability minimized. effort and measured measurement of clear group contribution and ratings or the output or not assessed; achievement productivity recognized. as of targets. targets. an alternative to individual PBR if this is not effective. Table 42.3 continued

Strategic reward Strategic reward management is about the development and implementation of reward strategies and the philosophies and guiding principles that underpin them. It provides answers to two basic questions: 1) where do we want our reward practices to be in a few years’ time? and 2) how do we intend to get there? It therefore deals with both ends and means. As an end it describes a vision of what reward processes will look like in a few years’ time. As a means, it shows how it is expected that the vision will be realized. The chapter starts with a definition of reward strategy and an explanation of why it is necessary. Consideration is then given to the structure and content of reward strategies. The guiding principles for inclusion in a reward strategy are discussed next and this is followed by a description of the development process and a note of the criteria for effectiveness. Examples of reward strategy are then given and implementation issues are assessed. The chapter ends with an examination of the important issue of line management capability. REWARD STRATEGY DEFINED Reward strategy is a declaration of intent that defines what the organization wants to do in the longer term to develop and implement reward policies, practices and 43

processes that will further the achievement of its business goals and meet the needs of its stakeholders. Reward strategy provides a sense of purpose and direction and a framework for developing reward policies, practices and process. It is based on an understanding of the needs of the organization and its employees and how they can best be satisfied. It is also concerned with developing the values of the organization on how people should be rewarded and formulating guiding principles that will ensure that these values are enacted. Reward strategy is underpinned by a reward philosophy that expresses what the organization believes should be the basis upon which people are valued and rewarded. Reward philosophies are often articulated as guiding principles. WHY HAVE A REWARD STRATEGY? In the words of Brown (2001): ‘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.’ There are four arguments for developing reward strategies: 1. You must have some idea where you are going, or how do you know how to get there, and how do you know that you have arrived (if you ever do)? 2. Pay costs in most organizations are by far the largest item of expense – they can be 60 per cent and often much more in labour-intensive organizations – so doesn’t it make sense to think about how they should be managed and invested in the longer term? 3. There can be a positive relationship between rewards, in the broadest sense, and performance, so shouldn’t we think about how we can strengthen that link? 4. As Cox and Purcell (1998) write: ‘The real benefit in reward strategies lies in complex linkages with other human resource management policies and practices.’ Isn’t this a good reason for developing a reward strategic framework which indicates how reward processes will be associated with HR processes so that they are coherent and mutually supportive? THE STRUCTURE OF REWARD STRATEGY Reward strategy should be based on a detailed analysis of the present arrangements for reward, which would include a statement of their strengths and weaknesses. This, as suggested by the CIPD (2004e), could take the form of a ‘gap analysis’, which 644 ❚ Rewarding people

compares what is believed should be happening with what is happening and indicates which ‘gaps’ need to be filled. A format for the analysis is shown in Figure 43.1. A diagnosis should be made of the reasons for any gaps or problems so that decisions can be made on what needs to be done to overcome them. It can then be structured under the headings set out below: 1. A statement of intentions – the reward initiatives that it is proposed should be taken. 2. A rationale – the reasons why the proposals are being made. The rationale should make out the business case for the proposals, indicate how they will meet business needs and set out the costs and the benefits. It should also refer to any people issues that need to be addressed and how the strategy will deal with them. 3. A plan – how, when and by whom the reward initiatives will be implemented. The plan should indicate what steps will need to be taken and should take account of resource constraints and the need for communications, involvement and training. The priorities attached to each element of the strategy should be indicated and a timetable for implementation should be drawn up. The plan should state who will be responsible for the development and implementation of the strategy. 4. A definition of guiding principles – the values that it is believed should be adopted in formulating and implementing the strategy. THE CONTENT OF REWARD STRATEGY Reward strategy may be a broad-brush affair simply indicating the general direction in which it is thought reward management should go. Additionally or alternatively, reward strategy may set out a list of specific intentions dealing with particular aspects of reward management. Broad-brush reward strategy A broad-brush reward strategy may commit the organization to the pursuit of a total rewards policy. The basic aim might be to achieve an appropriate balance between financial and non-financial rewards. A further aim could be to use other approaches to the development of the employment relationship and the work environment, which will enhance commitment and engagement and provide more opportunities for the contribution of people to be valued and recognized. Strategic reward ❚ 645

646 ❚ Rewarding people What should be happening What is happening What needs to be done 1. A total reward approach is adopted which emphasises the significance of both financial and non-financial rewards. 2. Reward policies and practices are developed within the framework of a well-articulated strategy which is designed to support the achievement of business objectives and meet the needs of stakeholders. 3. A job evaluation scheme is used which properly reflects the values of the organisation, is up-to-date with regard to the jobs it covers and is nondiscriminatory. 4. Equal pay issues are given serious attention. This includes the conduct of equal pay reviews which lead to action. 5. Market rates are tracked carefully so that a competitive pay structure exists which contributes to the attraction and retention of high quality people. 6. Grade and pay structures are based on job evaluation and market rate analysis, appropriate to the characteristics and needs of the organization and its employees, facilitate the management of relativities, provide scope for rewarding contribution, clarify reward and career opportunities, constructed logically, operate transparently and are easy to manage and maintain. 7. Contingent pay schemes reward contribution fairly and consistently, support the motivation of staff and the development of a performance culture, deliver the right messages about the values of the organization, contain a clear ‘line of sight’ between contribution and reward and are costeffective. 8. Performance management processes contribute to performance improvement, people development and the management of expectations, operate effectively throughout the organization and are supported by line managers and staff. Figure 43.1 A reward gap analysis continued

Strategic reward ❚ 647 Figure 43.1 continued What should be happening What is happening What needs to be done 9. Employee benefits and pension schemes meet the needs of stakeholders and are cost-effective. 10. A flexible benefits approach is adopted. 11. Reward management procedures exist which ensure that reward processes are managed effectively and that costs are controlled. 12. Appropriate use is made of computers (software and spreadsheets) to assist in the process of reward management. 13. Reward management aims and arrangements are transparent and communicated well to staff. 14. Surveys are used to assess the opinions of staff about reward and action is taken on the outcomes. 15. An appropriate amount of responsibility for reward is devolved to line managers. 16. Line managers are capable of carrying out their devolved responsibilities well. 17. Steps are taken to train line managers and provide them with support and guidance as required. 18. HR has the knowledge and skills to provide the required reward management advice and services and to guide and support line managers. 19. Overall, reward management developments are conscious of the need to achieve affordability and to demonstrate that they are cost effective. 20. Steps are taken to evaluate the effectiveness of reward management processes and to ensure that they reflect changing needs.

Examples of other broad strategic aims include: ● introducing a more integrated approach to reward management – encouraging continuous personal development and spelling out career opportunities; ● developing a more flexible approach to reward that includes the reduction of artificial barriers as a result of over-emphasis on grading and promotion; ● generally rewarding people according to their contribution; ● supporting the development of a performance culture and building levels of competence; and ● clarifying what behaviours will be rewarded and why. Specific reward initiatives The selection of reward initiatives and the priorities attached to them will be based on an analysis of the present circumstances of the organization and an assessment of the needs of the business and its employees. The following are examples of possible specific reward initiatives, one or more of which might feature in a reward strategy: ● the replacement of present methods of contingent pay with a pay for contribution scheme; ● the introduction of a new grade and pay structure, eg a broad-graded or career family structure; ● the replacement of an existing decayed job evaluation scheme with a computerized scheme that more clearly reflects organizational values; ● the improvement of performance management processes so that they provide better support for the development of a performance culture and more clearly identify development needs; ● the introduction of a formal recognition scheme; ● the development of a flexible benefits system; ● the conduct of equal pay reviews with the objective of ensuring that work of equal value is paid equally; ● communication programmes designed to inform everyone of the reward policies and practices of the organization; ● training, coaching and guidance programmes designed to increase line management capability (see also the last section of this chapter). 648 ❚ Rewarding people

GUIDING PRINCIPLES Guiding principles define the approach an organization takes to dealing with reward. They are the basis for reward policies and provide guidelines for the actions contained in the reward strategy. They express the reward philosophy of the organization – its values and beliefs about how people should be rewarded. Members of the organization should be involved in the definition of guiding principles that can then be communicated to everyone to increase understanding of what underpins reward policies and practices. However, employees will suspend their judgement of the principles until they experience how they are applied. What matters to them are not the philosophies themselves but the pay practices emanating from them and the messages about the employment ‘deal’ that they get as a consequence. It is the reality that is important, not the rhetoric. Reward guiding principles may refer to concerns such as: ● developing reward policies and practices that support the achievement of business goals; ● providing rewards that attract, retain and motivate staff and help to develop a high performance culture; ● maintaining competitive rates of pay; ● rewarding people according to their contribution; ● recognizing the value of all staff who are making an effective contribution, not just the exceptional performers; ● allowing a reasonable degree of flexibility in the operation of reward processes and in the choice of benefits by employees; ● devolving more responsibility for reward decisions to line managers. An example of a statement of reward philosophy and guiding principles is given in Figure 43.2. DEVELOPING REWARD STRATEGY The formulation of reward strategy can be described as a process for developing and defining a sense of direction. The main phases are: 1. The diagnosis phase, when reward goals are agreed, current policies and practices assessed against them, options for improvement considered and any changes agreed. Strategic reward ❚ 649

2. The detailed design phase, when improvements and changes are detailed and any changes tested (pilot testing is important). 3. The final testing and preparation phase. 4. The implementation phase, followed by ongoing review and modification. A logical step-by-step model for doing this is illustrated in Figure 43.3. This incorporates ample provision for consultation, involvement and communication with stakeholders, who include senior managers as the ultimate decision makers as well as employees and line managers. In practice, however, the formulation of reward strategy is seldom as logical and linear a process as this. As explained in Chapter 7, strategies evolve. Reward strategists have to respond to changes in organizational requirements, which are happening all the time. They need to track emerging trends in reward management and may modify their views accordingly, as long as they do not leap too hastily on the latest bandwagon. 650 ❚ Rewarding people Reward philosophy Principles ● We will provide an innovative reward package ● Innovative and differentiated policies and that is valued by our staff and communicated benefits. brilliantly to reinforce the benefits of working for B&Q plc. ● Reward investment will be linked to company ● Basic salaries will be competitive. performance so that staff share in the success ● Total compensation will be upper quartile. they create and, by going the extra mile, ● We share the success of B&Q with all receive above average reward compared to employees. local competitors. ● Increase variable pay as a percentage of overall to drive company performance. ● Pay for performance. ● Performance objectives must have line of sight for individuals/team. ● All parts of the total reward investment will ● Non-cash recognition is a powerful driver of add value to the business and reinforce our business performance. core purpose, goals and values. ● Pay can grow without promotion. ● Rewards are flexible around individual aspirations. ● We will not discriminate on anything other than performance. Figure 43.2 Reward philosophy and guiding principles at B&Q

It may be helpful to set out reward strategies on paper for the record and as a basis for planning and communication. But this should be regarded as no more than a piece of paper that can be torn up when needs change – as they will – not a tablet of stone. COMPONENTS OF AN EFFECTIVE REWARD STRATEGY Brown (2001) has suggested that effective reward strategies have three components: Strategic reward ❚ 651 Analyse business strategy and business needs Develop HR strategy Analyse present HR and reward policies and practices Assess needs of stakeholders – line managers and other employees Consult and involve senior management Consult, involve and communicate with employees Brief and train Final communications Develop and justify reward strategy and define guiding principles Prepare and test plan Implement plan Review and modify as required Figure 43.3 A model of the reward strategy development process

1. They have to have clearly defined goals and a well-defined link to business objectives. 2. There have to be well-designed pay and reward programmes, tailored to the needs of the organization and its people, and consistent and integrated with one another. 3. Perhaps most important and most neglected, there needs to be effective and supportive HR and reward processes in place. REWARD STRATEGY PRIORITIES The CIPD (2005d) survey into reward policy and practice covering 477 organizations with 1.5 million employees established that 45 per cent of employers had a formal reward strategy that was aligned to the business and human resource strategies of the organization. The top priority, as shown in Figure 43.4, is supporting the goals of the organization, followed by rewarding, recruiting and retaining high performers. 652 ❚ Rewarding people 0% 50% 100% Figure 43.4 Reward strategy priorities (Source: CIPD 2005d) Support business goals 79% Reward high performers 64% Recruit and retain high performers 62% Link pay to the market 53% Maintain market competitiveness 51% Manage pay costs 50% Ensure internal equity 41%

EXAMPLES OF REWARD STRATEGIES The source of the following examples of reward strategies is e-reward (2004a). AEGON UK A good example of the development of a reward strategy is provided by AEGON UK, the insurance group with 4,000 employees. Like many companies, AEGON UK’s pay systems and supporting processes such as job evaluation and performance appraisal used to stand alone, apart from other HR processes. The company has adopted a more holistic approach to the development of its new reward system – which it calls the Human Resources Integrated Approach – so that from every angle staff can look at the elements of reward, pay management, performance management and career development and observe that they are consistent and linked. The stated objective of this programme is ‘to develop a set of HR processes which are integrated with each other and with the business objectives’. In other words, AEGON UK aims to ensure that the processes of recruiting, retaining and motivating people, as well as measuring their performance, are in line with what the business is trying to achieve. The Human Resources Integrated Approach is underpinned by a competency framework. The established competencies form the basis of the revised HR processes: ● Recruitment: competency based with multi-assessment processes as the basic approach. ● Reward: market driven with overall performance dictating rate of progress of salaries within broad bands rather then existing grades. ● Performance management: not linked to pay, concentrated on personal development, objective setting and competency development. ● Training and development: targeted on key competencies and emphasizing selfdevelopment. Norwich Union Insurance Progression, Performance and Pay is the name given to Norwich Union Insurance’s new total reward strategy. It comprises four main elements: 1. Reward – salary and benefits, variable pay, all-employee share option plan and incentive awards. 2. Career framework – meaningful job content and career opportunities. 3. Performance – challenging work; recognition and brand supporting behaviours. 4. Development – learning opportunities and personal development. Strategic reward ❚ 653

As stated in the Norwich Union Insurance’s documentation and illustrated in Figure 43.5: These initiatives… support our commitment to the one team culture reflected in our balanced scorecard. The Progression, Performance & Pay framework is underpinned by the brand values: Progressive, Shared benefit and Integrity. These should be reflected in the way we agree objectives and use the skills, knowledge and behaviours model. Progression, Performance & Pay moves us towards ‘total reward’ where financial reward is just one element of the reward package. Other elements are benefits, recognition of performance, career opportunities and personal development. In our model these are expressed through reward, performance, career framework and development. This gives us the tools to help build NUI as a great place to work, which attracts and retains quality staff. The framework was accompanied by a commitment from senior management: ● to recognize our best people through career opportunities and reward packages; ● to develop all staff to their full potential; 654 ❚ Rewarding people development progression, performance & pay career framework reward performance ● pay ● benefits ● learning opportunities ● personal development ● meaningful job content ● career opportunities ● challenging work ● recognition ● brand supporting behaviour Figure 43.5 The Norwich Union Insurance Progression, Performance & Pay framework

● to widen career opportunities for all; ● to provide managers with the means to recognize and reward performance locally. Integrated reward at Kwik-Fit B&Q Will Astill, Reward Manager of B&Q, a retail chain with 25,000 employees, which completed a strategic reward review in 2003, explained to e-reward that: An overriding theme running through our review was on the desirability of adopting a strategic approach. It wasn’t a case of ‘let’s follow the best practice’, nor were we lured into adopting the latest fads and fashions. Applying a bespoke system – taking what someone has done before and adapting it to your organization – will not push you ahead of rivals. Our emphasis throughout the two-year process was on what’s right for the business. Strategic reward ❚ 655 ‘make the work worth it’ Organization design Reward Performance management Strategy, vision and values What should I be doing? How should I be doing it? ● roles and accountabilities ● communications and clarification What’s in it for me? ● base pay ● incentive pay ● benefits ● flexibility ● recognition How am I doing? How can I grow? ● learning and development ● performance culture ● coaching Figure 43.6 Integrated reward model – Kwik-fit

Other examples Other examples are given in Table 43.1 of the ways in which organizations have responded to the needs established by their business strategy and the business and reward issues they are facing. In each case the organizations started with broad-brush statements about their intentions and proceeded from there to prepare action plans and implementation programmes for specific innovations that had been fully justified by a cost/benefit analysis. IMPLEMENTING REWARD STRATEGY Formulation is easy, implementation is hard. In the UK more attention is now being given to how organizations can make things happen. It is recognized that a pragmatic 656 ❚ Rewarding people Organization Business strategy Business/reward Reward strategy issues Food distribution Increase efficiency Poor team work Broad-banding Innovate Inflexible Team pay Cost reduction Narrow focus Gain-sharing Engineering Maintain market share Skill-based pay not Link operating plan manufacturing Increase competitive working and performance edge PRP only for managers management Develop more Performance Replace skill-based sophisticated planning appraisal ineffective pay processes Introduce PRP for all International bank International growth Transactional rather Replace incremental Enhance customer than relational approach scales service Incremental scales Introduce Maintain market Pay for jobs not people contribution-related leadership pay Revise performance management Care provider, Growth by improving Flexibility Competence-related voluntary sector service delivery Cost of people pay Develop new projects Competence of people Broad-banding Win more contracts Table 43.1 Examples of reward strategies and their derivation

approach is required – what’s good is what works. It is also appreciated that implementation presents a massive change management challenge. The practical advice on managing changes in reward systems given by Paul Craven, Compensation Director, R&D, GlaxoSmithKline was: ‘Don’t expect people to change overnight and don’t try to force change. It is better to reinforce desirable behaviour than to attempt to enforce a particular way of doing things.’ The advice given by Nicki Denby, Performance and Reward Director, Diageo was to: ● keep it simple, but simple isn’t easy; ● ensure that the HR department is not developing policies and practices on its own, which are then tagged as just another HR initiative rather than something which is owned by the organization as a whole; ● not only explain the planned changes, the rationale behind them, and how they affect the workforce, but also communicate details of who was involved in the development process so that unnecessary fears are allayed. Will Astill of B&Q had three pieces of advice on implementation: 1. the value of in-depth employee consultation should never be undervalued; 2. no initiative should be implemented without looking at the return on investment; and 3. evaluate the effectiveness of programmes and take action as required. REWARD STRATEGY AND LINE MANAGEMENT CAPABILITY The trend is to devolve more responsibility for managing reward to line managers. Some will have the ability to respond to the challenge and opportunity; others will be incapable of carrying out this responsibility without close guidance from HR; some may never be able to cope. Managers may not always do what HR expects them to do and if compelled to, they may be half-hearted about it. This puts a tremendous onus on HR and reward specialists to develop line management capability, to initiate processes that can readily be implemented by line managers, to promote understanding by communicating what is happening, why it is happening and how it will affect everyone, to provide guidance and help where required and to provide formal training as necessary. Strategic reward ❚ 657

Job evaluation Job evaluation is of fundamental importance in reward management. It provides the basis for achieving equitable pay and is essential as a means of dealing with equal pay for work of equal value issues. In the 1980s and 1990s job evaluation fell into disrepute because it was alleged to be bureaucratic, time-consuming and irrelevant in a market economy where market rates dictate internal rates of pay and relativities. However, as the e-reward 2003 survey of job evaluation showed, job evaluation is still practised widely and, indeed, its use is extending, not least because of the pressures to achieve equal pay. In this chapter: ● job evaluation is defined; ● the different types of job evaluation schemes are described; ● information on the incidence of job evaluation is provided; ● the use of computers in job evaluation is discussed; ● the arguments for and against job evaluation are summarized; ● consideration is given to criteria for choice; ● the process of developing a point-factor scheme is described; ● conclusions are reached about using job evaluation effectively. 44

JOB EVALUATION DEFINED Job evaluation is a systematic process for defining the relative worth or size of jobs within an organization in order to establish internal relativities. It provides the basis for designing an equitable grade and pay structure, grading jobs in the structure and managing job and pay relativities. Aims Job evaluation aims to: ● establish the relative value or size of jobs (internal relativities) based on fair, sound and consistent judgements; ● produce the information required to design and maintain equitable and defensible grade and pay structures; ● provide as objective as possible a basis for grading jobs within a grade structure, thus enabling consistent decisions to be made about job grading; ● enable sound market comparisons with jobs or roles of equivalent complexity and size; ● be transparent – the basis upon which grades are defined and jobs graded should be clear; ● ensure that the organization meets equal pay for work of equal value obligations. The last aim is important. In its Good Practice Guide on Job Evaluation Schemes Free of Sex Bias the Equal Opportunities Commission (2003) states that: ‘Non-discriminatory job evaluation should lead to a payment system which is transparent and within which work of equal value receives equal pay regardless of sex.’ Approaches Job evaluation can be analytical or non-analytical. Jobs can also be valued by reference to their market rates – ‘market pricing’. These approaches are described below. ANALYTICAL JOB EVALUATION Defined Analytical job evaluation is the process of making decisions about the value or size of jobs, which are based on an analysis of the level at which various defined factors or 660 ❚ Rewarding people