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May 26, 2015

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Banking pay, HR, Pay Regulation, Reward, Reward Strategy

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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 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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September 25, 2013

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HR, Metrics, Reward, Reward communication, Reward Strategy, Strong analytics

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Pay round visualisations – Strong analytics III

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Introduction

An important part of any pay review is reviewing pay.  That is looking at pay modelling, outputs and outcomes.  My experience says that the 80/20 rule applies.  80% of the pay round outcomes will be straightforward.  What will be of interest is the 20% of the population that comprises of exceptions and outliers.  So a good analysis will be layered to provide details on the total spend by department or area and the identification of outliers and exceptions.

The most effective way to provide this data is to do so using graphical data and info graphics.  Human beings assimilated graphical data far faster, in most cases, than vast spread sheets of data or even summary data in tabular form.  We like to look for patterns and at pictures when going through the sense making process.

The other very important piece of the presentational jigsaw is to show, wherever possible, the link to business metrics and key process indicators. (KPI’s).  It is very useful to show correlations between our reward outcomes and business metrics.  We must use the data to show our “bang for the buck”.  That we are spending shareholder money to best advantage.  This approach should be supported by reference back of the pay outcomes to our reward strategy.  So if our strategy is to pay our top performers at the upper quartile of our pay market we must show that correlation in our presentations.

Getting pay visualisation right saves time, effort and increases the credibility of the reward team.  It aligns the reward analysis with that of the organisation and its management.  Having a cohesive pay narrative, linked to business outcomes with make the “sell” of the pay round easier and faster.  Anticipating the questions of our stakeholders is both simple and powerful.

Exceptions and outliers

If the pay round is well structured management will have a focus on the exceptions and the outliers.  Identify the top and bottom ten per cent of your pay proposals.  Clearly identify those staff who are being rewarded outside the policy or in a different way to their peer group.  DO NOT provide pages of spread sheets or tabular summary data. (Unless specifically asked for by a stakeholder).  For most managers pages of data are difficult and time consuming to read and difficult to interpret.

This graph shows a correlation between revenue ranking and market position.  It is immediately oblivious that there is an outlier.  The reason for that person’s position on the graph can be explained and a recommendation made as to how to correct the anomaly and increase the correlation between revenue ranking and market position.  (The underlying assumption is that this is part of the pay strategy).
Revenue
 

Develop the pay narrative

As reward professionals, working closely with our HR business partner colleagues, we should have developed a coherent pay narrative.  A story of what our pay round is trying to achieve and what it has actually achieved.  The reason for this is that it makes explanation, presentations and data analysis much easier if we have started off with a basic, clearly expressed set of principles and assumptions.  This may include foreign exchange rate decisions, key metrics including the budgets and a clean set of data as a starting point.  Time spent cleaning pay data is never wasted and can save a vast amount of time and trouble later in the process.  Data is never perfect.  I have frequently come across situations where the headcount I was using for the pay review and the information in the Finance department was different.  Agree and reconcile the approaches and numbers before the pay round starts.

There is never enough time or resources to process a pay round perfectly.  By undertaking the data cleansing, agreeing the pay narrative and assumptions and any reconciliations in advance (and appreciating that is not always possible) will save time and lead to a better pay review process.

A picture is worth a thousand words, or ten spread sheets

Producing high quality, clear info graphics and visualisations of reward data is a very efficient use of resources.  Returning to the 80/20 rule it allows management to focus on the 20% of the pay review that is important or of interest to our stakeholders. Graphics such as the one below can be used to answer questions before they are even asked.  Using this approach highlights our exceptions and the extremes of our pay distribution.

The supporting data is of course available behind the graphics.  But, returning to the theme of a good pay narrative, we can illustrate and support both what we are hoping to achieve and what we have actually achieved.  A good graphic is a “smack in the face with the obvious”. A crude but accurate comment on what a good graphic should achieve.

Business metrics and KPI’s

It is no longer enough just to present raw pay data.  We have to put the information in to the business context.  We must illustrate the connections and correlations between our limited pay and bonus budget and business outcomes.  Reward the performers and the revenue generators.  Pay outcomes can be used to give a clear message as to what behaviours and activities will be reward and those which will not.   Many organisations, even those in financial services, are looking carefully at the “how” something is achieved as well as the “what”.  Balanced scorecard approaches are very common; it is still possible to focus on the financial outcomes by giving it a high scorecard weighting; but we can nuance the approach by giving smaller weightings to cultural, behaviour and approach.  A well-constructed balanced score card will be measurable and give another basis for our graphics to show appropriate correlations.
Blog pic 3

In an earlier post (https://iandavidson.me/2013/08/23/pay-round-processes-a-big-data-approach-including-the-add-on-benefits-to-recruitment-training-and-development-and-succession-planning/) I showed how it is possible to run a pay round based almost entirely on those factors that lead to business success.  It is not easy and arguably it removes “discretion” from managers.  But, it is the use of that very discretion that often leads to upset and even legal challenge.  A robust process backed by robust data is the way forward.

blog pic 7

Conclusion

The pay round in the vast majority of organisations is resource and time constrained.  It can be made easier on all stakeholders by presenting a solid reward narrative illustrated and supported by appropriate and timely visualisations.  This allows the focus of the reviewing stakeholders, be they the Remuneration Committee, Executive management or line management, to be on the 20% of the population that requires attention rather than the 80% that does not.

A strong story, answering questions before they are asked and linkage with business metrics will be both appreciated as part of the alignment of HR and business strategy and as an efficient way to manage a pay round.  Providing good graphics saves time and increases focus when resources are, like high pay increases, very rare.

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August 17, 2013

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Employee benefits – cultural mood-music

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Employee benefits are often overlooked when thinking about organisational culture. Yet they are a powerful framing or reframing mechanism for amplifying the message in our organisation of “the way we do things around here”. Like a good base guitarist they can provide the rhythm underscoring the melody of our set piece riff.

Messages – explicit and implicit
There are a number of signpost continuums that are reflected in our benefit offerings;

  • Traditional to playful (think pensions vs bike to work)
  • Collective to individualistic (Set menu vs flex)
  • Paternalistic to intelligent consumer
  • Slow moving to early adaptor (Notice board vs Twitter)
  • Tea dance to Lo-fi (Think tea trolley to “Sushi made at your desk” (Hey, is that a new benefits concept?))

You get the idea. The what and the how of benefits delivery as well as the communication sets the mood music for how our organisation is perceived by employees and the wider world.

Conclusion
Benefits are not something that should just happen. They are an important rhythm to the music of our organisational culture. Not up there with the lead guitar perhaps; but an essential, if overlooked nuance and shading of the message of who we are and who we want to be.

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August 5, 2013

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Zero hours contracts: Extreme segmentation: the labour market dynamic

The news that the number of zero hours employees have been greatly undercounted illustrates a fundamental change in labour market dynamics. We are seeing an acceleration in the divide between the haves and the have nots. Those in the core on good pay, benefits and job security and those outside the core on poor pay, limited benefits and insecurity.

This enhanced segmentation highlights issues of social cohesion and human capital development. Could it represent the marginalisation of the young, the old and the unskilled into labour market ghettos, conceptual slums bottom feeding from leftovers of the core. A world where our children, our older relatives and the disadvantaged live on the crumbs from the rich person’s table. Not quite the brave new world we hoped for.

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July 27, 2013

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Demographics, HR, Pensions, Reward, Risk

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The pessimistic person’s pension problems Pandora’s package

Introduction

I had a letter recently from the Trustees of one of my defined contribution occupational schemes.  They told me they were going to change all of my carefully balanced investments in to funds of their choosing.  They said they were doing it in the best interests of all members; a reason that gives little room for argument.  It did set me thinking of the many pension risks we face; often not of our making.

Here is a list from the Pandora’s package of a pessimistic person’s pension problems.

Security risk

There is an assumption that our pensions are safe but what about:

  • The strength of the sponsor; as pensioners in Detroit have found – nothing is guaranteed
  • Investment manager – more on this later; but what happens if our investment manager fails?
  • Spouse risk; we assume that our spouse has made appropriate pension arrangements in the event of their death, but have they?  What about divorce?
  • State risk: some people rely on the state to provide a pension.  Research has shown that there are a lot of European countries who will not (and in some cases currently cannot) be able to afford the state pension burden.  If, it is going to be paid followed by when is it going to be paid followed by how much is going to be paid?

Political Risks

  • What tax regime are we going to face on our future savings and on pensions in payment?  In the US have we made use of the Roth rollover?  In Europe, what are marginal rates of tax going to look like in the future given the deficits are likely to last for another twenty years?
  • What limitations and regulations are going to be put in place now and in the future?  In the UK the limits on pension savings change every few months.  Are we going to face a savings limit; or like Australia a reduction in our state pension because we were prudent enough to save for our old age?  We know this is on the agenda of the UK and other European governments.
  • Are our pension’s savings going to be confiscated by the state at some stage, as we saw proposals to take savings from bank accounts in Greece recently? Do not think because it has not happened it will not happen in the future.
  • For those countries that allow income drawdown; will those rights be curtained or removed thus driving the proverbial coach and horses through our pension planning.
  • Regulatory risk; in order to protect pensions will regulators have to put such high hurdles in place that pension provision becomes impossibility expensive.

Economic risks

  • What happens to our savings when QE ends and the bond bubble bursts?
  • What happens if inflation takes off, as I consider very likely?  Are our savings and our pension payments protected against massive price rises?
  • Our country goes bankrupt!  Not at all impossible in these volatile times.
  • Annuity risks: are annuity risks going to crash even further (yes, probably).  Meaning we have to save vastly more for the same level of pension.

Sufficiency risk

  • Research by Fidelity and others have shown that very few people are saving enough to meet a basic standard of living let alone meet their retirement aspirations
  • Economic shocks for individuals such as unemployment, depression in the real level of wages, rising costs taking larger proportions of income are becoming the norm rather than the exception
  • Annuity rates are falling and there is little sign on the horizon of increases.  Forecasts based on old or historic annuity averages will underperform against the market reality
  • Life expectancy; this is the good news bad news story.  It is great that people are living longer.  But, that also pushes annuity rates down even further.  Someone (that is you) has to pay for all those extra years of pension

Investment risk

Where does one start?

  • Do we invest conservatively to reduce volatility; but with a greatly reduced investment return or do we invest more aggressively and risk losing it all?
  • Market timings – when do we buy and when do we sell; is our “lifestyle planning” going to mean our fund manager exists equities at exactly the wrong time?
  • Hidden costs eroding our pension savings.  De we actually know how much we are paying for all these advisors, fund managers, intermediaries, actuaries, professional trustees, pension lawyers, pension administrators and other assorted hangers on who seem to make a very good living out of our pension savings?
  • Investment advice; should we be in bonds or equities, infrastructure or emerging markets debt?  Even if we avoid the perils of active management do we know where we should be invested?
  • Diversification risk, everything seems to be correlated with everything else when we look at investments.  Are we over diversified or under diversified; should we be diversified?  Are our fund managers over or under diversified
  • Active vs. passive fund management?  Should we hope that “our” fund manager can do better than the market over the long term (statistically very unlikely) or should we invest in the market indexes and perhaps lose out on juicy “one-off” investment opportunities?
  • Vanilla or exotic investments.  Should we invest just in main index stocks, or should we use derivatives to help hedge our exposure?  Are Credit Default Swaps a good or a bad place to be; or both?

Operational risk

  • Have we got good fund administrators?
  • Are our pension records with our advisors correct and up to date?  Does someone still hold the record for the pension I took out in 1984?
  • Are our pension administrators undertaking the correct highly complex calculations correctly to ensure the correct final pension payment?  Some years are indexed against one figure (In the UK, for example, against RPI) and in other years against another index (again, for example in the UK, CPI).  Has inflation indexing, if we are that lucky, being calculated correctly.
  • Would we ever know if any of the above does contain errors?
  • Are the auditors of our pension scheme doing a good job for us?
  • Are the pension lawyers looking after our best interests
  • Have the pension trustees made the right investment and administrative decisions?
  • Have the regulators got sufficient resources and expertise to ensure that pension scheme members are being treated fairly?
  • Are the pension scheme communications easy enough to understand so we know the risks we are taking?

I could have gone on and on looking in my Pandora’s package but I have depressed myself enough already writing this.  I am going to have a little lay down and a cup of tea.

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May 30, 2013

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CIPD, Executive Reward, HR, Reward, Reward communication

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Strong analytics

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Introduction

The UK’s CIPD has published its annual reward survey. The CIPD reward survey; http://www.cipd.co.uk/hr-resources/survey-reports/reward-management-2013.aspx  

“Our findings show organisations responding to multiple contextual factors in their reward management choices.  Economic conditions continue to drive pay decisions for many. In the private sector, market competition and employee value are also key drivers, while in the public sector
more traditional forms of reward management prevail.”

The drivers of reward continue to be to attract talent and reward productive behavior.  I would argue that retention is less important that it used to be due to the lose labour market. The survey also looks at employee benefits; these can both support the social culture of a business and provide valuable, cost effective non cash engagement tools.

One key aspect that Charles Cotton, the CIPD Reward and Performance advisor, notes is that the reward profession is not particularly advanced in analyzing information in a way that is useful for the business.  Cotton goes on to note that

 

“Few employers are able to calculate the cost of their compensation and benefit programs, let alone be able to express this as a proportion of revenue, profit or economic value added.”
   

 

 

 

 

Strong Analytics

Reward and HR professionals have a number of tools to add value to the business case:

  • Strong analytics
  • Employee segmentation
  • Data visualisation

Our colleagues in Finance use KPI’s and key ratios to illustrate financial outcomes and we must do the same in reward. We must understand:

  • Key business segments and drivers
  • The timeframe – immediate, medium or long term, for the business strategies in those key segments
  • Key performers in those segments and responsible for those drivers

This information can drive our reward strategy.  By presenting appropriate strong analytics through data visualisation on the basis of appropriate segmentation gives a very powerful tool kit for us to work with and make recommendations to line management.

Asking the right questions

Any good analytical work and modelling starts with asking the right questions.  There is no point providing large amounts of statistical data and analysis without have a clear view of the questions we are using the data to answer.  This is a big issue with big data.  We have the data; but what do we use it to prove or disprove? 

Reward interventions must “do” something; be it reduce turnover, encourage managers to align with the interests of shareholders, or produce specific results.  Reward professionals must be able to show the outcomes of their products and programs.   For example, we must be able to show the relationship between our variable pay spend and the revenue generation, the return on capital employer (RoCE) and other key financial indicators.

Disclosure requirements

The “Say on Pay” requirements in the US and the regulations in the UK require the production of charts showing, for example, growth in relative total shareholder return against executive compensation.  We must extent this type of analysis through the organisation to show the stakeholders in the business; be they employees, executives, shareholders and regulators, that our reward program is progressive, does not reward failure and, as far as is possible, is “fair”.

I have argued in other blog posts that we are seeing the erosion of privacy around pay.  Within five years we will be reporting, as a minimum, on employees by bands of pay and more likely very detailed pay statistics on every employee in our organisation in the interests of “fairness” and transparency.

Strong Analytics II

There is little excuse for not providing strong analytics with appropriate data visualisation. Microsoft Excel provides some very good analytical and graphing tools and using the PowerPivot addin allows for the analysis of very large data sets and even the development of simple data cubes.  That is before we get in to many of the off-the-shelf compensation management tools and packages.

Here is an example of strong analytics presented through visualisation I produced from some sample data:

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The use of Microsoft Excel’s conditional formatting provides some intuitive “at a glance” analysis of bonus levels by department.  I thought about the type of questions the CEO might want to ask about the data and provided the answers in graphical and colour formats.

This second example shows a very simple graph of correlation between TSR and total remuneration for a FTSE 100 Executive.  It immediately shows the linkage between pay and performance; although TSR needs to be measured over a much longer time period, or alternatively normalised to remove the effects of the economic cycle, to provide a better analytic.

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Conclusion

As the CIPD survey noted, reward is, as always, becoming more complicated.  At the same time we are seeing far more scrutiny of pay by the largely uninformed politicians, regulators, shareholder advocacy groups and the media.  We must arm ourselves for this intrusion by preparing our toolkit of strong analytics to defend our positions and explain our philosophy.

 

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May 15, 2013

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CIPD, Hackathon, HR, Reward, Reward communication, Reward Strategy, Social Media

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CIPD Hackathon – Hacking HR to Build an Adaptability Advantage; A reward perspective

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Introduction

The UK’s HR professional body, the CIPD has recently set up a “Hackathon” to look at how HR can build an adaptability advantage.  A good idea with an interesting approach.  There appears to be limited consideration of how reward will support and enhance the approaches.  Reward has powerful implements in its tool kit to support change.   So I set my mind to an analytical structure to think about building adaptability advantage.

Wisdom of crowds – a challenge

I am a great believer in the wisdom of crowds.  Therefore I throw a challenge out to all those interested in reward, change, innovation and HR to generate ideas as to how the reward toolkit can be used to support adaptability advantage.

The reward blockers

Reward is largely designed to support existing behaviour.  So, in some organisations, it is used to support the status quo.  Rewarding behaviour that supports the organisation’s ideology and putting reward power in the hands of managers who have an understandable vested interested in supporting the status quo.  The challenge is to design an analytical reward framework that supports creative destruction, moving on from the status quo to a new organisational state and ideology.

A suggested framework – resource based strategy

I have used the resource based strategy framework as a starting place.  I know this may be consider a little old fashioned, but it works for me and if you have a better structure I would be very pleased to hear about it!  Using the resource based strategy approach we look at:

  • Resources
  • Capabilities
  • Competencies
  • Value Chain

that support adaptability and how we can use reward to support these factors.

Resources

What are the resources that support adaptability – how do we identify and cluster them?  Clearly people are the key.  But, what sort of people?  One could argue that it is the mavericks and free thinkers that lead the charge on adaptability.  Yet these types of people do not always fit or engage well with the corporate environment.  How do we reward the disrupters in our organisation without descending in to some Faustian pit of chaos?

Capabilities

How do we build organisational and personal capability to support adaptability?  What would the reward structure supporting such capability building look like?  Would we know it if we saw it, how would me measure it?  Organisational learning and routines would be key in building these capabilities – but it has always been an interesting question in the management of knowledge as to how we measure and reward organisational learning?  (Even ignoring the concept that organisations do not “learn” people do the learning).

To sustain competitive advantage our capabilities in adaptability must be hard to imitate – otherwise everyone will copy us and probability at a lower cost.    So we have to reward not only specific capabilities but those that are hard to imitate.  They may be hard to imitate because they are specific to our corporate environment – but to gain competitive advantage they must be so much more than just organisationally or sector specific.

Competencies

The competencies we need should flow out of the capabilities – or perhaps not?  What specific, observable, rewardable competencies are required and with what and how are we rewarding them?

Value chain

What are the internal and external value chains using our unique resources and capabilities that lead to adaptability advantage?  We must look to our clusters of resources and capabilities and how these are combined to give our competitive advantage.  What reward tools do we use to strengthen our value chains and the activities that support them; perhaps across enterprises and organisations, turning rigid barriers porous?

Conclusion

There are far too many questions and too few answers in this blog.  If the reward perspective; which is incredibility powerful in encouraging behaviour change can be harnessed, using the wisdom of crowds, to the task of “Hacking HR to Build an Adaptability Advantage” we will not only add enormous value to the process; but we will be key in ensuring its enduring success.  Over to you O wise crowds.