Effective Reward Strategies Reward Strategy in practice – the Lloyds TSB experience London Councils – September 2007 Tim Fevyer, Compensation & Benefits, Lloyds TSB

Historic approach to reward strategy

Historic way of working… Start with a grand plan –Adopted a classical approach to strategy development –Top down, heavily planned and very rational –Ordered and rigid Start with a grand plan –Adopted a classical approach to strategy development –Top down, heavily planned and very rational –Ordered and rigid The centre has all the answers –What the offer should comprise –Who should get what –What individuals pay adjustments should be The centre has all the answers –What the offer should comprise –Who should get what –What individuals pay adjustments should be Focus on pay –Pay to get people in –Pay to keep people –Pay to increase performance Focus on pay –Pay to get people in –Pay to keep people –Pay to increase performance

Historic way of working… Outcomes –Sheep-dip approach to package design –Reward is done to you (missing ownership) –Broad-brush decision making (un-equal pay) –Value of reward spend is wasted –Over reliance on a pay panacea Outcomes –Sheep-dip approach to package design –Reward is done to you (missing ownership) –Broad-brush decision making (un-equal pay) –Value of reward spend is wasted –Over reliance on a pay panacea

Base pay context: pre-1980s Low competition Few products Privilege to be a customer! Homogeneous workforce Jobs for life Strong hierarchy

Base pay choices: pre-1980s Time based progression line –People get a service based increase –Increase mainly determined by cost of living Everyone progresses to top of scale over time Ignores performance, ignores worth & value Generates significant, unjustifiable, pay disparity Everyone progresses to top of scale over time Ignores performance, ignores worth & value Generates significant, unjustifiable, pay disparity

Base pay context: the 80s and 90s Deregulation Greater competition More products – sales emerge Greater customer choice and expectation Increasing diversity of the workforce Jobs less secure

Base pay choices: the 80s and 90s (stage 1) The fixed matrix –People rated according to their performance –Rating then determines their pay adjustment People rewarded every year for something they did in one year Risks ignoring true worth or value Unjustifiable pay disparity remains People rewarded every year for something they did in one year Risks ignoring true worth or value Unjustifiable pay disparity remains

Base pay choices: the 80s and 90s (stage 2) The variable matrix –People rated according to their performance –Rating determines the adjustment range Enables market position to be factored in Still risks unjustifiable pay disparity Still reward people every year for something they did in one year Enables market position to be factored in Still risks unjustifiable pay disparity Still reward people every year for something they did in one year

Todays approach

In reality… Outcomes much more fluid, emergent, responsive Create overall framework, within which responses are flexible Consider: internal politics, cultural norms, what actually works Start with a few simple questions for the business: What are we in business for? What are our core objectives? What are our people goals? How does our reward strategy support the above? What changes could be made to make it even better?

Where do we find the answers?… Design –Spend much more time talking to people –Plan for initiatives adapt to their implementation –Incorporate inherent flexibility –Aim for locally owned change Decision making –Pay decisions made where the information is –No centrally dictated pay adjustments or matrices –Local decisions Central framework –Shifting emphasis of Line, HR and the centre

Determining what really matters…

Is money the answer…? Traditionally pay was the answer to everything Found its impact limited…unless you get it wrong! How long do pay increases last? Are people ever happy with pay? Focus on what really drives engagement

What drives performance? Source: Corporate Leadership Council Study, 2002

Implications… Market Positioning Individual Contribution Rewarding Performance Flexibility Total Reward Customer Focus Marketing Get the basics right but then focus on what really does make a difference

Determining the basics…

Where should we pitch base pay? Percentage of employees Planning to leaveNot planning to leave Source: Watson Wyatt Total Reward survey 2004 Proportion of employees actively considering leaving their current job in the next 12 months categorised by perceived market positioning

What high performing organisations do… Base pay typically managed around 50 th percentile Then highly differentiated according to contribution Business success shared with those who make a difference Consider and use total reward…not just pay Clearly communicated and marketed coherent total offer Clear vertical line of sight to business goals Source: Bespoke Hewitt research 2004 Towers Perrin HPO research 2003 Base pay typically managed around 50 th percentile Then highly differentiated according to contribution Business success shared with those who make a difference Consider and use total reward…not just pay Clearly communicated and marketed coherent total offer Clear vertical line of sight to business goals Source: Bespoke Hewitt research 2004 Towers Perrin HPO research 2003

Managing individual contribution –Three simple questions Paid less than contribution?...increase pay Paid equal to contribution?...move pay with market Paid more that contribution?...dont adjust pay Local decision making within a framework of the relevant market and pay pot Local decision making within a framework of the relevant market and pay pot £ 100% market median 90% 120%

Getting pay right - markets National market for all National market for most Functional market for some National market for most Functional market for some Functional markets for many National market for some Geographical markets for some Functional markets for many National market for some Geographical markets for some

The cultural shift… Im paid to perform and if I get an increase it will be because the market has moved, or I bring extra value beyond normal expectations. Ive performed well this year so I should get a salary increase

Variable Pay – rewarding performance Base pay reflects individual contribution Variable pay reflects annual performance Business performance determines the pot Individual performance determines the allocation Overall opportunities linked to relevant market

What really makes a difference?

Market Positioning Individual Contribution Rewarding Performance Flexibility Total Reward Customer Focus Marketing

Flexibility: managing to needs The best companies need talent with a diverse range of backgrounds, skills, mindsets… Meeting diverse needs through flexible reward can: –increase value to individual and company –encourage people to join –encourage people to stay –help people feel better about the company Overwhelming call for flexibility Held together within a consistent framework

Stage 1Stage 2Stage 3Stage 4 Focus on Base Pay Offer defined by Salary Focus on main tangible elements Offer defined by Total Comp Focus on Base and Bonus Offer defined by Total Cash Focus on all main package elements Offer defined by what its like to be here Total Reward: managing the whole Towers Perrin Total Reward Model

Customer Focus: employee treatment 70,000 employees: not one homogeneous group Identifiable groupings with low participation levels Framework for further research Springboard to segmentation 5 key segments with clear differences in: - what they value; - where they spend money; - what they like doing.

Customer Focus: segmenting employees May be setting up a home More computer literate Live for now Not financially astute, little debt, few financial products Interested in things that will improve quality of their life: - spending money; - looking good; - enjoying themselves. Entry Bands Age under 29 (young free and single!) Implications: Bullet-point type tone Most information posted online Short, simple, to the point Dont cover detail or how things work Show how it benefits them Implications: Bullet-point type tone Most information posted online Short, simple, to the point Dont cover detail or how things work Show how it benefits them

Marketing: managing the messages Do people value it? How do you know? Do people know about it? How is it communicated and positioned?

The lessons for us…

Base it on business needs Focus on what really makes a difference Find out what really makes a difference Talk to people about design Involve people in bringing it to life Create the framework but build inherent flexibility Push decision making closer to the answers Market and brand it - dont just communicate Keep reviewing and refreshing it