Author Archives: Ian Davidson

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August 11, 2015

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Pension freedoms = bosses’ burdens

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Introduction
Much has been written about.the new UK pension freedoms; to treat pension pots like bank accounts. What has not been talked about is the vast burden these so called freedoms impose on both organisations and pension trustees. These burdens can be split into three categories.
Risk
Costs
Expectations

What the freedoms do is to pass more of the burdens of an ageing workforce to employers and pension trustees and away from the state. Further, if employers and trustees pause for thought, let alone refuse to implement these measures, they are demonised by
Government ministers. In a stroke of genius, they even co-opted one of the most articulate and high profile commentators on pensions and ageing population issues, Roz Altman, by making her part of the Government.

The pension freedoms are a Government smoke and mirrors exercise that would make Darren Brown blush.

Context
We are aware of the issues and costs of an ageing population. Successive governments have not only taken a “head in the sand” approach by ignoring the spiralling costs, but, have cynically protected state pensions and other age related benefits to attract the grey vote.

In an environment of out of control public spending, the Government has cynically and arguably with stealth, sought to transfer the burden of old age to pension schemes, employers and individuals, of future pension risks and costs.

Risks
There are many risks implicit in the pension freedoms. Some examples:
Bad or no advice
Under estimation of longevity
Administration issues, from complexity through legacy IT systems to poor administrative practices.
Loss of guaranteed benefits
Tax issues

Bad or no advice
Good advice is hard to find and expensive. You get what you pay for in life. There is a perception encouraged by the Government, that advice is either not necessary or should be free. Yet those exercising pension freedoms are taking risks and facing uncertainty, sometimes without even realising it. When the money runs out or the unexpected tax bill arrives,they will look for someone to blame, to claim compensation from or to sue. For DC and DB Occupational schemes that is likely to be the employer or the Trustees (which give trustee indemnity amounts to much the same thing). This also applies to the partners and families of those who exercise the freedoms. There will be much wailing and nashing of teeth when survivors find no death benefit and no cash left after the death of a loved one.

There has already beehn commentary about the unsuitable nature of ‘lifestyle” investment options under the new freedoms. If experience is anything to go by, this new pension class will be looking for the holy grail of rising returns and no risk. Good luck with that…

Then there are the sharks in the water, circling the unsophisticated. Coming up with expensive schemes that are doomed to failure in a few years: particularly when the economic black swan appears all too soon. Again, who will be to blame, the former employer or pension trustees.

The same “advisors” urging taking a lump sum to take a holiday or buy a new car. Pensioners cannot pay exorbitant utility bills with a holiday or eat their ageing, devalued car. Who will be to blame, who will meet the costs?

Under estimation of longevity
The killer (pardon the pun). The already puny pension pot (current average £120,000 at retirement) will have to last twenty years, with inflation, care and medical costs rapidly eating in to the capital. A rough calculation, without any lump sum, looks like the average amount will not last ten years.

It is unlikely, short of an unbelievable economic miracle, that the Government can maintain the so called triple lock on pension increases. We have already seen stealth reductions in the state old age pensions for those who followed advice and opted out of SERPS and its successors. The generational unfairness, as pointed out by David Willets in “The Pinch” Is getting worse. The costs of increasing longevity are falling on the young as more and more Government expenditure goes to the elderly, paid for by a shrinking workforce often still burdened with student debt before the rapidly rising cost of housing bites.

Administration issues
Few in the pension industry would argue, with a straight face, that pensions administration is agile or even efficient. To ask pensions IT systems to be upgraded quickly to administer the pension freedoms is to live in a fool’s paradise. To identify crystallised and uncrystallised funds over long periods, managing the tax issues (and reports of major HMRC errors and poorly thought out assumptions are already circulating) are major hurdles. The required IT changes will take many months, if not years.

In addition, recent history shows that changes to pension regulation occurs almost monthly. Attempts to correct both poorly thought out implementation as well as unintended consequences will result, quickly, in a perfect storm of regulatory, tax and structural changes: all to be absorbed by employers, trustees and providers at their own cost of course.

Lost benefits, seen and unseen
Many pension schemes, both private and company cover a mixture of risk benefits. These include life cover and, most critically, a small number have guaranteed annuity rates. These are often far in excess of market rates. Yet, some in the Government are saying no advice is needed (because good advice is expensive). Well, as the song said, you what, you what, you what! People may be giving up expensive non- replicable benefits for immediate cash.
Then there is the issue of long-term care costs. Pension freedoms will result in tomorrow’s care costs being spent today. Pensions from annuities at least provided some income stream against future care costs. The ever rising costs will have to be met by asset disposal (spending their children’s inheritance) or by the hard pressed tax payer. The benefits of a steady cash flow in elder years is washed away by immediate cash.

Expectations
Pension freedoms have been sold by the Government as a panache to the perceived evils of annuities. So the masses are swapping a guaranteed lifetime income, albeit small; for volatility, uncertainties and risk – and that is only the taxation regimes.

An expectation has been built up that these freedoms will magically change a lifetime of under provision of pension saving in to a happy retirement. Even before the freedoms: research showed a yawning (sic) chasm between pension expectations and the actual amount saved by the vast majority of the UK workforce.

Who will be blamed when these great expectations run into the buffers of economic reality? Could it be the pension trustees, the sponsoring organisations and the pensions industry by any chance? PPI anyone?

Costs
Here we have the nub of the issue. The cost subject can be split into four main issues:
Advice costs
Administration costs
Transaction costs
Professional and legal costs

Advice costs
Pension funds are often the biggest asset pool an older individual has.. (If not then insufficient has been saved), These savings have to provide cash flows for an unknown period. This at a time of unprecedented economic uncertainty. Yet there is a wilful refusal by Government and individuals to see the necessity to pay for expert, tailored advice. Yes, advice is expensive, but better than an old age of poverty. The issues that require expert advice include longevity risk (living longer or shorter than expected); investment risk (risk vs return and volatility) and taxation risk. (The frequent changes in tax regimes impacting savings).

Trying to develop investment strategies, hedging overlays and appropriate risk and reward approaches will tax the most learned financial advisors. We are already seeing some advisors turning away business, either because they fear being overwhelmed by demand or they are worried about giving best advice in the minefield of shifting regulation and tax treatment.

Getting any of these issues wrong will result in financial embarrassment at best and abject poverty at worse. When it goes wrong in the absence of advice who will be asked to “bail out” the individuals? The former employers, the trustees and the insurers. The state will, of course, wash their hands, not that they will have and funds anyway.

Transaction costs
Even in the short period since the “freedoms” started: we have seen billions of pounds of assets and cash moving around; all of which attract transaction costs, another deduction from the asset pot. For small funds transaction costs eat rapidly in to already inadequate savings. Again, employers and trustees will be expected to meet some if not all this cost.

Professional and legal costs
Trustees will pass large expenses for lawyers, actuaries and other advisors on to employers. Where there is no sponsoring employer the pension scheme will take the hit. Yet Trustees and their sponsoring organisations will have to take more and more advice as the regulations and practical exercise of the freedoms create greater complexity, risk and uncertainty.

The advisors will be very conservative in their advice and rightly so. The results will be frustrated pension scheme members, fearful trustees and exploded balance sheets of sponsoring organisation both expenses and provisions.

And there’s more. The announcement of consultation on major changes to tax treatment on pension saving and payments are both radical and involve a great and unlikely leap of faith in politicians keeping to their word over a lifetime of pension savings and income. Who, in their right mind, would base advice to trustees, sponsors and individuals on the fatal quicksands of government tax and pension policy?

Conclusion
Much has been made of the potential of the new pension freedoms. But, even putting aside the fact that these freedoms will only really help a small constituency of middle class, middling affluent, middle aged people (definition of the Conservative Party?). Who will carry the enormous costs and risks? These include, but are not limited to, financial, reputational and legal risks. They are also very long tailed risks. With life expectancy for those retiring today being somewhere around twenty years; who will to be blamed when the pension well becomes dry in ten years?

An adult discussion is needed between the Government, the insurance industry, the actuarial profession, sponsoring organisations and trustees on the allocation and mitigation of costs, risks and responsibilities before the pension freedoms turn in to a swamp of expense, recriminations and legal action stretching far in to the future. And, should I see any other flying pigs I will let you know.

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June 23, 2015

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Time, value and a bonus

IAN_2497

 

Introduction

I was at a City lunch in a conversation with a senior executive of an American bank and her partner, a gifted financial analyst.  We discussed the impact of bonus accrual accounting standards on balance sheets.  Then she made a startling statement.  “The accruals cost us millions, but the executives value their bonus at a fraction of its face value.”   We then spent two hours discussing that statement.

In both women’s eyes the issues are the trends in executive compensation to long deferral periods, bonuses held in stock and the potential value reduction through future downward adjustment and claw back. The issue for executives is economics 101.  A dollar has less value tomorrow than today and uncertainty over the number of tomorrow’s dollars reduce the value still further.  Yet, the increasing costs of executive incentives weigh heavy on the corporate balance sheet and in the eyes of the shareholder advocacy groups.

Pressures on bonus structures

The demand for longer bonus deferral periods reflects the perceived risk horizon of the impact of executive decisions.  The driver for deferral into stock is to increase executive alignment with shareholder interests.  Increasing conditionality around claw back of bonuses paid and value reduction of unvested payments is a reaction to executive misdemeanors.  All of these are worthy objectives – but they come with unintended consequences.

Impact

The cumulative impact of these changes is that the face value of the incentives becomes close to meaningless to the recipients.  Future value becomes unknowable.  Long deferral periods lead to great uncertainty as to value (the very basis of the Black Sholes calculation).  Stock value is heavily impacted by external events such as market crashes. Decisions made in good faith can, with several years’ hindsight; look wrong if not negligent, leading to high levels of management risk aversion.  The cash flows on which an executive has to base her future become smoke and mirrors.

Organisational penalties

The core of a reward strategy is to attract, retain and motivate.  If the recipient of a reward does not value the payment at the same level as the cost to the organisation, the strategy fails. Motivation and retention is reduced if lower value than the cost is attached to the award.  Yet, the balance sheet, P&L and share dilution have heavy organisational effects in both dollar and reputational terms.

The impact on the individual executive’s behavior is also meaningful.  Risk aversion becomes important to avoid penalty.  Capital protection rather that appreciation becomes a driver to reduce future uncertainty.  As we have seen in some labor markets, upward pressure on base salary and thus dollar certainty is increasing.

Unintended consequences – lose lose…

We are at a tipping point.  Remuneration costs are rising, for executives value is falling; external criticism is increasing rapidly as is remuneration regulation. There is a vicious circle of increasing face value to make future value meaningful; something of a tail chasing strategy. The system is broken.  Not yet beyond repair, but the longer the malaise festers the more painful the eventual solution.

A root and branch review is needed and needed now.  Executive compensation has always been complex and opaque.  Its death rattle is now being sounded – at least in its current form.  The reward profession needs to move contemplation from its navel to this vexed subject before it is too late; although what the alternatives are I shudder to contemplate.

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May 26, 2015

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Epidemic of thieving bankers

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Introduction
Why have so many well paid, highly educated men (and it is almost entirely men) working in financial services caught the disease of fraud and theft? There is manipulation of LIBOR and FX rates, alleged dubious dealings in derivatives, insider trading; even down to evasion of train fares. Is the infection caused by greed, hubris, poor leadership or a corrupting culture? What is to be done?
Environment
Financial services is one of the most heavily regulated, monitored and controlled environments. Yet, even allowing for the gross incompetence of the regulators, the level of wrongdoing is breath-taking. It is essential, for the survival of the already low levels of trust in financial services, that the infection of thievery and self-enrichment is tacked with the vigor of attacking an epidemic.
Are societal norms to blame? Over the last few years we have seen enormous growth in tax evasion, expense fiddling and influence peddling (and that is only the politicians). It is arguable that the environment among the well off and those who should be setting an example in society is that obedience to the rules, both the spirit and the letter is for the little people. Even when caught the response is often that nothing wrong has been done; it is the rules that are at fault or that the regulations are to be gamed to the highest extent to the advantage of the individual. In that context I guess that a little rate manipulation is seen as quite acceptable. Informal sub cultures have developed, despite all the regulatory training and people development: where criminal or near criminal behavior is not just acceptable but encouraged. The disease spreads tenaciously, secretively, hidden from the cleansing light of day until it is too late. Certainly Human Resources appear to have lacked any form of X-Ray vision to detect the wrongdoing not just at an early stage but at any stage at all.
The Epidemiological approach
It is time that an epidemiological approach to the problem is taken. Examination of the causes, spread, transmission and monitoring of the disease in the hope of finding a cure or eliminating the causes of this epidemic is necessary and timely. We have big data tools, masses of data, specific examples and outbreak centers’ – perhaps even a patient zero or two. Trying to kill the diseases by punishing the host (in this case by large fines on the banks paid for, ultimately by the shareholders) is akin to killing the dog in order to get rid of the fleas.
Consequences
If we do not take the epidemiological approach now we risk simply driving the behavior underground making it harder to find and with even more painful consequences for the bank customers and the little people who always seem to carry the cost burden be it via higher taxes, austerity or erosion of personal wealth. This is the winter of our discontent, it is time to let lose the weapons of disease control before it turns in to a cancer that destroys the entire body of financial services.

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May 5, 2015

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Complex can of worms – The Investment Association urge fund managers to divulge pay practices

Photograph-by-Ian-DavidsonIntroduction
The Investment Management Association has urged its members to disclose their pay policies and how this encourages alignment between investment teams and clients. At one level this is a worthy aspiration, particularly given the recent attacks on the industry by the Institute of Directors. On the other it is a smoke and mirror exercise to hide poor practice and misaligned reward. Anyone with any knowledge of the workings of financial services reward knows that broad principals often hide dirty details at the operational level.

Complexity, culture and competition
The publishing of generic pay policies cannot reflect the necessarily complexity of remuneration structures and practice in the investment management industry. Investment and asset management is, like the majority of financial markets, heavily segmented, heavily differentiated and deeply complex, There are considerable differences between the activities of an Equity Index fund, an active bond fund, a property fund and an active emerging markets equity fund. Their risk and reward profiles are totally different as is often the time frame in which they operate, There are multiple flavours of “funds of funds” as well as cross holdings of house and non-house funds with the occasional derivative overlay. Each and every segment will have a different reward strategy, outputs and labour markets. The industry has long ago moved away from “long only” strategies to complex and hybrid mixtures of long, short, derivative and real asset funds; all with very different revenue and risk profiles,

The characteristics of retail and institutional funds can be different as are their objectives. The maturity and fund flows also add layers of complexity to structuring remuneration. Some investment funds are nearer hedge funds than the traditional investment approaches with hedge fund like carry arrangements and performance fees. No one set of remuneration principals can cover the vast array of arrangements – often set on a fund by fund basis and changed every year,

Culture
As we have learned from the history of the many investigations in to financial services malpractice; culture can play a larger role in determining behaviours, reward and performance than any set of policies. A typical example is the on-going issues with LIBOR fixing. The “nod and wink” or the tacit acceptance by senior management that certain behaviours will not be noticed if a profit is turned is as frequent in investment management as it is anywhere in financial services. The same pressures on sales and fund performance exist in this industry as it does in, say investment and corporate banking. The amounts at stake are of eye watering size. In 2013 assets under management just in the UK were £6.2 trillion and that is before the recent uptick in world stock markets. The FT estimates that an average compensation cost per employee at global asset managers is US$263,000 and is set to overtake investment banking pay by 2016.
Regulation in the sector is growing and increasingly odious. However, as history of the recent past shows, the regulators are invariably behind the curve and just do not have the intellect or resources to catch up with changing remuneration and risk profiles in fast moving, innovative financial services industries.

Competition
The competition for star players in the investment and asset management industries are just as intense as in investment banking. Individuals and teams move houses with remarkable rapidity; given the alleged longer term horizons. The facts are that performance is measure over months, quarters and annually the same as it always has been. Despite regulation, lucrative transfer terms are still a very active activity in this market place. Again, there are few star performances and everyone knows who there are. The fight to retain and recruit talent from a limited pool is one of the major drivers of remuneration in this sector. A 2013 survey by Heidrick & Struggles in late 2013 noted that:
• 41% of respondents are actively recruiting
• 57% of distribution professionals are open to considering new opportunities
• 50% of survey respondents had changed jobs in the last three years
Dated as this survey is, the trend can only be upwards given the ever increasing amount of assets under management in the global marketplace as investors scramble for return in the long-term low interest rate return environment.

The amount paid to these star players cannot be overestimated, although small in number their remuneration can add up to a considerable percentage of the employee costs of an organisation. Thus the use of averages is, like most remuneration measurement in financial services, deeply misleading. The differentiation, the complex nature of packages, the uncertain future value of compensation awarded today means that even establishing a base line is fraught with methodological difficulty.

Remuneration policies
If you wanted to be mischievous; it would be fun to play buzzword bingo with investment and asset management remuneration policies. They all want to attract, retain and reward. They all want to create shareholder value within the risk appetite of the organisation. The vast majority will pay lip service to employee behaviors and risk management as counter-balances to pure performance measurement. Frankly, I could write a remuneration policy for any of these organisations in a relatively short period of time.
These policies hide a complex reality of highly diverse practices with a dazzling array of performance metrics (often differing between individual peers in the same team) that would take an actuary to calculate the outcomes; and that is before the inevitable horse trading around what the metrics actually mean and how they should be applied.

The remuneration policy will no doubt talk of alignment of interest with clients; but what does that really mean in practice? As one large institutional investor said to me only last week; she did not really care how the return was made provided she they hit their target benchmark. Other investors will have strict ethical guidelines or even religious considerations as constraints on the activities of the managers. Thus what aligns with one client requirements will be an anathema to another. Yet it may well be the same investment manager running both funds – what then is “alignment”?

Concluding can of worms
The request made to investment managers to be more open on their remuneration is a good try but no cigar. Being pragmatic, it may be seen as a sophisticated effort to ward off yet further regulation and statutory disclosure. The reality is that, like so much remuneration in financial services any potential “truth” is deeply hidden and can only be understood by seasoned professionals and remuneration analysts and even then on the basis of numerous, conflicting assumptions.
I know from experience that the world of asset and investment management remuneration is complex as a necessity. It reflects the fragmented, segmented complex world in which these organisations flourish and make a great deal of money.
Trying to reduce the environment to the level of disclosure of remuneration policy is perhaps something of a pointless, resource wasting and ultimately a counterproductive exercise.

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April 29, 2015

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Politicians, promises and payment by results

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Introduction
As the General Election in the UK comes to an end I was thinking about all the political promises, pledges and lists of broken guarantees. It struck me that the country could take a leaf out of the reward book and pay politicians by results. In this age of big data it would be easy to set up metric based targets for the five-year term of parliament. Then we could pay the politicians against their metric achievement. Judging from the large number of alleged financial scandals surrounding our MP’s and alleged comments from senior politicians such as Malcolm Rifkin about how poorly they are paid, financial reward certainly seems very high on the agenda of those who lead us.
Payment by results
Using a payment by results approach based around big data metrics and evidence based policy approaches would allow voters to easily measure achievement – or lack thereof, Likewise, it would be easy to see what pledges have been met or not.
The payment by results approach, designed by reward professionals, (who else?) and monitored by an independent body; for example the Institute for Fiscal Studies, who give credibility to the politicians promises and hopefully reduce the meaningless political rhetoric and general unpleasantness that has dogged this election campaign.
Effective opposition
The same approach could be used for opposition parties, effective challenge to the executive, votes won, policies implemented and the like.
Summary
Rather than having to wade through the swamp of claims, counterclaims, pledges and dodgy statistics we would have clear measures against KPI’s set for the five-year term. In addition perhaps politicians would stop moaning about their pay if, like those of use in business they were paid for their hard work and success; although on second thoughts….
#ge2015 #bigdata #reward #pay

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April 23, 2015

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Giving it away

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Question
You are sitting in your office when the CEO walks in. She says “I want to give half my salary away to increase the minimum pay in the organisation to $25,000.” Do you:
A) Burst out laughing?
B) Sit her down with a coffee and ask how long she has spent in the sun?
C) Start working out the new pay and the impact on the benefit costs?

Introduction
We have seen a couple of recent cases of exactly this happening. CEO’s taking a salary cut or turning down pay increases to fund either general increases or to raise the minimum pay in their organisation. What are the reasons behind this startling phenomenon? Guilt, publicity or an increasing discomfort with levels of pay inequality? Is the startling level of inequality beginning to cause discomfort to the high paid?

The facts
In the United States the top 1% of earners are paid 20% of total earnings. ( http://en.m.wikipedia.org/wiki/Income_inequality_in_the_United_States). The reverse of this coin is that 25% of jobs in the United States are low paid.

The issues
Pay inequality is largely perceived in relative terms: what we are paid compared to the colleague sat next to us. I remember giving a talk to HR in an investment bank. I told them average earnings in the UK were $35,000 and 62% of the UK population earned less than this – the team did not believe me. On checking, the average earnings in the room was $70 000 and the highest paid was $220,000.

Increasing inequality has, so far, had limited impact. We have seen the “Mac attack” on low pay in the catering sector, the occupy movement make occasional protests yet most carry on as normal. Sociologists argue that inequality leads to a breakdown of social cohesion and trust – but have we seen this?

The counter argument is simple. The labour market works and we are paid what we are worth. But, we know the market is tilted. If favours certain backgrounds, certain coloured skin and one sex over another. White male middle class high earners have largely done well in the last decade over, for example, black working class women. So, pay inequality is also an issue of social fairness.

What is to be done?
We have a number of options
A) Do nothing – the labour market more or less works and the alternatives are worse
B) Encourage an open and honest debate – but will it achieve anything?
C) Legislate – but state initiatives on pay seldom work and always lead to unfortunate consequences
D) As pay professionals start to ask questions about inequality of our CEO’s – but will they listen?

What do you think?

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June 29, 2014

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The Cobblers last, digital marketing and reward.

Introduction

  I was in a branch of Timpson recently where I noticed a cobblers last.  This is a rare sight.  I am old enough to remember when most shoe shops had them in the shop window; a bit like the three balls above a pawn brokers shop.  In reward we have a number of tools that go in and out of fashion like the cobblers last.

Recently I undertook a post graduate certificate in digital marketing with Google Squared in order to make sure that I was using the most up to date tools of the trade, particularly for reward communications.  I learnt a great deal about curation, the customer journey, the importance of content and the enormous power of digital communication in this world that has moved far beyond the technology of the cobblers last.    It also helped refresh my thinking of the roles of imagery, imagination, innovation and illustration in communication.

 

Reward’s digital cobblers last

There are a large number of tools available to reward professionals to help get the message across – particularly in a world very largely dominated by digital communication.  I have used You Tube videos to demonstrate total reward concepts, Podcasts to discuss the latest pay regulations (and the CIPD produced some very informative broadcasts).  And Twitter to publicise interesting reward web content.    Blogs, both written and video, are a very good way to publicise changes and new initiatives in reward.  The raw power of modern personal computers linked with cheap yet sophisticated software packages for producing excellent videos and technically proficient podcasts puts the creative process in the hands of most of us. 

 

A few months ago I contributed a chapter on risk and reward to a new HR eBook, edited by David D’Souza, an OD professional, called “Humane Resourced”.  This excellent collection of HR blogs stormed to the top of the HR best seller list at Amazon and was even a top ten selling business book on the same platform.  Such is the power of the new media that makes publishers, film makers and broadcasters of us all. 

 

Networking has been around since the days that humans learnt to communicate further than they could shout.  There are some excellent digital tools for networking such as Google Plus and LinkedIn.  These tools will not just allow you to communicate, but find like-minded people and relevant professional groups for you to meet and join.   There are communities of interests available on any subject; and if you cannot find one to fit your interests, set one up….  I have an interest (but little talent) in photography, largely in the niche field of police and military vehicles; yet my Flickr photography mini site has had over 130,000 views; such is the power of the digital.

 

Proper and appropriate use of social media and digital technology means that you can generate a consistent message, a new meme, or brand image to a diverse and large audience at little cost except the not inconsiderable time resource and mental commitment to the cause.

 

Corporate realities – the Empire strikes back

We all live in a corporate reality where blogs, videos, podcasts and the like are controlled by the marketing and PR departments who have a strong fear of brand contamination or social media embarrassment.    I have two responses to this; having a firm grasp of digital media tools will enable reward practitioners to go to the corporate gate keepers with ideas and imagination to kick start some new reward communications.  Second, and perhaps more open to debate, large organisations are, with a few noticeable exceptions, slow moving and not nimble in a fast moving social media world.  Perhaps, just perhaps, reward could help move the paradigm.

 

Alternatively you make think the entire subject is just a load of old cobblers lasts.  

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May 14, 2014

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Reward and Rock and Roll

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Introduction

What have the worlds of David Bowie, Black Sabbath and reward have in common apart from dealing  in large amounts of money?  An outstanding book, “The business of music”,,(http://www.academy-of-rock.co.uk/readnow/ ) by the renaissance man, Peter Cook, innovation Guru and rock musician, gives the answers.   Issues of creativity, innovation, communication and leadership have always been important in the reward leader’s toolkit.  Peter’s book provides an amusing but erudite Hayes instruction manual on these key areas.

 

The author – Peter Cook

I met Peter on the creativity and innovation module of my MBA.     He was leading an impromptu jam session by a group of senior managers to illustrate the nature of innovation and leadership. He is a polymath who is a gifted musician, writer, educator, consultant and social media expert.  But, he is also the most unusual of men who works in several different domains, yet manages to bring together these worlds of music, business strategy, innovation practices and writing with high energy and infectious enthusiasm.   His gift for story telling laced with personal anecdotes, key writings from the likes of Charles Handy and powerful metaphors make reading this book a joyous and educational experience.

 

Creativity and innovation

Peter uses the multiple reinventions of Kylie Minogue and David Bowie as lessons in innovation.  We can draw parallels in reward.  We need to constantly reinvent our products; if only as a response to the every changing regulatory and political environment.  As Peter points out it is just not enough to keep doing the same thing time after time and expect a different result.  Innovation is the art of taking the existing and making it more. 

 

I have a personal view that it is time for reward to reinvent itself from being a semi passive technical function to be more assertive, to set agendas rather than respond to them and to be less of a backing singer and move more in to the spotlight.

 

Another excellent musical example that he quotes is a group of jazz musicians improvising.  Each member of the group picks up and builds on the rhythms of the other group members while still maintaining the coherent soundscape.  This is another key skill in reward leadership.  We must improvise both on our own but also as a part of the HR and business team, while maintaining a constant internal and external harmony with our customers and stakeholders.

 

Communication

The Music of Business draws out some excellent lessons in communication.  As Peter points out, this is the soul of music:  talking to an audience, often at a deep, almost spiritual level.  Who has not got a favourite piece of music that conjures up some important memory or emotion?  Yet musicians and their producers tightly target the music at a very specific demographic segment.  I have an acquaintance, Tom Robinson who was a very successful musician (2468 Motorway and Sing if you’r glad to be gay for example).  Last year I attended a concert by him as EMI had re-released a new anthology of his music.  When I entered the concert venue the vast majority of people there were clones of me!  Tom’s appeal was to a very specific demographic – he has also reinvented himself as an equally successful award winning radio presenter.

 

The lessons for reward are clear.  We must clearly design and market our products for specific demographic segments.  We must communicate to our customers at the level of feelings and meaning as well at perhaps more superficial levels of value delivered.  Peter’s book gives excellent insights as to what good communication means and perhaps some technical hints as to how to carry out this communication at a deeper level.

 

Leadership

Peter writes engagingly on the subject of leadership.  It, alongside business strategy are at the heart of this book.  He quotes multiple examples and tells fascinating stories of both good and poor leadership.  He reflects on the musical leadership and longevity of some of the world’s top musical acts.  As technologies and tastes change many in the world of music have disappeared without trace (and think of the many companies who have done the same, or like Kodak perhaps failed to change with the times) yet others have not only survived but prospered as we have moved from vinyl through MTV to MP3 and beyond.

 

The parallels for reward are all too clear.  We must provide leadership that evolves with changes in the technological and regulatory environments.   Sometime this will mean revolution and sometimes reinvention.  Going along with the status quo is to go along with the dinosaurs

 

Business strategy

.Business strategy is at the heart of “The music of business.”.  Peter’s discussion on business strategy issues like strong culture range from the music of AC/DC to Marks and Spencer, taking in the writings of Michael Porter, Mintzberg and Andrew Sentance.  Peter gives equal weight to both the design of business strategy and also its execution.  He note examples of both good and poor strategy and execution.  It is clear that perfection in both is a requirement for success in business – music or otherwise.

 

The application to reward is clear.  We need a well thought out, innovative strategy with excellent and well thought out execution.  Most reward leaders are good at execution – but perhaps lag in the development of good business strategy.

 

Conclusion

The Music of Business is an engaging and erudite discussion on business strategy, creativity and innovation painted on the canvas of rock music.  It is a book you can dip in to or devour from cover to cover as I did.  It is the type of book that gets you thinking and may well take you off on unexpected journeys.

 

For those of us in reward it has some powerful lessons from outside our normal comfort zone.    My experience of the best reward leaders are those who think outside the box, have imagination and a strong cognitive framework in which to exercise their daily activities.   This book will help develop a different way of thinking and viewing the world – if only by creating a different mind-set about The Music of Business.

 

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February 2, 2014

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Hackathon, HR

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Rewarding Adaptability – Digital Freedom Challenge

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My idea (hack) for the Management Innovation Exchange, international  Digital Freedom Challenge has been shortlisted as a finalist.

It is called Rewarding Adaptability

The organizers said:

The Digital Freedom Challenge team evaluated contributions from innovators from around the world and from every kind of organization—looking for depth, boldness, originality, thoroughness, and the ability to inspire and instruct in equal measure. We certainly found those qualities in your contribution!

Summary

Crowd funding for adaptability: encourage an internal market in adapbatilbty activities by having employees with ideas to bid for resoruces and other employees to bet on the most succesful ideas

Recognition programmes: Directly and immeidatly rewarding those employees whose behavours support the design principles

Time awards: reward those who come up with innovative and creative suggestions supporting adaptability, specific time to develop their thinking and ideas.

Problem

In many organisations ideas are generated from the top of the organisation or from the “Research and Development” department.  There are complex management processes to turn ideas into projects.  As a  result the creativity of the workforce and their implicit knowledge is lost to the organisation

The problem the Hack addresses is outlined by  Doz and Kosenen’s work on strategic agility.  Managers hoard their resources rather than actively sharing with others.  This hack challenges the management orthodoxy that they control resources and workers utilise them at management command.

Solution

The approach is based on the concept of crowdfunding innovative ideas by creating and developing an internal market in adaptability.  This is achieved by each employee being able to propose a project idea and put it forward to all employees.  Individuals have a “bank” of hours – for example ten per month; that they can bid against individual projects.

The projects with the highest number of hours bid goes into process.

There is a parallel incentive plan that rewards employees who have come up with successful projects with a percentage of the hours bid as “free time” for them to use as they wish; either for holiday, or to work on the project or to be converted to cash.

This is a total break with the normal approach on idea generation and project management.  It puts power, in the form of resources, into the hands of employees rather than management.

Practical Impact

The hack is stunningly simple.  Here is an example of the approach:

This allows employees to make bids simply against a project and against their own budget.

Each employee will write a presentation for their project with a time and skills budget which will be shared with employees

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November 3, 2013

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HR

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Reward fights back – peashooters against tanks, some closing thoughts

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Introduction

Unless you have been living in a monastery then you will aware that HR in the UK has been under attack on a number of different fronts by the media and by politicians. 

 

     The mauling given to the former BBC Head of HR

     The criticism over the high pay of senior managers in the charity sector

     Attacks on zero hours contracts

     Complaints on police PPO’s overtime payments

 

Much of the criticism has been aimed at the area of reward.  The quantum  of the BBC termination payments,  sizeable remuneration in the third sector even the discussion on low pay and zero hours contracts are clearly in the orbit of reward.  What has puzzled and dismayed me as a seasoned reward manager is the lack of a robust response on these issues.  Fleet Street knives have been sharpened and deployed against HR practices with very little parry from the profession or its leaders.

 

The issues

Let’s breakdown what is behind the political and media rhetoric.  All big organisations have enhanced termination payments in place.   Why?  First, if it is a true redundancy where there is no replacement of role, the payback on a redundancy payment is very rapid.  If you pay two years pay you are probably only paying 15 months costs of employment (let us not forget that employment costs also include all the infrastructure costs of offices, IT, administration support and the like) so you are very quickly in “profit”.  I have only once seen this argument put forward in the attacks on BBC HR.  Second, making a settlement agreement with an employee avoids costly legal disputes and reputational damage for both the organisation and the individual.  Not to mention the management time costs.  I have had some involvement with legal cases involving very senior managers having to sit around for hours at a time at court being totally unproductive, not to mention many expensive hours of briefings and the like with highly charging  QC’s.  Paying enhanced redundancy is very often in the interests of the organisation the stakeholders and the former employees.  So, why does nobody stand up and explain this?  I guess the facts do not make such good headlines.

 

We have seen the offensive (in both meanings of the word) being taken by politicians and the media over senior management pay in the charity sector.  Why has nobody shown the politicians the salary surveys and the head-hunter advice on the costs of employing senior management?  And, as a fan of big data I have to ask if anyone has produced the figures to show the large difference to an organisation that good leaders make in terms of both profit and success.    

 

I also notice some attacks in the media recently against the overtime being paid to the Metropolitan Police Personal Protection Officers who look after the Royal Family, the Prime Minister and the like.  These are very highly trained people – experts in their field with many years’ experience and very great skills.  The do a very difficult job very well in the vast majority of cases.  They may be required to put their life on the line for the people they protect – yet there are complaints about their overtime.  There has been no discussion that I have seen of the enormous value of their work or the circumstances that led to the requirement for long hours.  Why not?

 

There has been a lot of talk of both zero hours and low pay of late.  No one would deny that low pay is an issue.  But, it is a function of the labour market.  Increasing low pay is a social good but comes at an economic cost.  Politicians should not on one hand bemoan the erosion of working families incomes in the UK while at the same time urging employers to increase pay.  Such increases can only be paid for by raising prices.

 

Conclusion

You will, by now, have perceived the common theme.  Much of what is done in reward may not meet the highest moral standards, (and since when have either politicians or the media ever met that requirement); but our work is essential, commercial and pragmatic.  The labour market is imperfect, ambiguous and messy.  No amount of editorials or political band-standing is going to change those facts. 

 

One Head of Reward did point out to me when I was researching for this article that the targets of these attacks, the BBC, the police and the big charities, are all out of favour with the government and thus may be seen as legitimate targets.  She may say so, I could not possibly comment.

 

What is needed is a data rich, fact based discussion on these important reward questions by those who know and understand the issues.  We need a very big pea shooter to take on the storm troopers of the Westminster village and the chattering classes.  But it is time for reward professionals to do what they do best, provide the data and the analytics to take the battle in to the enemy camp.  Let us have a proper intellectual debate on these issues rather than the glass house occupants driving their tanks over the green lawns of the HR and Reward profession. 

IN CLOSING

I would urge you to buy/read the best-selling (#1 Amazon HR books) HR book  “Humane, Resourced” a crowd sourced ebook by some 50 HR professionals providing a cutting edge view of HR today by those who fight in the trenches.  I have honoured to have been a contributor to this volume.  All the revenue from sales of the book go to charity.  A very worthwhile read.   

 

This is my last reward blog post for a while.  I hope you have enjoyed the variety of topics covered over the last couple of years