The biggest issue in reward is surprisingly, pensions. We are faced with a perfect storm that includes changing demographics with the ratio of workers to pensioners heading to an unsustainable low. Long term and historic low rates of investment returns linked with rapidly falling annuity rates meaning fewer bangs for your pension bucks. The level of state pension provision in many European countries such as Italy, France and Greece is unsustainable in good times let alone the current economic meltdown. This is leading to a relatively rapid increase in state retirement age (and some would argue nothing like fast enough to match the demographic and economic environment) and attempts by some countries, such as the UK, to move pension provision for anything over the safety net limit, to employers and employees.
Labour market demographics relating to pensions are moving to the equivalent of the horror movie. Fewer, younger workers with high levels of debt (caused by a mixture of higher university fees in the UK to mass youth unemployment in Greece and Italy) are supporting higher levels of the non-working elderly population. Job tenure appears to be getting shorter with longer periods of UN or underemployment, as recent UK graduate employment statistics have indicated. The ability for younger employees to build a retirement pot over a working lifetime has been heavily eroded at the same time as state support is steadily being removed either by real reductions in pension value, means testing of anything over the most basic pension and increases in state retirement ages. If this is linked to the increasing cynicism and downright hostility to the entire world of financial services, pensions and investment included, of younger people, that makes retirement savings bottom of any list of financial priorities and thus unlikely to happen until far too late from a cohort of workers who will struggle to support the aging populations across the world.
We also have the unedifying spectacle of late middle aged workers having to support, on one hand their adult children who cannot find well-paid jobs or the ability to purchase or rent their own accommodation alongside financially supporting their elderly parents and other relatives who have too much wealth to be eligible for the rapidly shrinking state care home provisions but insufficient wealth to provide for themselves. An issue which incidentally will impact on the wealth inheritance of the middle classes further eroding their ability to have a nest egg for retirement.
In general people are living for longer, perhaps much longer as a mixture of improved living standards and innovative medical interventions (soon to be further enhanced by individualised bio-medical approaches around DNA mapping) means that life expectancy is moving in to the eighties and beyond. The downside of this is the rapidly increasing medical and care costs of an ageing population being funded by a smaller and smaller number of poorer and poorer, indebted younger workforce facing competition for jobs and income from the Asian tigers and BRIC economies.
All these economic factors sit alongside a greater social expectation of a “good” retirement. Fidelity Investments has produced some excellent research highlighting the gap between what people save for retirement and their expected income at that time against their retirement aspirations. The gap is vast and growing. The issue of social revolution arises that when todays older workers see the retirement goalposts being moved further and further away and when they reach retirement their living standards plummet not only way below their expectations but arguably below a subsistence level with the state unwilling or more likely unable to pick up the slack. How will this massive demographic cohort react? Who will they blame (because of course there must always be someone to blame) and more worryingly what are they going to do about it? What about those in work seeing their taxes being used to fund income and the rapidly increasing social care bill for the elderly while they themselves see the pot for their old age reducing to nothing and their own living standards being not only less than their parents (well-paid jobs, accommodation, a secure old age??) and perhaps even less than their grandparents…..
We are indeed, like the Titanic, blindly heading towards the iceberg of demographics. In some ways we are worse off as those who run governments are well aware of what is happening but turn a Nelson like blind eye towards the iceberg both due to the short term nature of politics and because any of the solutions are so painful no one wants to even think about them let along propose apocopate policy responses.
Even those of us who work in reward can do little against the headwinds of the current economic, social and political environment – we are already in the perfect storm and things can only get worse.
Monthly Archives: October 2012
The narrative of reward
I was rereading a collection of essays by William Gibson (the inventor of the term “cyberspace”) called “Distrust that particular flavour”. Gibson has a wonderful narrative style. As an example he writes, “The end point of human culture may well be a single point of effectively endless duration, an infinite digital Now”. Reading it made me reflect on the power of narrative and how it may be harnessed to benefit the communication of reward.
The power of storytelling in business is well known; http://www.forbes.com/sites/patrickhanlon/2011/10/10/8-master-storylines-for-business-storytellers-part-1/, but how can we undertake successful storytelling to develop a narrative for reward? Telling a story gives meaning, cohesion and structure to complex subjects. It allows our audience to engage in a powerful way and leads to a much greater understanding of our subject than a dry, dusty, factual exposition. My children seem to pick up more history from the comic story telling of the BBC’s “Horrible histories” than from well-crafted history lessons at school.
In this time of social media and press scrutiny of reward we have a vast audience of interest. It includes politicians, shareholders, staff, non-executive directors, compensation committees, regulators, tax authorities. the public, journalist and pundits. All have different understandings, agendas and viewpoints. By using a good story of what we are achieving and what we hope to do we can craft a broad canvas to interest and engage our audiences.
The recently published best-selling book “Thinking, fast and slow” by Kahneman strongly extolls the importance to human thinking of making things simple and memorable rather than presenting concepts that require a lot of mental effort and thought. It argues that people bring to mind the simple and memorable far quicker and perhaps in a more positive way than something that requires to be thought about. Providing an engaging and interesting tale of success will frame the way our audiences view our work. With that achieved we can perhaps seek to reveal the complexity and ambiguity that is the actual context of so much reward work.
Engagement is key to understanding. A well-crafted story creates the images and metaphors that define how people think about reward. Many of us have read Gareth Morgan’s “Images of Organisation”. This has a powerful narrative of how the way we use metaphors about our organisation defines how we visualise and think about them. Do we think of our organisation in warlike terms, “the fight for success” or sporting metaphors, “going for gold” (very apt after the successful Olympics)? These metaphors will largely define how we think about our organisation. In the same way the story and metaphors we use in our reward narrative will define how our audiences think about and visualise our products. Think for a moment about the different images that arise from the use of the word “reward” as opposed to “compensation”. Reward has positive images, compensation perhaps less so. Are we rewarding people for their contribution or compensating them for their time and effort?
A good narrative also helps us as reward experts in carefully defining the “well-formed outcomes” that we hope to achieve as well as giving coherence to our thoughts and approaches.
My two final challenges to myself is to work out how I can craft a powerful story that is relevant to the multi-country, multi-cultural environments in which I operate and how I can find time amid all the operational pressures! Any offers for a solution or some amazing stories on those complex issues?
Complexities of reward
My wife and I like to work together to solve the Telegraph quick crossword on my ipad, we are not good enough yet to attempt the cryptic crossword. We like crosswords as they test our knowledge but also because you can go off down the wrong path very easily and not realise it until that last clue where you know the answer but it does not fit in the grid because of an earlier wrong answer.
Reward is like this in many ways. It is moving from being the quick puzzle to being a very cryptic crossword where mistakes can be made and not discovered until a long way in to the process or product design. It has become apparent to me that Reward is at a crossroads, in the middle of a maze. There are now so many stakeholders involved, employees, management, compensation committees, regulators shareholder advocacy groups, trade unions and politicians it is difficult to know which way to turn. They all have different viewpoints, different agendas different understandings and different needs.
There is a lack of common ground, common language and common definitions. What, after all is high pay or low pay for that matter? Are we looking at absolute or relative levels of pay? Are we comparing with some mystery average or mean? As a result what looks fair and reasonable to a Compensation Committee looks like highway robbery to a trade union. The area is fought with paradox. We can see these paradoxes at work in the controversy over BBC pay for talent. Because the BBC is funded by licence payers there is the application of a different standard for, say Jeremy Clarkson, than there would be if he worked for a privately funded broadcaster. Yet the labour market in which he operates is exactly the same. Is he supposed to be happy to earn less because he works for the BBC? Would we be happy to be paid less because we work in the public sector, and judging by the latest earning statistics for those in the public sector vs. the private sector the answer to that is a clear no.
What we and others are paid is very important; yet there is no overarching theory on pay and reward. There are attempts such as the excellent tournament theory or expectation theory for example. Labour market economists will talk about supply and demand – but that is not the entire story. Behavioural economics are increasing playing a part in pay theory. Yet, like Steven Hawkins attempt at a grand unifying theory we are really nowhere near achieving a consensus on what is fair pay.
So reward specialist have the issue of not only undertaking complex work on pensions, share options, taxation, total reward, flexible benefits, accounting standards, compensation disclosure rules and the like but we have to be able to justify our recommendations before the court of public opinion, political scrutiny and regulatory microscopes. Often with the benefit of 20 20 hindsight.
There are two concerns around the complexity. The first is that there are very few individuals who can move between the technically complex and the “public relations” facets of current reward activities. Second, only the larger companies have the resources and time to fully fulfil the requirements, demands and disclosures needed by the stakeholders, Reward normally sits in HR, yet it has strong interfaces with Finance, investor relation, Risk and Compliance, to name but a few.
Perhaps a new breed of expert will appear phoenix like from the current ashes of the shareholder spring; but somehow I think we will just muddle along as always, relying on expensive consultancies
Ian Davidson Reward Blog 