Low inflation prompts overhaul of reward systems
HR and compensation practitioners need to be more creative in designing reward and recognition systems in times of low inflation, according to a new report by UK pay analysts Incomes Data Services.
Pay practitioners have become accustomed to hearing that the new climate of low inflation has taken some of the shine off merit-based awards as there is now little scope for substantial salary rises for above-average performers. But, according to IDS, employers face a daunting challenge. The question is really what employers can do to motivate people when the money available for pay increases is less than they are used to .
When it comes to motivating employees in periods of sustained and low inflation, it seems some fundamental adjustments are required in the management of reward. For more established businesses the familiar ways of motivating people may no longer work, says IDS. The ability to resolve recruitment and retention problems by throwing money at them does not exist. Without changes in approach, employees will become increasingly frustrated.
IDS issued a stark warning: The reduced scope for individualisation suggests that there will a crisis of motivation.
Getting it right
So, how can organisations get the most from their reward systems? IDS admits there is no readily available formula , especially when the age and composition of the workforce is so diverse. However, an approach which emphasises teamwork, skills, personal development and steers clear of the 'quick fix' not only fits the age of zero inflation, but is well suited to the more knowledge-based, team-based approach that is essential for future success.
Collective rewards: Rather than moving away from performance-related pay altogether, IDS advocates shifting the focus of reward away from merit awards based on individual performance to payments linked to team or enterprise success.
Long-term: In the new climate, the annual award cycle is likely to be unsatisfactory , says IDS, especially when it is linked to merit. Employers may have to make less frequent awards, with much greater emphasis placed on the longer-term, such as increments linked to experience and competence.
Payment by results: Bonuses make sense when inflation is low, says IDS. Why? Because it is easier to keep a lid on costs with bonuses and they provide a more immediate motivational impact than simple salary rises. Besides, a bonus culture allows employees to be proud of their achievements without being promoted.
Results-oriented: Payments may need to be tied more closely to results than they have been. All too many bonuses in more traditional businesses are only loosely tied to results — take, for example, profit sharing. But in the newer companies contacted by IDS bonuses are much more focused and tied to the achievement of targets.
Non-financial rewards: The harsh reality is that employers are motivated by more than cash, so employers should provide new forms of recognition that do not depend on the promotion of money, says IDS. Organisations may need to adopt what other researchers have termed a total reward approach, with greater emphasis on non-financial, intrinsic rewards such as training and career development as a way for individuals to progress.
As IDS puts it: Employees work for money, but employers need to seize every opportunity to emphasise and develop the other elements which make their organisation attractive and worthwhile and make employees feel valued .
Broadbanding could lead to new problems
The IDS researchers remain unconvinced by the attractions of one of the major contemporary trends in management pay: broadbanding. The report makes clear that introducing this form of pay structure is far from plain sailing. IDS has a strong message for those of you considering this move: Broadbanding obviously gives companies room for manoeuvre, but could lead to new problems. There is bound to be discontent when the pay of some groups or individuals is allowed to drift up because of market forces while others are held back, without the comfort of an appreciable pay rise to look forward to.
Moreover, there are a host of other formidable stumbling blocks. The absence of structure means that employees can be uncertain where they stand. It puts a great deal of pressure on line managers to communicate with staff about their development and goals.
Title: Managing reward in low inflation , IDS Focus 92, winter 1999.
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