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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Rebuilding trust in the City of London

 

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Introduction

I was at a recent meeting in the City of London to launch the document “Focus on rebuilding trust in the City” a Chartered Institute of Personnel and Development (CIPD) survey of staff in financial services in the City of London on trust and their employment relationship.  (I tweeted from the meeting #rebuildtrust )  The keynote speakers to an invited audience of senior City HR people and journalists were:

 

It was an informative meeting presenting both the survey results and material on initiatives taking place to build trust after the calamities, errors, poor judgement and near criminal activity in the City over the last few years, which has badly eroded trust in what was once a gold standard for honesty and integrity.

Both Peter Cheese and Andrea Eccles gave particularly good presentations from different ends of the initiative spectrum.  Peter spoke on the big picture and in particular the role that HR has to play in leading the changes.  Andrea spoke of the very important key initiatives at grass roots level that City HR are taking, working with the Lord Mayor’s City Values forum.

The key themes during the meeting were:

Each of these themes is explored below.

Culture

Culture has been identified by the CIPD in earlier work as being fundamental to the required changes in the City.  The survey indicated clearly that the existing culture is a long way from being what is needed.  45% of the participants said their employer put profit before values.  Only 47% of staff saw customers as their key stakeholder.  As one of the speakers said, “What is required is a return to the core values of caring for customers and caring for employees”. 

One interesting take on the subject was the suggestion that financial services organisations need to focus more on recruiting “ethical” people.  My own experience, backed up by the survey results, is that a lot of people join financial services to make money.  In order to be seen as successful and to make the big bucks you need to be aggressive and egotistical; otherwise how would you make deals worth millions of pounds?  Unfortunately, aggression and egotism are not good indicators of ethical behaviour.  This goes to the heart of the matter; it is very difficult to make lots of money in an ethical and customer focused way.  The demands on one hand, by shareholders and analyst to make shed loads of money on one hand, and on the other, regulators, politicians (especially the European Union) and media on the other trying to stop profitable activity.

The role of HR in leading the changes was highlighted several times.  Again the paradox between this approach and the role of HR in supporting the business to carry out its activities was evident.  A good example was a comment about the morality of HR being involved in compromise agreements in financial services.  It was alleged that these compromise agreements can (as in the case of the NHS) be used to gag whistle blowers.  The reality is that compromise agreements are an essential part of the HR toolkit.  It allows for the amicable separation between employer and employee, normally on a “no fault” basis.  In the fast paced and rapidly changing environment like financial services, there will be differences of opinion, strategy and personality clashes.  Compromise agreements lead to a civilised and low cost way of managing these situations.  The suggestion that HR should stop using them is really throwing the baby out with the bathwater.  HR has far more important tasks in providing the frameworks for culture change than worrying about compromise agreements.  It is getting tied up in the detail rather than working on the big strategic picture that often leads to HR being perceived as a barrier rather than an enabler.

There was some good news.  RBS, the largely state owned bank in the UK, was singled out for praise for its work in introducing a much more ethical and customer centred approach – something of which I have some personal experience. (And would like to have more if Rory Tapner is reading this).  Sadly examples of good practice are few and far between. 

Values

Part of the discussion on culture must include values.  City HR is leading a lot of work on the development of toolkits to help.  The presentation by Simon Thompson went in to detail on the work of the Institute of Bankers on professional standards and many big employers in the City have signed up to these standards and the educational and training frameworks that support these approaches. 

Professionalism

This was a key theme in the presentations.  Raising the level of professionalism is very important in defeating the current broken culture.  What do I mean by broken culture?  It is the behaviours that allowed the manipulation of LIBOR rates for profit; that mis-sold products including PPI and, perhaps, some derivative products for gain rather than the good of the customer.

The survey showed that only 30% of staff are in professional bodies with standards.

To work in HR in the City you need to be CIPD qualified, yet to work as a banker you need no qualifications at all

That quote summed up for me the entire issue around professionalism.  One can argue about professionalism and its meaning.  It does normally provide a framework of acceptable (and unacceptable) behaviour that can form the basis of reward on one hand and disciplinary action on the other.

There was a comment that there are a vast number of codes of practice, regulations, laws, (domestic and foreign) and guidance – some of which is in direct contradiction.  True, but no one said it was going to be easy.

I must again praise the work of City HR in providing structure and good practice for professionals in the City.  This slow drip drip drip of information, tools and frameworks are, over the long term, likely to prove to be a bigger boost to professionalism than grand culture change initiatives by those embedded in the current City ideology. 

Leadership

One of the more disappointing results from the survey was that 41% of the participants said that there was one rule for senior management and another of other staff.   Given that nearly all the speakers emphasized the key role of senior management and CEO’s in leading the culture change; there is still a big mountain to be climbed.  The fact that only 36% of “other ranks” are aware of their organisations values indicate that organisational leadership has a large communications issue on their hands; and what is leadership if it is not communication of the vision.

Risk Management

A key theme during the presentation and during the Q&A session that followed was risk management.  It is clear that the framework to support culture changes needs good human capital measures and strong analytics.  Why?  Two major reasons were discussed.  First, it is difficult to discuss change if it cannot be properly measured.  Second, in the world of financial services number crunching and risk analysis are part of the bread and butter of daily activity.  To have credibility, the change activity, particularly if led by HR, needs to adopt this approach.  When I worked in investment banking I sat on the Operational Risk committee and that experience led directly to my design and implementation of a reward risk framework.     Exactly the same type of approach can be used when thinking about risk and culture in the financial services environment.  It is this sort of fundamental change in thinking that is going to provide the scaffold for the success of the work in culture change.  HR does, on occasion, shy away from people metrics; yet they are an essential framework for designing interventions and supporting our businesses. 

Role of HR

There was a lot of discussion on the role of HR.  Here I must depart from the gospel according to the panel speakers.  There are two places the pressure for change will come; the first is from senior management.  There is a bit of an issue with this one.  Senior management got where they are by supporting and encouraging the status quo.  Much of this has been made in management literature; the ideology of management has support for the status quo deeply imbedded within it.  Asking senior management to support massive cultural change may be like expecting turkeys to vote for Christmas….  The second place is from the employees within the organisation.    It is possible, as history has shown, for small but articulate groups of people to push for change from within the organisation.  Given the above mentioned ideology that is a possibility but not a strong probability. 

If culture change becomes another HR intervention it has the possibility to be marginalised and not become part of mainstream business thinking.  The survey showed that a number of culture change initiatives have not worked so far.  Only 17% of participants saw the culture change in their organisation as being very effective.

Clearly HR does have a role in providing the toolkits, interventions, training and development necessary to carry out the culture change; but leading it is not, in my view, going to happen and if it does it is more likely to lead to a marginalisation of the change on the business agenda as so often happens with HR led initiatives.

HR does have a key role in modelling and supporting behavioural change as well as ensuring that the new generation of bankers coming through at least start with an ethical mind-set. 

Reward issues

Reward is at the heart both of what is “bad” in the City and what will help drive change.  But,

  • 73% of staff think that some people in financial services are overpaid
  • 67% say there is secrecy around pay for senior mangers
  • Only 36% see reward as being “fair”.

As reward professionals we have to stand up and be counted.  Discussion needs to take place on what is “fair” pay.  Pay systems have to be somewhat more open so there is a greater understanding of what people are being paid for,

Key tasks include:

  • Better advocacy of pay levels and differentials in organisations
  • Development of incentives to encourage professionalism
  • Development of reward and performance management that encourage thinking about how an objective is reached as well as the measure of the objective.
  • Being as open as is appropriate to stakeholders on our reward approaches and outcomes
  • Being an advocate both internally and externally for the reward systems and outcomes.
  • To bring measured, data led, rational debate to politicians, the media and other commentators to prevent or at least moderate the near hysteria around financial services and senior executive pay

Conclusion

The CIPD report is a timely looking glass in to the views of those who work in financial services as to issues of trust and reward.  It is well written and influential; I would recommend it to you. (Disclosure note; I undertook some analysis of the raw data in the report for the CIPD).  Both the CIPD and CityHR are clearly thought leaders in this field and their activities are to be applauded.  The report is an important part and input to the on-going discussion on this subject.

The report is also timely.  The results from the Banking Standards Inquiry by the UK’s House of Commons are due to be produced very soon.  Unfortunately it may be argued by some that it has been badly tainted even before release because:

  • The standards of politicians in the UK are at an all-time low and lecturing other people on ethics and standards is at best the pot calling the kettle black and at worst rank hypocrisy.
  • A lack of understanding of the world and work of financial services by MP’s who have seldom operated in the real world and those who have did so via the playing fields of Eaton (an elite fee paying school in England  attended by many of the UK cabinet and their advisors).
  • A large part of the problems with the collapse of trust in financial services is due to inaction by politicians and regulators who believed that light touch and not actually understanding what was going on was a good way to regulate a very complex, risky, global business.
  • A potential perception that there is a lot of band-standing and jealousy going on at Westminster village that does not aid credibility

I hope I am wrong and wait to read the report with interest.  However, the weight of history is against them; since when have politicians made anything better?

Failure is not an option unless we do want the politicians to bring their incredibly costly sledge hammers to smash some nuts that, it turns out on closer inspection, actually have nothing to do with the problem.

It is only by hard work based on sound data such as the CIPD report; and not taking some moral high ground and seeking to apportion blame; that will make the very necessary changes.  HR and reward in particular do have key roles to play.  At the end of the day there must be the drive and will in the Board room to make the required culture change a reality. 

#reward #rebuildtrust #CityHR #RBS #trust #financialservices #cipd #cityoflondon #stronganalytics #rewardmanagement #risk #riskinhr #hrblogs

 

 

 

Visualisation of reward risks – the appetite for risk

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Introduction

The profile of reward and the risks it runs can hardly be higher.  Just in the last few days we have seen media headlines about alleged million pound plus salary overpayments in an NHS trust to further issues around votes on remuneration reports, for example the report in the Telegraph of Imperial Tobacco facing investor revolt over its bonus revamp.

These risks include operational reward risks (an often overlooked area) such as making sure that payrolls are run accurately with appropriate tax accounting and payments through to communications between remuneration committees and the shareholder advocacy groups such as, in the UK, the ABI or in the US ISS.

Risk is part of business operations.  What is important, if not essential, is to measure and manage those risks in a systematic framework.    This allows us reward professionals to discuss risk issues confidently with the business, our colleagues in external and internal audit as well as the regulators.  A systematic process allows us to define and agree our risk appetite with our organisations and reduces (although will never abolish) surprises from our reward activity.  I am a great believer in two philosophic approaches.  One is that we always underestimate the frequency and impact of random events.  The recent best seller “Thinking fast and slow” by Kahbneman is a fascinating book on these issues. Likewise, we will always be subject to “black swans” the disruptive large scale random event that no one was expecting.

An overall approach to reward risk

Rosario Longo has published a very good blog “Risk and Reward Risk Management” which gives an excellent overview and structure for looking at reward management risk.   He identifies the key stages and stakeholders in the analysis of risk – mostly from an operational reward risk perspective but the approach is also applicable to the wider questions of strategy, executive remuneration and so on.

His approach on risk measurement and evaluation is very similar to an approach I developed that allows the use of a relatively simple Microsoft Excel spread sheet to generate a visualisation of risk scores in an organisation.  Rosario makes the excellent point that risk scores and measurements are not absolute numbers but an expression of relativity in relation to the known reward risks that organisations may face.

The visualisation approach

It must be recognised that my approach is essentially a sub-set of the type of systematic approach that Rosario has suggested.  Much of the data feeding in to my spread sheet will have been collected by the methods and collaborations suggested by him.  I would add that much of the generation of indicators in my approach are a result of the implicit knowledge of the person drawing up the risks and metrics.  An experienced reward professional will know where the key choke points in reward operations lie and what issues tend to occur during bonus planning and reward processes.

First step: the listing of reward risks

There are a number of approaches to listing the risks in reward.  I like to use a systematic approach by looking at the individual reward processes and then considering the risks attached to each process.  When I last carried out a process like this I came out with a list of over 300 risks.  Here are some examples of reward risks:

Lack of   understanding by senior management of the reward process

Issues   with Regulators over reward

Levels   of base salary insufficient to recruit

US   Benefit structure not appropriate for culture

Vendor   costs not being controlled

Communications   with employees insufficient

Remco has insufficient market data

Table 1 Examples of reward risks

It would be good practice to collaborate on the list with stakeholders such as Remco, HR business partners, the Finance and Audit departments etc to get their views on what they see as reward risks.

The list of reward risks is not static; it will change with time and such issues as changes in legislation, tax, reporting requirements, code changes and so on. A quarterly review of the list would be a good starting point. 

Some organisations run risk databases; such as Operational Risk departments – or may even have access to external risk databases.  All of these are good sources of intelligence on risk in reward.

Once we have a list of risks we more on to the next stage of probability.

Second step: listing probabilities

This is the most difficult stage of the process.  In the vast majority of cases we look to our (and other) organisational history to see what has “gone wrong” or “needs improvement” in the past.  In addition we must also scan events to look for issues that have occurred in other organisations, either in our sector or elsewhere.  Again, access to an external risk databases is a good way of keeping up with risk issues.  Advisors can also be a good source of advice around incipient risks.

At the end of the day risk is largely down to individual judgement.  Unless you have risks with a high frequency which allows mathematical modelling such as Monte Carlo simulations then you have to make an informed judgement call on the probability of risk based on history.  However, as investment advisors are keen to point out, past performance is no predictor for future results”.  Also any risk listing will be specific to the organisation to which it relates – it is all about context.

My model uses a risk weighting of 1 to 10.  Where a rating of one is highly improbable and ten is certain.    Once again, the rating is not static.  Risk probabilities change over time, so the probabilities must be reviewed frequently to ensure we are capturing as many of the issues as possible with their shifting probabilities. 

I am sure that statisticians or actuaries would have much more sophisticated approaches to this process; but I have designed the approach so that HR and reward professionals have a basic framework to start their risk mapping, if you have access to more sophisticated approaches then do use them.

It is important, from a methodological standpoint, not to read false accuracy in to the risk probability approach.  At the end of the process we are looking at the relative levels of risk in our organisation to give some focus as to where we should concentrate resources; not a forecasting tool.

 Third step: listing impact

This is perhaps easier than listing probabilities.  Again we use a simple 1-10 scale where one indicates no impact to ten – the end of life as we know it.  What we are looking at here is what impact would the risk have on our organisation?  For example, would incorrect tax payments on employee remuneration lead to reputational and financial damage?  Would not paying our R&D staff insufficiently result in them leaving with long term damage to our research effort?   Again, we are looking at an estimate of impact, ranging from some minor inconvenience to putting the existence of the organisation at risk.  As an example of this we have seen some companies run in to very serious financial problems in the UK as they had not fully considered the risks they were taking with their final salary pension schemes and the funding requirements nearly bankrupted them.

Another story around impact and probability.  When working in the City I was advised to carry an emergency gas mask.  I questioned the advice.  It was pointed out to me that the probability of a terrorist gas attack in the City was small (although perhaps higher now than in the past), the probability of being on an over ground or underground train catching fire and filling with smoke was considerably higher – but still low.  However, the impact of either of these events was a ten.  So while I hope I never have to use the mask, it only takes one occurrence of the above and me to have the mask to save my life.  We do tend to underestimate low probability, high impact events; as a former scout leader, “be prepared” it a good motto for reward risk as well as scouting.

At this stage we have a list of risks, a listing of probability against each risk and a score for the potential impact of the risk.

Forth step: Risk correlation multiplier

My initial model of risk in reward did not contain a risk correlation multiplier.  However, I have come to the conclusion that difficult as it is, consideration has to be given to this issue.  What is a risk correlation multiplier?  Simply put, if a risk occurs how likely is it that the risk will cause an increase in another risk factor.  Taking a simple example of payroll.  The risk is that we are not paying our employees correctly.  There is a correlation (and I am not strictly talking of statistical correlation here) between not paying employees correctly and not paying the correct statutory deductions in the relevant country.  What I have done is added a correlation multiplier to the score for the risk of not paying employees correctly to reflect it will increase risk in other areas.  If you pay employees in different countries, perhaps on split contracts, the issue of where payment is made, where, and how much tax is due and the implications of getting it wrong, impact on a number of other risks and pose a real operational threat.

Once again we are in the world of estimates.  The more statistically aware will see I am multiplying estimates by estimates by estimates; giving a number which arguably has no real meaning.  However, as noted above we are not looking for an arithmetical answer but relativities of risk in our organisation to allow us to focus resources in the most effective way possible.

We are nearly at the end of the process…

Fifth step: Generate the risk score

This is simply the product of the probability, impact and risk correlation multiplier.  The risk score is a single number that allows us to rank our scores and see where the highest risks in our environment appear to exist.  

Final step: mapping the risk

As figure one above shows, it is possible to produce a useful graphic that shows where are key risks are concentrated.  This is really beneficial when talking to stakeholders, who may not need the detail of the process, but allows them to focus in on the key risk factors. 

Clearly if you have 300 risks, mapping them like this will not work.  In that case it is easy to return to our original process map of reward and use this approach to map risk against each process with an overall map showing a cumulative risk for each process in our reward product stable.  Once again individual circumstances and trial and error will lead us to a process that is optimal for us and our organisation.

Managing the risks

Once we have the information on the likely risks in our reward environment we need to consider how to manage them.  In my model I use a column called “mitigation”.  That is what we can do to reduce the risk.  It may be, for example, that we review the risk with an external advisor or with our Finance department to see how the risk can be reduced.  Linked to this is the next column which I have called “Controls”.  So, for example, if we are concerned about inappropriate payments being made from payroll we can have four eyes, or even six eyes sign off on non-regular payments.  Or, perhaps mandate a random sampling and checking of the payroll.  Again, our colleagues in external and internal audit can be of great help in designing controls on our key risk areas. 

Having appropriate key performance indicators is one approach to managing risk matrix issues.  We need to know and measure before we can attempt to control.   It is not possible to attach KPI’s to every reward process; but there are many that we can.  For example, we can look at attrition statistics, together with leaver interviews to deduct if pay levels are an issue and track this over time.  Payroll and pension payment errors are easy to use for KPI’s.

Many years ago when I worked for Ford Motor Company, everyone in the business, over a certain level or employed in certain key areas were required to undertake a course in statistical process control (SPC).  I suspect this may be a little old fashioned these days; but I found it a very useful way to look at error occurrences and decide if they were random issues or there was an underlying systematic problem that needed to be addressed.  KPI’s and SPC taken together are very powerful tools for spotting issues before they become (or as they become) problems.  Every organisation will have their way of managing risk, but having an organised systematic approach, from the very simple to the very sophisticated is a very good way to start on the risk management journey.

For me, the final part of the risk management mapping is identifying the risk owner.  Who has responsibility for the process in which there are risks?  This helps focus our attention on the whom as well as the what of stakeholder risk management.

Risk appetite

One of the other important outputs from risk mapping is to agree with management the risk appetite of an organisation.  What risks within the matrix are acceptable and which are unacceptable.  Risk is part of business and the costs of mistakes are again part of the cost of business.  The question arises as to how much cost (including indirect cost such as reputational damage) is an organisation prepared to “allow”?  What risks are completely unacceptable and need to be completely removed if that is possible or a willingness to spend more or less on mitigation of risk.  This is an area where a risk mapping in reward can add real value to a business.

Conclusion

The mapping of risk in reward is a key process.  It gives some comfort to management, auditors and regulators that we are aware of the risks of our activities and the steps we have taken to measure, control and mitigate as appropriate. 

The two frameworks, from Rosario Longo and my spread sheet based approach provide a very useful toolkit for a systematic approach to risk in reward and at least forms the basis for a comprehensive risk structure.

Risk mapping adds value to our activities and processes for the business as it both prevents unnecessary costs and contributes in a very positive way to the governance of our organisation.

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