Reward in a changing landscape

What are we going to cover? The changing nature of work The changing workforce Society’s Voice Regulatory impact Reward – the traditional model Reward and Engagement Reward – a new model

The changing nature of work We are becoming a talent economy 50 years ago, 72% of top 50 US companies involved in control and use of natural resources c. 1960, the Rise of the talent Economy began Whereas in the 50 years to 1960, the number of creative roles increased by only 3 percentage points (to 16%), in the 50 years that followed to 2010, they doubled to 33% By 2013, only 20% relied on ownership of natural resources and half of the top 50 US companies were talent-based HBR (Oct 2014), Martin RL The Rise (and Likely Fall) of the Talent Economy

The ‘Hollowing out of Work’ Low payMedium payHigh pay Department of Business, Innovation & Skills, Research Paper 134, Oct 2013 Hollowing out and the future of the Labour Market The changing nature of work Change in employment by occupationn

Baby Boomers – born 1946 to 1964 Generation X – born 1965 to 1982 Generation Y – born 1983 to 2000 Generation Z – born 2001 onwards ‘People, especially Gen Ys and Boomers, are looking for … a “remixed” set of rewards. Flexible working arrangements and the opportunity to give back to society trump the sheer size of the pay package” HBR (July 2009), Hewlett, Sherbin & Sumberg How Gen Y & Boomers will reshape your agenda Age Demographic The changing workforce

Society’s Voice

Shareholder Spring The High Pay Centre welcomed the show of strength from investors over remuneration, confirming ‘The negative publicity for companies like [X] and [Y] creates real pressure to bring pay back to fairer, more proportionate levels’ Shareholder vote on pay requiring 50% vote in favour and is binding Will this go even higher?

Society’s Voice So why does executive pay get so much attention?

Society’s Voice Shareholder Spring

But… Society’s Voice http ://cdn.caughtoffside.com/ wp- content/uploads/2014/09/Cristiano- Ronaldo-Real-Madrid6.jpg

And … Society’s Voice

content/uploads/2014/09/Cristiano- Ronaldo-Real-Madrid6.jpg Maybe focus should be at other end of spectrum – protecting and providing for the lowest paid in society. Legislative £6.50 ph £260 pw £13,520 pa Social The Living Wage

Stronger Regulation European Regulation Capital Requirements Directive III and IV Alternative Investments Fund Managers Directive Undertakings for the Collective Investment in Transferable Securities IV

Stronger Regulation Pay-out Process Rules  Between 40% and 60% of variable pay should be deferred  Half of deferral should be deferred into shares of company or funds managed  Should be subject to clawback and malus  50% of immediately available variable should also be delivered in instruments with a retention period attaching  Salary cap introduced which limits variable pay to 1 x base salary (or up to 2 x with shareholder approval)

Reward – the traditional model

Maslow’s Hierarchy of Needs (1954) Herzberg’s Two-Factor Theory (1964) Money is just a hygiene factor and doesn’t engender true motivation Adams’ Equity Theory (1963) “A finding that employees are dissatisfied with pay is, in effect, a non-finding. It is to be expected. The key thing that the organization needs to focus on is whether employees are more dissatisfied with their pay than are employees in other organizations.” Lawler (1990)

Reward – the traditional model Does the traditional model work? Extrinsic rewards can increase motivation / performance for uninteresting tasks But increasing rewards decreased intrinsic motivation for interesting tasks If the reward is tangible and foreseeable, intrinsic motivation decreases by 36% Meta-analyis by Deci et al (1999) For tasks that are creative, rather than mechanical, in nature … … extrinsic rewards can actually reduce performance Glucksberg (1962)

Reward – the traditional model Does the traditional model work? Rewards / incentives work when the task is simple or the answer is obvious They don’t work when confronted with complex problems, where the data is uncertain, incomplete or ambiguous And they need to be carefully thought through – so beware of what you incentivise!!

A quick Dilbert break

Reward & Engagement Companies with engaged employees perform about 4 times better in financial terms (Watson Wyatt, 2009) Companies with engagement scores in the top quartile performed on average 12% higher on customer advocacy, 18% higher on productivity, and 12% higher on profitability (Gallup, 2006) Each engaged employee is worth about $5,000 pa in additional profit (Hewitt Associates, 2009)

Reward & Engagement The link between pay and pay satisfaction is not strong (< 4.8%) The link between pay and job satisfaction is even weaker (< 2%) cited in Chamorro-Premuzic (2013, HBR Blog) Gallup found no link between level of pay and employee engagement

Reward & Engagement

Greenberg (1986) – looked at determinants of fairness in performance evaluations Procedural fairness and Distributive Fairness Folger & Konovsky (1989) – Perceived fairness in pay decisions Distributive fairness more important in driving satisfaction with own outcomes Procedural fairness more important in driving trust in the supervisor and commitment to the organisation

Reward – a new model Dan Pink (2010) DRIVE – the surprising truth about what motivates us

Reward – a new model Intrinsic drive (the joy of the task) is powerful Identifies two types – Type X and Type I But intrinsic motivation / drive can be damaged by extrinsic motivators The basic deal still has to be right (fair) But, otherwise, classic reward structures and incentives don’t work for Type I

“People do work for money – but they work even more for meaning in their lives. In fact, they work to have fun” Pfeffer (1998) Reward – a new model

Take money off the table Ensure internal and external fairness Pay a little more than the market demands Make your performance metrics wide-ranging and make the upsides modest Reward – a new model

What might all this look like?

Summary There is more to motivation and engagement than pay and bonus But we cannot ignore reward – it remains an important part of our toolkit and It still needs to fair / equitable Flexibility in reward structures (benefits) and approach to work may become even more important as we try to attract and retain talent in a changing environment Find structures / approaches that give employees autonomy and reflect their values / needs And – since nothing stays still – what works today may not work tomorrow…

Thank you