Assessing Reward Effectiveness

Transcription

1 Assessing Reward Effectiveness HR Tomorrow 2014 April 2014 Tom McMullen, Adam Kahle, and Dow Scott, Ph.D

2 About Hay Group Hay Group consults with 9,000 clients worldwide in a wide variety of areas, including: Organizational effectiveness Managerial and executive assessment Compensation and benefits Performance management Executive remuneration and corporate governance Employee and customer attitude research Offices in 48 countries Employees worldwide International clients 2

3 About Dow Scott Dow Scott, Ph.D. is a Professor of Human Resources in the Quinlan School of Business Administration at Loyola University Chicago and President of Performance Development International; a management consulting firm. Dr. Scott s consultation and research focuses upon: Compensation and incentive pay Attendance improvement Team and HR development Recruiting and staffing systems HR program evaluation Performance Development International, LLC PDI is dedicated to helping our clients create a competitive advantage through people. We are committed to providing quality and personalized service. We support our clientele through: Customized evaluations and assessments of specific HR strategies, policies and programs. Development of state of the art customized HR programs and high performance organizations. Employee involvement at all levels, thereby fostering commitment and accountability for results. Linking HR programs to organizational performance. 3

4 01 Background

5 A disconnect? Where reward professionals spend their time Externally benchmarking reward amounts and design Managing compensation fairness Controlling compensation and benefits costs What CEOs are demanding Optimizing productivity and cost effectiveness Engaging employees Developing and retaining key talent Aligning human capital and reward with business strategy Note: per recent Hay Group, Conference Board and SHRM research 5

6 Failure to evaluate reward effectiveness The disconnect causes the following problems: HR and Compensation can t answer C-suite questions about strategic effectiveness of reward programs Limits ability to improve reward policies, programs and practices Forces pay policy and program decisions to be based on gut and anecdotal information Indicates reward professionals are out of step with senior management 6

7 Evidenced-based decisions Increased demands that business decisions be based on data, facts with proper context Data/facts from inside and outside the organization Context includes strategy, culture and process Evidenced-based decisions require: Clear program objectives and purpose Rigorous data collection and analysis Implementable solutions Barry Beracha, former chief executive at Sara Lee, reportedly kept a sign on his desk that said, In God we trust. All others bring data. 7

8 Previous research findings Hay Group - Loyola University - WorldatWork Studies 47% evaluate base and variable-pay programs - most informally (2005) Less than 20% formally evaluated their reward communications (2006) 11% focus on reward ROI; but 48% plan to do so in next 2-3 years (2013) Other research (primarily United Kingdom) Corby, et al. (2009) found little formal evaluation of pay programs and pay structures CIPD survey and E-Reward Surveys (2009) found 32% and 12% of companies evaluated reward programs, respectively Armstrong, Brown & Reilly (2011) case study found little interest in reward program evaluation 8

9 The world has changed! CEOs understand the impact human capital and rewards have on organization effectiveness...transforming how we think about rewards What was: Pay is a cost which must be minimized What is: Pay is an investment which must be optimized Reward optimization starts with systematic and comprehensive assessment

10 Our research questions Our survey asked the following key questions What is senior executive interest in reward effectiveness? How is reward effectiveness assessed? How successful are methods in assessing effectiveness? What challenges do reward professionals face? What are best practices? 10

11 02 Study Methods

12 Sample Surveyed Hay Group registered website users and other groups (e.g., Chicago Compensation Association) Over 380 organizations participated Organizations primarily in North America and Europe Respondents include senior management, HR and reward professionals 12

13 Representative participants 13 13

14 Industry sector Manufacturing 23% Finance & Insurance 14% Retail Trade 9% Professional, Scientific & Technical Svcs 8% Public Administration 4% Utilities 3% Transportation & Warehousing 3% Healthcare & Social Assistance 3% Educational Services 3% Accommodations & Food Services 3% Other Services (except Public Adm) 3% Wholesale Trade 2% Mining 2% Information 1% Real Estate & Rental & Leasing 1% Agriculture, Forestry, Fishing & Hunting 1% Construction 1% Arts, Entertainment & Recreation 1% Other 15% 14

15 Company revenues 15

16 Geographic region 16

17 Ownership status Not-forprofit 8% Govt or public sector 9% Other 4% Publicly traded 44% Privately owned 35% 17

18 03 Research Findings

19 Management most interested in... Area C-Suite HR Comp Avg How reward programs link to enterprise or corporate performance How externally competitive the reward program is for benchmark jobs How reward programs link to individual performance How reward programs align with the business strategy and culture of your organization How reward programs support overall employee engagement or commitment How reward programs affect employee motivation and effort 87% 77% 80% 81% 80% 75% 76% 77% 83% 73% 73% 77% 80% 73% 77% 77% 82% 77% 67% 75% 87% 73% 61% 74% How total labor costs compare to competitors 82% 74% 64% 73% 19

20 Management least interested in... Area C-Suite HR Comp Avg How reward programs affect employee retention or turnover How well employees understand their reward programs How reward programs compare to "best practices" in other organizations How reward programs link to team, department, or unit performance 76% 71% 61% 69% 80% 66% 61% 69% 75% 63% 64% 67% 67% 59% 58% 61% The ROI of individual reward programs (i.e. base, STI, LTI, benefits, etc.) The return-on-investment (ROI) of the organization's entire suite of reward programs How reward programs may discriminate based on protected class status (e.g., age, gender, race) 64% 53% 59% 59% 60% 51% 55% 55% 49% 37% 36% 41% 20

21 Surprises? Affirmations?

22 Most used assessment processes At 80%+ usage: Employee exit interviews Cash compensation surveys Informal management feedback Informal employee feedback Employee turnover rates Formal feedback via employee attitude surveys 22

23 Assessment method effectiveness: Macro measures Method C-Suite HR Comp Avg Return on investment (ROI) calculating reward program investment relative to results 26% 19% 38% 28% Employee or work unit productivity 47% 45% 42% 45% Assess the degree to which reward programs are aligned with the business strategy 59% 59% 58% 59% 23

24 Assessment method effectiveness: External benchmarking Method C-Suite HR Comp Avg Purchased cash compensation surveys from survey providers to compare compensation levels 72% 72% 81% 75% Free cash compensation surveys via websites or recruiting firms to compare compensation levels Purchased total remuneration surveys (ie cash compensation plus benefits values) Reward program design surveys from surveys, consultant assessment, etc. Total current labor cost benchmarking with competitors 16% 12% 17% 15% 86% 78% 70% 78% 56% 58% 56% 57% 57% 56% 54% 56% 24

25 Assessment method effectiveness: Employee feedback Method C-Suite HR Comp Avg Informal employee feedback regarding reward program effectiveness 42% 39% 36% 39% Informal manager feedback regarding reward program effectiveness Formal feedback from employee engagement surveys. Reward focused formal employee feedback (e.g. surveys, focus groups or interviews) Reward-focused formal manager feedback (e.g. surveys, focus groups or interviews 51% 51% 40% 47% 67% 67% 61% 65% 60% 54% 56% 57% 61% 62% 52% 58% 25

26 Assessment method effectiveness: Operational metrics Method C-Suite HR Comp Avg Turnover rates across most occupations and jobs 47% 51% 47% 48% Rejection or acceptance of job offers 34% 41% 33% 36% Exit interviews or surveys of departed employees 51% 53% 37% 47% Time required to fill job openings 36% 35% 46% 39% Assessed value of human capital (e.g., replacement cost of talent) 38% 40% 40% 40% Protected-class analysis (e.g., gender, race, age, etc) 38% 40% 42% 40% 26

27 Assessment method effectiveness: Key talent Method C-Suite HR Comp Avg Key talent turnover rates among high potential employees, key jobs or high performance employees 65% 61% 58% 61% Bench strength (staffing pipeline) for key positions 55% 49% 49% 51% 27

28 What assessment methods work best in your organization?

29 Future focus for assessment: Macro measures Method C-Suite HR Comp Avg Return on investment (ROI) calculating reward program investment relative to results 26% 32% 42% 33% Employee or work unit productivity 18% 19% 19% 19% Assess the degree to which reward programs are aligned with the business strategy 55% 47% 50% 50% 29

30 Future focus for assessment: External benchmarking Method C-Suite HR Comp Avg Purchased cash compensation surveys from survey providers to compare compensation levels 22% 19% 21% 21% Free cash compensation surveys via websites or recruiting firms to compare compensation levels Purchased total remuneration surveys (ie cash compensation plus benefits values) Reward program design surveys from surveys, consultant assessment, etc. Total current labor cost benchmarking with competitors 13% 7% 4% 8% 33% 28% 30% 30% 20% 25% 20% 22% 22% 19% 29% 23% 30

31 Future focus for assessment: Employee feedback Method C-Suite HR Comp Avg Informal employee feedback regarding reward program effectiveness 30% 23% 27% 27% Informal manager feedback regarding reward program effectiveness Formal feedback from employee engagement surveys. Reward focused formal employee feedback (e.g. surveys, focus groups or interviews) Reward-focused formal manager feedback (e.g. surveys, focus groups or interviews 26% 25% 27% 26% 30% 35% 27% 31% 34% 27% 27% 29% 29% 35% 31% 31% 31

32 Future focus for assessment: Operational metrics Method C-Suite HR Comp Avg Turnover rates across most occupations and jobs 20% 17% 23% 20% Rejection or acceptance of job offers 20% 21% 19% 20% Exit interviews or surveys of departed employees 18% 21% 19% 19% Time required to fill job openings 29% 29% 15% 24% Assessed value of human capital (e.g., replacement cost of talent) 34% 35% 32% 34% Protected-class analysis (e.g., gender, race, age, etc) 20% 24% 18% 20% 32

33 Future focus for assessment: Key talent Method C-Suite HR Comp Avg Key talent turnover rates among high potential employees, key jobs or high performance employees 33% 37% 43% 38% Bench strength (staffing pipeline) for key positions 49% 49% 43% 47% 33

34 Barriers to assessing reward program effectiveness Area C-Suite HR Comp Avg Lack of budget, time or resources to invest in assessment of reward programs Lack of methodology or expertise (e.g., not sure how to get reliable information) Lack of senior management interest or commitment Not convinced enough value will be achieved to justify the investment 65% 65% 80% 70% 60% 49% 50% 53% 29% 42% 46% 39% 28% 38% 39% 35% 34

35 What are your challenges?

36 Respondents: Best Practices Benchmarking Internal AND external benchmarking surveys and lots of communication Compensation level and design benchmarking Completing reward practices surveys such as this one Operational/financial metrics analysis Tracking reward program levels and payouts with key business metrics Comparing reward payouts to organizational performance improvement Using dashboards with selected KPI's, benchmark data comparisons Monthly reporting analysis against prior year Alignment of rewards to business strategy Actually connecting rewards with documented performance, as opposed to anecdotal evidence formerly used Aligning corporate strategy down to individual goals and objectives Clarify reward strategy, design work, assess employee preferences Linking rewards to key business measures 36

37 Respondents: Best Practices (cont.) Engagement surveys & other forms of employee feedback In-house developed culture survey and other surveys like Best Places to Work and Most Admired surveys Employee / manager focus groups to ensure alignment of reward goals Informal feedback of management and employees 1-to-1 conversations with leaders to get their views on effectiveness Communications Consistent reference to program objectives stressing that people make pay decisions, not the systems Educating leadership on total value of rewards, application and external comparison We are working to build awareness of current offerings via Total Reward Statements 37

38 04 Conclusions & Recommendations

39 Assessing Reward Effectiveness Effectively 1. Make a strong business case for assessment 2. Take a holistic & balanced approach 3. Build ongoing assessment into reward program design & implementation 4. Involve employees and managers in the process 5. Go beyond cash compensation benchmarking 6. Invest the time and resources to be successful 39

40 Strong business case To get a seat at the table, HR must: Demonstrate how reward programs supports the business and talent management strategy Provide evidence linking reward effectiveness and business performance Demonstrate ability to make evidence-based decisions Strategies for making the business case Show how other organizations assess reward strategies and the impact on business performance Assess your reward programs by a holistic and balanced process 40

41 Holistic and balanced approach Use formal, consistent, longitudinal assessment processes Balance financial, operational and perception measures Monitor quantitative and qualitative measures of effectiveness over time Obtain board, executive, manager and employee opinions Don t get hung-up on false precision Make program improvements as needed 41

42 Perceptual Quantitative ($) Holistic and balanced approach External $ Benchmarking Cash compensation surveys Benefits prevalence surveys Total remuneration surveys Total labor cost benchmarking Reward design prevalence surveys (financial/non-financial) ROI Benchmarking ROI/productivity Analysis Compensation levels vs. financial/operational ratios Turnover rates key talent retention Bench strength - quality and quantity Cost of replacing workers External Perception Benchmarking Comparison of employee opinion survey w/other organizations Employer brand/reputation benchmarking (e.g., best places to work, most admired companies) External Internal Perception Benchmarking Employee opinion survey (longitudinal), focus groups, Perceptions of reward effectiveness, fairness, competitiveness, preferences Perceptions of alignment with business strategy, performance Internal 42

43 Holistic and balanced approach Need to take a multi dimensional approach ROI tells you how one investment compares to another, not how to improve it Must examine the drivers of financial results as well Results Behavior Understanding Perception Scott, K.D., Morajda, D., and McMullen, T.D., (2006) Evaluating pay program effectiveness. WorldatWork Journal. 15(2),

44 Recommendations Build assessment into reward design and implementation Clarify reward philosophy and strategies Establish specific goals for reward programs Develop measures of effectiveness in advance Establish a process for collecting and analyzing data Report findings and strategies for improvement Involve managers and employees Recognize that employee and manager involvement builds program commitment and trust Use manager and employee feedback to improve program quality and effectiveness Use assessment to reinforce program values and build reward program understanding and acceptance 44

45 Recommendations Go beyond pay benchmarking Traditional compensation benchmarking tells a small part of the story Extend to total remuneration benchmarking, which includes the value of benefits programs Extend to total labor cost benchmarking, as possible Invest time and resources Include assessment in program design and administrative budgets and job accountabilities Develop assessment expertise internally or externally Remember assessment likely provides more opportunities than threats Get help from your friends (HRBPs, line managers) 45

46 Thoughts, Comments, Questions?

47 Tom McMullen Hay Group Chicago Adam Kahle Hay Group Chicago Dow Scott, Ph.D. Institute of Human Resources and Employment Relations Loyola University Chicago