As pay awards and the economy start to pick up, FDs and HR teams are looking to see if they can get “more bang for their buck”, writes Chris Warmoll
GETTING to grips with what best motivates, rewards and engages employees is a fine art. As the economy expands, Financial Directortakes a look at what are some of the most powerful stimuli for recruiting and retaining staff and what role finance should play in ensuring that corporates derive the most value from the cost of incentivising colleagues.
The age-old mantra that cash is king may well hold sway in the kingdom of instant gratification. And just such a stance is certainly borne out from research conducted by the Chartered Institute for Personnel and Development (CIPD). Its Show me the money: The behavioural science of reward report found that “money has a powerful effect on behaviour, over and above those arising purely from its value, and including unintended and distorting effects”.
But delayed reward – an über-gospel that is much adored and puritanically practiced by the self-denying middle classes – also has its fan base. And it appears that a natty fusion of the two approaches is part of the solution.
However, it now goes way beyond the employer pension contributions and gym memberships of old, as Apple and Facebook have demonstrated. That duo of high-tech sassiness now offers its female employees the opportunity to freeze their eggs in a bid to both recruit and hold on to those with all-X chromosomes.
Apple said it would start to offer the mildly leftfield benefit to its US-based staff at the beginning of this year, arguing that it was “always looking at new ways” its health programmes can meet employee needs. The move is part of the iPhone maker’s expanded benefits offering for women which includes extended maternity leave alongside cryopreservation and egg storage.
Fellow tech giant Facebook also offers egg freezing payments to its female employees of up to $20,000 (£13,000) alongside adoption and surrogacy help and a range of fertility support for both sexes.
While some may baulk at the somewhat Orwellian overtones of the offering, its history as a benefit can be traced back to it being made available to cancer patients prior to them embarking on courses of chemotherapy which damage a woman’s eggs. This then morphed into the concept that, by removing and fertilising eggs when women are in their 20s, they could – on paper at least – lengthen the window of opportunity to fall pregnant and start a family over the next couple of decades.
But the CIPD report notes that such tangible rewards could run the risk of undermining the desire to do a good job. “They appear to work best in areas where little intrinsic motivation is present, and when the incentives support individuals’ need for autonomy and a sense of competence,” it notes.
Overall, the research finds that employers can tailor their offerings more favourably by being more aware of how employees react to benefits and reward. And while the allure of cold hard cash may work as the best motivator, more is not always better when considering other benefits. In fact, while wider benefits can be highly valued, the report makes a case for keeping these additional benefits to a minimum and ensuring they are as well targeted as possible.
“Other benefits, such as healthcare, company cars or gym membership, can form an important and effective part of a reward strategy. Where there is an element of flexibility, they may additionally support diversity and autonomy, but employees may in fact perceive having to make a decision as a cost,” it finds.
“Avoiding a choice may lead to inertia, retaining a form of benefit that is no longer valued. There is thus a case for minimising the range of benefits offered and simplifying the process of selecting them. It is also worth noting that the subjective value of a benefit to an individual can lessen over time, resulting in a perceived loss, as does the removal of a benefit. Such losses are experienced as greater than the original value of the benefit. We argue employers should refresh the benefits offered, try to avoid offering benefits that may need to be taken away and think carefully about whether removal is necessary.”
While this may appear somewhat obvious to the more seasoned benefits professionals, it gives good foundation to closely analysing take-up and actual usage of benefits rather than purely relying on the wish list resulting from staff surveys. The report also reveals that additional employer pension contributions are frequently undervalued and good regular communication of these is required.
“Traditionally, there has been wide support for offering pension contributions above the required minimum, in particular because of the benefits seen in staff attraction and retention,” it says.
“Evidence from behavioural science suggests employees tend to significantly undervalue the employers’ contributions except in very late career, suggesting that, like deferred incentives, pensions don’t punch their weight as an element of reward. However, proactively and regularly communicating the value of pension contributions can help counter this.”
However, it is in reference to pay structures that the report brings the biggest conclusions.
It finds that individuals have a subjective view of their own worth which varies over time – affected by elements such as the wider economic climate and how they compare their own reward and skills to those of peers.
Too frequently, this is put down to the “tendency to overvalue our own skills in relation to others”. This, the report notes, can play out in various ways, which include potentially losing people at the top of pay scales perceive when they face barriers to pay progression.
“Having more flexibility in base pay structures can help counter such examples of endowment bias,” it suggests.
Yet, it agrees there is a balance to be struck as people valued fairness in pay. When coupled with incoming demands on employers for greater pay transparency, it is clear that this could be a challenge.
CIPD research adviser Jonny Gifford explains: “The key is having a flexible reward package that takes into account behavioural nuances and doesn’t rely solely on a wad of cash as the only means to motivate staff. It’s a change in direction for many but should also be welcome news for organisations that, in a challenging economic context, need to be more creative with their rewards package.”
Duncan Brown, head of HR consulting at the Institute for Employment Studies, says the landscape of employee benefits has changed since the tight employment market of the early 2000s when a flexible and wide array of benefits were all the rage.
“Post-recession, there’s a lot of different models emerging. You’ve got the Sports Direct zero-hours contracts with a very small elite on a good package and high incentive and you’ve got traditional employers like John Lewis, which somehow – with a very expensive package, pretty good pay for a retailer and amazing benefits – is very successful. Most organisations are somewhere in the middle,” he explains.
Such a scenario has left the traditionally paternalistic world of the pensions and comprehensive benefits packages somewhat in the doldrums, says Brown, “The finance director says, ‘Well, what are we really getting out of this?’ – and in some cases, it’s left HR departments struggling to justify that”.
But what should FDs do?
“Ask themselves what the aim of the benefits package is,” says Brown. “Is what you offer any better than if you just gave them cash and let them buy their own benefits? FDs need to look at the total package cost. Break it down and look at the philosophy of the organisation. Is it a professional, added-value business or a low-margin, low-cost business? To what extent is the benefits package in line with that?”
While most research indicates that, when joining a potential employer, the prospective financial remuneration, in terms of salary and any bonus, is the pre-eminent force in decision making, “most evidence is that isn’t what differentiates why you want to stay at a place and bust a gut” once firmly embedded in an organisation.
It’s “more down to ‘it’s a cool place to work’, ‘I have a great manger’, ‘brilliant feedback on how I’m doing’, ‘I get loads of development’, or ‘get told when I do a good job’”, says Brown.
“It’s a combination of the financial and non-financial that the most successful organisations are able to leverage to get a really high contribution from their workforce. There are studies that show a secure package can work, but again, what’s the model? John Lewis gets away with a relatively high-cost reward model that cuts its turnover but means it can deliver good customer service which means people spend a lot of money, so it pays off. But it would put another retailer out of business.”
First cut is the deepest
As the recession began to bite and companies began to shed employees and extricate themselves from costly, but paternalistic defined benefit plans, companies also introduced pay freezes. Some cut their benefit packages too deeply, says Brown.
“Some have probably not looked enough at the whole package; some will have over-reacted to cost increases on pensions and done some short-term cost cutting when they should have looked at the whole context and the impact in the longer term. A reward package is part of a transaction, part of an employment relationship and you can quantify those aspects of that – and others you can’t,” he explains.
Now that pay awards and the economy are both starting to pick up, FDs and HR teams are looking to see if they can get “more bang for their buck and motivate staff more at an equivalent or reduced cost level”, continues Brown.
Improving communications is also key, argues Brown, as employee focus groups often report negative feelings towards their benefits package – but they’re far more receptive to the benefits once reminded of what they actually get.
“Most organisations do a poor job of communicating, despite communications technology getting a lot cheaper and sexier,” argues Brown. He says a lot more work needs to be done in terms of getting employers to let their employees know what their package is worth – particularly if giving them a choice.
So what needs to happen at the senior management level in terms of a road map to employee benefit success?
“Putting the hard and the soft sides together – and that implies HR and finance working together,” concludes Brown.