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SPECIALIST HR




  A rewarding                                                                                                                                                                               Top pay as a multiple of average pay



  crisis for
                                                                                                                                                                                            in six leading companies, 30 years ago and now
                                                                                                                                                                                                                                                                                                    x60
                                                                                                                                                                                                x44.1
                                                                                                                                                                           MULTIPLE OF                             x14.5              x13.6            x16.5         x14.9              x13.3       x40
                                                                                                                                                                           AVERAGE PAY
                                                                                                                                                                             (1979 - 80)                                                                                                            x20       MulTiplicATion
                                                                                                                                                                                                                                                                                                              TAbles
                                                                                                                                                                                                                                                                                                    x0




  HR?
                                                                                                                                                                                                                                                                                                              Data taken from Cheques
                                                                                                                                                                                TOP PAY
                                                                                                                                                                                               £225,000                                              £143,000                                                 with Balances, the report
                                                                                                                                                                              (1979 - 80)                        £87,000             £79,000                        £81,000           £75,000
                                                                                                                                                                                                                                                                                                              of the High Pay
                                                                                                                                                                                                                                                                                                              Commission (HPC),
                                                                                                                                                                                               Lonmin            Barclays         Lloyds Banking        BP            GKN           Reed Elsevier             November 2011, using
                                                                                                                                                                              COMPANY                                                 Group                                                                   figures supplied by IDS.
                                                                                                                                                                                                                                                                                                              Top pay in 1979-80 is a
                                                                                                                                                                                                                                                                                                              director’s remuneration,
                                                                                                                                                                                                                £4,366,000                           £4,453,000                                               while in 2009–11 it is the
                                                                                                                                                                                TOP PAY
                                                                                                                                                                              (2009 - 11)                                                                          £1,534,000                                 actual total earnings of
                                                         Words: Dr Jonathan Trevor                                                                                                            £1,865,000                           £2,572,000                                        £2,028,000               the lead executive. The
                                                         infographic illustrations: Section Design                                                                                                                                                                                                  x0
                                                                                                                                                                                                                                                                                                              HPC report points out a
                                                                                                                                                                                                                                                                                                              number of caveats,
                                                                                                                                                                                                                                                                                                              particularly the fact that


   Reward policy is increasingly complex, impossibly
                                                                                                                                                                                                                                                                                                    x20
                                                                                                                                                                                                                                                                                                              the multiples of average
                                                                                                                                                                                                                                                                                                              pay for 2009–11 are
                                                                                                                                                                                                                                                                     x47.7                          x40       calculated on global

   technical, focused on too few people, and has
                                                                                                                                                                           MULTIPLE OF                                                                 x63.2                           x38.4
                                                                                                                                                                           AVERAGE PAY                             x75                 x75                                                                    wage bills and
                                                                                                                                                                                                                                                                                                    x60       headcounts, while data
                                                                                                                                                                              (2009 - 11)

   serious unintended consequences. We need a new
                                                                                                                                                                                                                                                                                                              for 1979–80 is UK only.
                                                                                                                                                                                                x113.1                                                                                              x80       However, the data gives
                                                                                                                                                                                                                                                                                                              an indicative picture of


   approach to liberate value across the organisation
                                                                                                                                                                                                                                                                                                    x100      growth in top earnings
                                                                                                                                                                                                                                                                                                              relative to average pay in
                                                                                                                                                                                                                                                                                                    x120      each company




 R
                        eward is controversial. Whether it’s bank-                                   the employment relationship. The focus for all was the limi-          of interest is the new order of the day, and incentives appeal-                                This should not be interpreted as a rejection of perform-
                        ing bonuses, fat cat pay for failure, or                                     tation of risk posed by conflict within the employment rela-          ing to the financial self-interest of employees at all levels,                              ance pay per se, but perhaps as recognition of the many addi-
                        even MPs’ expenses, reward is always in                                      tionship, whether lost productivity on the one hand, or lost          from the bottom to the top (especially), have become the pri-                               tional factors that discreetly influence performance out-
                        the news, always an emotive issue and                                        wages and job insecurity on the other.                                mary means through which it is secured.                                                     comes beyond the control of management. Successive studies
                        everybody, always, has an opinion – most                                        until the 1980s and sweeping reform at the hands of the               However, managing reward in the strategic sense is far                                   over the past decade indicate that employees consistently
                        often negative. This, of course, is not new.                                 Iron Lady as well as an exasperated nation, conflict contain-         from straightforward. A central theme of my recent book                                     rate financial reward as less important than other factors,
                        The better part of the 20th century saw                                      ment was the order of the day, and consensus, as difficult as         Can Pay be Strategic? A Critical Exploration of Strategic Pay in                            including their relationship with their immediate superior,
   industrial action dominating domestic media reporting as                                          it can be, was the means through which relative harmony               Practice is that strategic reward systems are often extremely                               progression opportunities and the reputation of the firm.
   Britain tore itself apart through class conflict, with pay dis-                                   was secured.                                                          difficult to manage because of their complexity. Indeed, for                                   Performance pay is merely one element of the package




                                                                                                 M
   putes and picket lines marking the literal front line between                                                                                                           many organisations, research indicates that attempts to use                                 that directs employees’ best effort, behaviours and skills.
   unions and management.                                                                            The new order                                                         reward strategically can prove to be more of a liability than a                             Meaningfully integrating financial and non-financial ele-
      Whether then, now or in the future, reward (or pay if you’re                                                          ore recently, we have invested instead in      benefit, producing conflict rather than unity.                       ‘ConCerns over         ments into a coherent proposition as “total reward” remains
   old school) has the potential to induce conflict and consume                                                             the notion that reward is a key element in        conflict in this context is not as obvious as striking miners     talent attrition       a challenge because it requires wide involvement across the
   value like few other features of modern society. Popularly                                                               securing performance and value creation.       challenging police armed with batons and water cannon. It is         are driving            organisation by line managers, HR functions (beyond
   seen as a force for ill, can reward be a force for good or are                                                           Management unilaterally, so the theory         much more dangerous than that, organisationally, because it          reward deCisions       reward) and employees themselves.
   practitioners destined always to live in controversial times?                                                            goes, chooses reward strategies, practices     is discreet and ever present. It takes the form of employee          more than any             Further, my research reveals that concerns over talent
      The nature and role of reward in organisations has shifted                                     and processes that best support the strategic direction of the        disengagement and disenfranchisement, which ultimately               other                  attrition are driving reward decisions much more than any
   dramatically over the course of the past 30 years. The major-                                     organisation. Reward, when managed strategically, is a pow-           results in employee attrition and the withholding of all-            Consideration,         other consideration, including performance. Perhaps unsur-
   ity of the early to mid post-war period (late 1940s to early                                      erful means through which employers promote employees’                important discretionary effort. As a result, reward specialists      inCluding              prisingly, the highest performing individuals are not always
   1970s) was characterised by the “golden era” of industrial                                        line of sight with managerial goals, align effort and secure          believe that an overhaul of performance-based rewards is             performanCe’           the highest paid. High performance does not necessarily
   relations, in which management and employee representa-                                           desirable behaviours.                                                 necessary, given the many acknowledged challenges and                                       equal high reward. Additional powerful factors within the
   tives (typically trade unions) sought collectively to repre-                                         It is still a critical element of attracting and retaining tal-    unintended consequences experienced when attempting to                                      labour market are influencing decision-making. But if firms
   sent and mitigate the pluralism of interest inherent within                                       ent, but its role as the behavioural lever is its real value. unity   link pay to performance.                                                                    are not paying for performance, what are they paying for?



40 ⁄   JANUARY 2012
       PEOPLEMANAGEMENT.cO.uk
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                                                                                                                                                                                                                                                                                                           PEOPLEMANAGEMENT.cO.uk      ⁄ 41
SPECIALIST HR

                                                              This is the thorniest item currently dominating the reward
                                                                                                                               Historical earnings (median,                                                                        CEO pay packages (median)                                                                                     Highest and lowest FTSE 350 lead
                                                           agenda. The issue is talent – or rather, what constitutes talent
                           PRESSURE
                           MOUNTS                          in the contemporary environment. It is all too easy to speak        indexed): FTSE 350 CEOs                                                                             by market listing, 2010-11                                                                                    executive total earnings levels 2010-11
                           April 2011
                                                           in platitudes about people being a company’s most important         compared with all full-time                                                                                                                                                                                                                    FTSE
                                                                                                                               UK employees




                                                                                                                                                                                                                                                                                                                                 £2,711,238
                           Fair pay in the                 asset, but, in reward terms, talent refers increasingly to the                                                                                                             BASIC SALARY          TOTAL CASH*           TOTAL EARNINGS**                                               COMPANY                   RANKING TOP 10 - TOTAL EARNINGS
                           public sector                   very few and not the many. companies are prioritising their                                                                                                      £3m
                           Review by economist Will                                                                                                                                                                                                                                                                                              Xstrata                       10          £18,426,105
                           Hutton, commissioned by         top management populations more than ever and will do                  FTSE 100 CEO*       FTSE 250 CEO*             ALL FULL-TIME EMPLOYEES**
                                                                                                                                                                                                                                                                                                                                                 Reckitt Benckiser             21          £17,879,000
                           HM Treasury, called for         anything to hold on to those precious few because, it is per-




                                                                                                                                                                                                                                                                                                                    £2,009,489
                                                                                                                               *Based on median total earnings of CEO or                                                   £2.5m                                                                                                                 ICAP                          82          £13,419,619
                           annual publication of pay
                                                           ceived, corporate competitiveness depends upon it. The              equivalent as shown in annual reports
                           details of all board-level                                                                                                                                                                                                                                                                                            Tesco                          17         £12,038,303
                           executives, together with       implication is that value flows from the few at the top – not       **Based on ONS data taken from the ASHE survey
                           multiples showing ratio of                                                                                                                                                                       £2m                                                                                                                  Rio Tinto                      5          £11,623,162
                                                           the many who are destined merely to follow.
                           top to median pay in all                                                                                                                                                                                                                                                                                              WPP Group
                           public bodies – and in the         The fear is that the talented few will leave if denied the       350                                                                                                                                                                                                                                             39          £8,949,985




                                                                                                                                                                                                                                                                                            £1,092,502
                           private sector too.             possibility of significant financial incentives. Perhaps this                                                                                                                                                                                                                         Gulf Keystone Petroleum       186         £8,913,223
                                                                                                                                                                                                                           £1.5m
                                                           explains why, according to IDS, in the last financial year the                                                                                                                                                                                                                        Experian                      43          £8,601,984




                                                                                                                                                                                                                                                                                         £853,000


                                                                                                                                                                                                                                                                                                         £830,000
                                                           average increase in total earnings for FTSE 100 directors           300                                                                                                                                                                                                               Jupiter Fund Management       165         £8,530,871




                                                                                                                                                                                                                                                                       £559,000
                                                                                                                                                                                                                            £1m




                                                                                                                                                                                                                                                                      £520,316
                                                           was 49 per cent, while average employee pay rises have been                                                                                                                                                                                                                           Pearson




                                                                                                                                                                                                                                                                                  £450,750
                                                                                                                                                                                                                                                                                                                                                                               40          £8,003,641




                                                                                                                                                                                                                                                                   £330,000
                                                                                                                                                                                                                                                     £295,000
                                                           well below the rate of inflation.




                                                                                                                                                                                                                                                     £300,117
                                                                                                                                                                                                                                                    £239,000
                                                                                                                                                                                                                                                                                                                                                                                       BOTTOM - 10 TOTAL EARNINGS




                                                                                                                                                                                                                                      £219,217
                                                                                                                                                                                                                                      £215,757
                                                                                                                                                                                                                                     £177,250
                                                              Indeed, over the past decade, executives’ and bankers’                                                                                                       £0.5m
                                                                                                                               250                                                                                                                                                                                                               RPC Group                     299          £340,000
                                                           remuneration has increased by hundreds of per cent over
                                                           “Main Street” pay. It could be argued that incentives and                                                                                                                                                                                                                             Big Yellow Group              308          £299,708
                                                                                                                                                                                                                             £0                                                                                                                  Nautical Petroleum
                           Sept 2011                       bonuses are being deployed not to align performance, but to                                                                                                                                                                                                                                                         333          £279,000
                                                                                                                                                                                                                                        AIM        FLEDGLING SMALLCAP              FTSE 250              FTSE 100
                           Consultation                    attract and retain the talented few. Performance is the sec-                                                                                                                                                                                                                          Anglo Paci�ic Group           327          £262,317
                                                                                                                               200
                           on executive pay                                                                                                                                                                                        *Salary, bene�its + value of last earned bonus including deferred shares
                           Consultation paper              ondary concern in reward – a talent “logic” that favours the                                                                                                                                                                                                                          Ferrexpo                      104          £213,338
                                                                                                                                                                                                                                   **Total cash + the value of crystalised/realised share-based incentives
                           launched by business            few and not the many has supplanted it.                                                                                                                                                                                                                                               Imperial Innovations          314          £199,995




                                                           T
                           secretary Vince Cable, who                                                                                                                                                                              FTSE 100, the 100 most highly capitalised blue-chip
                           referred to “concerns about                                                                                                                                                                                                                                                                                           Stobart Group                 323          £181,900
                                                                                                                                                                                                                                   companies; FTSE 250, mid-capitalised companies not
                           the disconnect between          Why does it matter?                                                 150
                                                                                                                                                                                                                                   covered by the FTSE 100; SmallCap, companies outside                                                          Kalahari Minerals             271          £150,000
                           how our largest listed                        his is both surprising and worrying for a number                                                                                                          the FTSE 350 Index; Fledgling, UK companies listed on the
                           companies perform and the                                                                                                                                                                               London Stock Exchange that are too small to be included                                                       Sports Direct International   201          £150,000
                           rewards that are on offer”.                   of reasons. First, many would argue that we are                                                                                                           above; AIM, the London Stock Exchange’s international                                                         Asian Citrus Holdings         263          £138,404
                           Government proposals                          making a transition from an industrial age to         100                                                                                                 market for smaller growing companies.
                           expected this month.                                                                                                                                                                                    www.ftse.com www.londonstockexchange.com
                                                                         the uncharted territory of the technology-                                                                                                                                                                                                                              *some �igures converted




                                                                                                                                                                                                                                                                                                                                                                                     £0m


                                                                                                                                                                                                                                                                                                                                                                                              £2m


                                                                                                                                                                                                                                                                                                                                                                                                        £4m


                                                                                                                                                                                                                                                                                                                                                                                                              £6m


                                                                                                                                                                                                                                                                                                                                                                                                                    £8m


                                                                                                                                                                                                                                                                                                                                                                                                                           £10m


                                                                                                                                                                                                                                                                                                                                                                                                                                    £12m


                                                                                                                                                                                                                                                                                                                                                                                                                                           £14m


                                                                                                                                                                                                                                                                                                                                                                                                                                                  £16m


                                                                                                                                                                                                                                                                                                                                                                                                                                                         £18m


                                                                                                                                                                                                                                                                                                                                                                                                                                                                £20m
                                                                                                                                      2000

                                                                                                                                             2001

                                                                                                                                                    2002

                                                                                                                                                           2003

                                                                                                                                                                  2004

                                                                                                                                                                         2005

                                                                                                                                                                                 2006

                                                                                                                                                                                        2007

                                                                                                                                                                                               2008

                                                                                                                                                                                                      2009

                                                                                                                                                                                                             2010

                                                                                                                                                                                                                    2011
                                                                                                                                                                                                                                                                                                                                                 from foreign currency
                                                                         enabled. Necessarily, our organisations are                                                                                                               Source: IDS
                                                           changing too – from the bureaucracy fit for the stable and
                                                           predictable world of the industrial age, in which efficiency is
                                                           king, to the unstable and non-linear world of the informa-                                                                                                              in fact – just because it appears to work elsewhere does not                                               LINKS & NOTES
                                                           tion age, in which innovation reigns supreme. Here, value is                                              MEdIaN pay dEaLS                                              ensure relevance in all contexts. Equally, overly technical                                                                                                                            ThE avEragE
                                                           found throughout the networked eco-system, in which                                                       acrOSS ThE prIvaTE                                            reward systems are fundamentally ineffective – how can they                                                                                                                            INcrEaSE IN TOTaL
                                                           reside the liberated talents and capabilities of the many –                                               SEcTOr durINg ThE                                             be motivational if they cannot be understood?                                                              • CIPD Training The                                                         EarNINgS fOr fTSE
                                                                                                                                                                                                                                                                                                                                              reward management short
                           Nov 2011                        not purely those of the talented (or lucky) few at the top of                                             ThrEE MONThS TO                                                  However, this all pales next to the most worrying conse-                                                courses and qualifications
                                                                                                                                                                                                                                                                                                                                                                                                                          100 dIrEcTOrS IN ThE
                           High Pay Commission
                           Set up by Compass think         the corporate pile.                                                                                       ENd SEpTEMbEr                                                 quence – systemic conflict arising as a result of iniquity. Like                                           will give you in-depth                                                      LaST fINaNcIaL yEar
                                                                                                                                                                                                                                                                                                                                              technical knowledge and
                           tank and the Joseph                What reward looks like in future organisations is not yet                                              Source: IDS                                                   the late 1970s and early 1980s, will we witness widespread                                                                                                                             Source: IDS
                           Rowntree Trust, and chaired                                                                                                                                                                                                                                                                                        skills to enable you to
                                                           clear, but investing solely in the few would seem a perver-                                                                                                             civil unrest because of the perceived inequality made possi-                                               develop tailored strategies
                           by business journalist
                           Deborah Hargreaves, its         sion of the empowering logic of the information age.                                                                                                                    ble by a culture of reward that favours only the few? Last                                                 and solutions that support
                           final report set out evidence                                                                                                                                                                                                                                                                                      real organisational and
                                                              There are also significant reputational risks attached to                                                                                                            summer’s viral riots in the uk’s cities perhaps offer a glimpse                                            business needs
                           “that excessive high pay
                           damages companies, is bad       current reward practices. The perceived shortcomings of                                                                                                                 of the future if we maintain our current trajectory.                                                       bit.ly/cipdrewardtraining




                                                                                                                                                                                                                                   T
                           for our economy and has         executive and banking pay are damaging to the legitimacy             Over recent years, reward has become impossibly techni-                                                                                                                                                                                              past was characterised by busy hands and feet. We desired
                           negative impacts on society                                                                                                                                                                                                                                                                                        • All IDS data comes from
                           as a whole”.                    and credibility of the corporate whole. continued contro-          cal – and not just at the executive level. Firms are locked in a                                     Where do we go from here?                                                                                  the Director’s Pay Report              only productivity from the many – in other words, compli-
                                                                                                                                                                                                                                                                                                                                              2011/12 incomesdata.co.uk
                                                           versy will only attract further attention from regulators and      tournament of technical escalation on all fronts. The result is                                                   he crisis in reward, if you believe it is a crisis,                                           and the IDS Pay Report
                                                                                                                                                                                                                                                                                                                                                                                     ance with rules and effort towards targets, both conceived
                                                           the public alike and, as many remuneration directors believe,      mutually assured abstraction of reward practice to the point                                                      is an opportunity, however, to re-evaluate the                                                IDSPay.co.uk                           by the few. Work is no longer physical for the many, but nei-
                                                           inhibit further the ability of organisations to align reward       where it is no longer grounded in the imperatives of the busi-                                                    role of reward in both value creation and value                                                                                      ther is it liberated (or empowered, to use HR speak).
PHoToGRaPH: THe GuaRDIan




                                                                                                                                                                                                                                                                                                                                              • Hay Group data comes
                                                           practice to business priorities. Indeed, the government is         ness, but aligned instead to generic market norms and so-                                                         preservation. As Rahm Emanuel, mayor of chi-                                                  from the report Which Way                 Our workplaces are still characteristically bureaucratic –
                                                           due to publish proposals this month aimed at curbing exces-        called best practice. It is a path to non-alignment between                                                       cago, said of the current financial crisis when                                               Now For Reward?                        work is performed by the many against the highly prescribed
                                                                                                                                                                                                                                                                                                                                              bit.ly/haygroupreport
                                                           sive boardroom pay (see panel, left).                              reward and strategy. Worse still, institutional research indi-                                       he was Whitehouse chief of staff: “Never let a good crisis go                                                                                     standards of the few. This is no bad thing for the many
                                                              Potentially worse still, shareholders who perceive them-        cates that many companies merely follow the herd down the                                            to waste.”                                                                                                 • Can Pay Be Strategic?                organisations for which the bureaucratic model remains fit
                                                                                                                                                                                                                                                                                                                                              A Critical Exploration of
                                                           selves as disempowered by their “agents” (a posh academic          path of technocracy and normative practice adoption when                                                In my opinion, firstly and most obviously, organisations                                                Strategic Pay in Practice              for purpose. But it is certainly not appropriate for all organi-
                                                           term for executives), will become more activist on reward,         faced with uncertainty over reward outcomes. After all, how                                          should seek to embrace the many. This is not simply a reward                                               is published by Palgrave               sations – and fewer still if we are truly moving into the infor-
                                                                                                                                                                                                                                                                                                                                              Macmillan
                                                           demanding a greater and ultimately binding say on pay.             wrong can something be if everyone is doing it? Very wrong                                           issue but, fundamentally, a work issue. Human capital in the                                                                                      mation age.



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SPECIALIST HR

      As an example, I recently asked a class of senior managers
   on a corporate change executive education programme if                                                                            AverAge totAl
   they felt they had permission from their executive to take                                                                        eArnings A
   ownership for business transformation. The timid response                                                                         yeAr for
   was, at best, ambiguous; at worst, it was a straight “no”.                                                                        A ftse 100
      Human capital in the post-bureaucratic future must be                                                                          director
   radically different. The competitive environment will                                                                             Source: IDS
   increasingly demand new capabilities of our organisations
   beyond mere excellence of execution. competitiveness will
   be a function of the capability of the many to autonomously
   acquire, share and integrate new knowledge with existing
   practices to realise high-value innovations. This is a model of                                urable and, therefore, relatively easy to incentivise. Perhaps
   collective enterprise and not lone-wolf entrepreneurialism.                                    it is also because important aspects of the work lack mean-
      Permission will simply not feature. Of course, there will                                   ing? But are highly leveraged incentives the only means
   always need to be a degree of hierarchy and managerial co-                                     though which effort can be secured?
   ordination in our organisations, because efficiency will                                          Arguably, the relationship between contemporary work
   always matter. It is just that it will progressively matter less                               and personal fulfilment is weak, and will only become more
   than other capabilities and, by extension, the few will also
                                                                         ‘current reward          so as work becomes increasingly specialised, routine and,
                                                                         practices,
   matter less. current reward practices, especially individual                                   ultimately, depersonalised.
                                                                         especially
   incentives, are standing in the way of this transformation and        individual                  This is not a reward issue, but reward is being used as a
   organisations need to move on or, I fear, move out.                   incentives, are          crutch for both weak leadership and, perhaps, intellectually
      There are better means for achieving desired reward out-           standing in the          and morally impoverished work. In this vein, reward is part
   comes than relying on financial reward and appealing to               way of this              of the problem and will never be the solution, no matter how
   individual self-interest. Work should be a reward in itself           transformation.          much money is put on the table. It is destructive and will only
   because it is intrinsically engaging – not least because it           organisations            continue to court controversy. That does not mean we need
   makes a demonstrable and positive difference to the worlds            need to move on          to revert to past practice, but we do need to look to the future
   of our people, customers and communities. As psychologist             or, i fear,              and ask how reward might be – must be – different.
   Frederick Herzberg famously said: “If you want someone to             move out’
   do a good job, then give them a good job to do.”                                               about the author • dr Jonathan trevor is director of the
      To a large extent, average banking pay is so out of kilter                                  Centre for People and Organisation, Cambridge Judge Business
   with average industry pay because the work output is meas-                                     School, University of Cambridge




   How use of variable pay differs according to seniority                                     Source: Hay Group


        annual bonus            spot recognition scheme               share options    long-term incentives




                   ExEcutivEs
                                                              sEnior ManagEMEnt
                                                                                                        ManagEMEnt
        33%                                                   23%
                                                                                                              8%                    6%
                                                                                                                                                staff        2%
                                        42%                                                         10%

                                                                                      47%
                                                          12%
                                                                                                                                         35%
                                                                                                   25%                   56%
               17%                                                                                                                                        57%
                             8%                                        18%




44 ⁄   JANUARY 2012
       PEOPLEMANAGEMENT.cO.uk

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Reward 01.12

  • 1. SPECIALIST HR A rewarding Top pay as a multiple of average pay crisis for in six leading companies, 30 years ago and now x60 x44.1 MULTIPLE OF x14.5 x13.6 x16.5 x14.9 x13.3 x40 AVERAGE PAY (1979 - 80) x20 MulTiplicATion TAbles x0 HR? Data taken from Cheques TOP PAY £225,000 £143,000 with Balances, the report (1979 - 80) £87,000 £79,000 £81,000 £75,000 of the High Pay Commission (HPC), Lonmin Barclays Lloyds Banking BP GKN Reed Elsevier November 2011, using COMPANY Group figures supplied by IDS. Top pay in 1979-80 is a director’s remuneration, £4,366,000 £4,453,000 while in 2009–11 it is the TOP PAY (2009 - 11) £1,534,000 actual total earnings of Words: Dr Jonathan Trevor £1,865,000 £2,572,000 £2,028,000 the lead executive. The infographic illustrations: Section Design x0 HPC report points out a number of caveats, particularly the fact that Reward policy is increasingly complex, impossibly x20 the multiples of average pay for 2009–11 are x47.7 x40 calculated on global technical, focused on too few people, and has MULTIPLE OF x63.2 x38.4 AVERAGE PAY x75 x75 wage bills and x60 headcounts, while data (2009 - 11) serious unintended consequences. We need a new for 1979–80 is UK only. x113.1 x80 However, the data gives an indicative picture of approach to liberate value across the organisation x100 growth in top earnings relative to average pay in x120 each company R eward is controversial. Whether it’s bank- the employment relationship. The focus for all was the limi- of interest is the new order of the day, and incentives appeal- This should not be interpreted as a rejection of perform- ing bonuses, fat cat pay for failure, or tation of risk posed by conflict within the employment rela- ing to the financial self-interest of employees at all levels, ance pay per se, but perhaps as recognition of the many addi- even MPs’ expenses, reward is always in tionship, whether lost productivity on the one hand, or lost from the bottom to the top (especially), have become the pri- tional factors that discreetly influence performance out- the news, always an emotive issue and wages and job insecurity on the other. mary means through which it is secured. comes beyond the control of management. Successive studies everybody, always, has an opinion – most until the 1980s and sweeping reform at the hands of the However, managing reward in the strategic sense is far over the past decade indicate that employees consistently often negative. This, of course, is not new. Iron Lady as well as an exasperated nation, conflict contain- from straightforward. A central theme of my recent book rate financial reward as less important than other factors, The better part of the 20th century saw ment was the order of the day, and consensus, as difficult as Can Pay be Strategic? A Critical Exploration of Strategic Pay in including their relationship with their immediate superior, industrial action dominating domestic media reporting as it can be, was the means through which relative harmony Practice is that strategic reward systems are often extremely progression opportunities and the reputation of the firm. Britain tore itself apart through class conflict, with pay dis- was secured. difficult to manage because of their complexity. Indeed, for Performance pay is merely one element of the package M putes and picket lines marking the literal front line between many organisations, research indicates that attempts to use that directs employees’ best effort, behaviours and skills. unions and management. The new order reward strategically can prove to be more of a liability than a Meaningfully integrating financial and non-financial ele- Whether then, now or in the future, reward (or pay if you’re ore recently, we have invested instead in benefit, producing conflict rather than unity. ‘ConCerns over ments into a coherent proposition as “total reward” remains old school) has the potential to induce conflict and consume the notion that reward is a key element in conflict in this context is not as obvious as striking miners talent attrition a challenge because it requires wide involvement across the value like few other features of modern society. Popularly securing performance and value creation. challenging police armed with batons and water cannon. It is are driving organisation by line managers, HR functions (beyond seen as a force for ill, can reward be a force for good or are Management unilaterally, so the theory much more dangerous than that, organisationally, because it reward deCisions reward) and employees themselves. practitioners destined always to live in controversial times? goes, chooses reward strategies, practices is discreet and ever present. It takes the form of employee more than any Further, my research reveals that concerns over talent The nature and role of reward in organisations has shifted and processes that best support the strategic direction of the disengagement and disenfranchisement, which ultimately other attrition are driving reward decisions much more than any dramatically over the course of the past 30 years. The major- organisation. Reward, when managed strategically, is a pow- results in employee attrition and the withholding of all- Consideration, other consideration, including performance. Perhaps unsur- ity of the early to mid post-war period (late 1940s to early erful means through which employers promote employees’ important discretionary effort. As a result, reward specialists inCluding prisingly, the highest performing individuals are not always 1970s) was characterised by the “golden era” of industrial line of sight with managerial goals, align effort and secure believe that an overhaul of performance-based rewards is performanCe’ the highest paid. High performance does not necessarily relations, in which management and employee representa- desirable behaviours. necessary, given the many acknowledged challenges and equal high reward. Additional powerful factors within the tives (typically trade unions) sought collectively to repre- It is still a critical element of attracting and retaining tal- unintended consequences experienced when attempting to labour market are influencing decision-making. But if firms sent and mitigate the pluralism of interest inherent within ent, but its role as the behavioural lever is its real value. unity link pay to performance. are not paying for performance, what are they paying for? 40 ⁄ JANUARY 2012 PEOPLEMANAGEMENT.cO.uk JANUARY 2012 PEOPLEMANAGEMENT.cO.uk ⁄ 41
  • 2. SPECIALIST HR This is the thorniest item currently dominating the reward Historical earnings (median, CEO pay packages (median) Highest and lowest FTSE 350 lead agenda. The issue is talent – or rather, what constitutes talent PRESSURE MOUNTS in the contemporary environment. It is all too easy to speak indexed): FTSE 350 CEOs by market listing, 2010-11 executive total earnings levels 2010-11 April 2011 in platitudes about people being a company’s most important compared with all full-time FTSE UK employees £2,711,238 Fair pay in the asset, but, in reward terms, talent refers increasingly to the BASIC SALARY TOTAL CASH* TOTAL EARNINGS** COMPANY RANKING TOP 10 - TOTAL EARNINGS public sector very few and not the many. companies are prioritising their £3m Review by economist Will Xstrata 10 £18,426,105 Hutton, commissioned by top management populations more than ever and will do FTSE 100 CEO* FTSE 250 CEO* ALL FULL-TIME EMPLOYEES** Reckitt Benckiser 21 £17,879,000 HM Treasury, called for anything to hold on to those precious few because, it is per- £2,009,489 *Based on median total earnings of CEO or £2.5m ICAP 82 £13,419,619 annual publication of pay ceived, corporate competitiveness depends upon it. The equivalent as shown in annual reports details of all board-level Tesco 17 £12,038,303 executives, together with implication is that value flows from the few at the top – not **Based on ONS data taken from the ASHE survey multiples showing ratio of £2m Rio Tinto 5 £11,623,162 the many who are destined merely to follow. top to median pay in all WPP Group public bodies – and in the The fear is that the talented few will leave if denied the 350 39 £8,949,985 £1,092,502 private sector too. possibility of significant financial incentives. Perhaps this Gulf Keystone Petroleum 186 £8,913,223 £1.5m explains why, according to IDS, in the last financial year the Experian 43 £8,601,984 £853,000 £830,000 average increase in total earnings for FTSE 100 directors 300 Jupiter Fund Management 165 £8,530,871 £559,000 £1m £520,316 was 49 per cent, while average employee pay rises have been Pearson £450,750 40 £8,003,641 £330,000 £295,000 well below the rate of inflation. £300,117 £239,000 BOTTOM - 10 TOTAL EARNINGS £219,217 £215,757 £177,250 Indeed, over the past decade, executives’ and bankers’ £0.5m 250 RPC Group 299 £340,000 remuneration has increased by hundreds of per cent over “Main Street” pay. It could be argued that incentives and Big Yellow Group 308 £299,708 £0 Nautical Petroleum Sept 2011 bonuses are being deployed not to align performance, but to 333 £279,000 AIM FLEDGLING SMALLCAP FTSE 250 FTSE 100 Consultation attract and retain the talented few. Performance is the sec- Anglo Paci�ic Group 327 £262,317 200 on executive pay *Salary, bene�its + value of last earned bonus including deferred shares Consultation paper ondary concern in reward – a talent “logic” that favours the Ferrexpo 104 £213,338 **Total cash + the value of crystalised/realised share-based incentives launched by business few and not the many has supplanted it. Imperial Innovations 314 £199,995 T secretary Vince Cable, who FTSE 100, the 100 most highly capitalised blue-chip referred to “concerns about Stobart Group 323 £181,900 companies; FTSE 250, mid-capitalised companies not the disconnect between Why does it matter? 150 covered by the FTSE 100; SmallCap, companies outside Kalahari Minerals 271 £150,000 how our largest listed his is both surprising and worrying for a number the FTSE 350 Index; Fledgling, UK companies listed on the companies perform and the London Stock Exchange that are too small to be included Sports Direct International 201 £150,000 rewards that are on offer”. of reasons. First, many would argue that we are above; AIM, the London Stock Exchange’s international Asian Citrus Holdings 263 £138,404 Government proposals making a transition from an industrial age to 100 market for smaller growing companies. expected this month. www.ftse.com www.londonstockexchange.com the uncharted territory of the technology- *some �igures converted £0m £2m £4m £6m £8m £10m £12m £14m £16m £18m £20m 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 from foreign currency enabled. Necessarily, our organisations are Source: IDS changing too – from the bureaucracy fit for the stable and predictable world of the industrial age, in which efficiency is king, to the unstable and non-linear world of the informa- in fact – just because it appears to work elsewhere does not LINKS & NOTES tion age, in which innovation reigns supreme. Here, value is MEdIaN pay dEaLS ensure relevance in all contexts. Equally, overly technical ThE avEragE found throughout the networked eco-system, in which acrOSS ThE prIvaTE reward systems are fundamentally ineffective – how can they INcrEaSE IN TOTaL reside the liberated talents and capabilities of the many – SEcTOr durINg ThE be motivational if they cannot be understood? • CIPD Training The EarNINgS fOr fTSE reward management short Nov 2011 not purely those of the talented (or lucky) few at the top of ThrEE MONThS TO However, this all pales next to the most worrying conse- courses and qualifications 100 dIrEcTOrS IN ThE High Pay Commission Set up by Compass think the corporate pile. ENd SEpTEMbEr quence – systemic conflict arising as a result of iniquity. Like will give you in-depth LaST fINaNcIaL yEar technical knowledge and tank and the Joseph What reward looks like in future organisations is not yet Source: IDS the late 1970s and early 1980s, will we witness widespread Source: IDS Rowntree Trust, and chaired skills to enable you to clear, but investing solely in the few would seem a perver- civil unrest because of the perceived inequality made possi- develop tailored strategies by business journalist Deborah Hargreaves, its sion of the empowering logic of the information age. ble by a culture of reward that favours only the few? Last and solutions that support final report set out evidence real organisational and There are also significant reputational risks attached to summer’s viral riots in the uk’s cities perhaps offer a glimpse business needs “that excessive high pay damages companies, is bad current reward practices. The perceived shortcomings of of the future if we maintain our current trajectory. bit.ly/cipdrewardtraining T for our economy and has executive and banking pay are damaging to the legitimacy Over recent years, reward has become impossibly techni- past was characterised by busy hands and feet. We desired negative impacts on society • All IDS data comes from as a whole”. and credibility of the corporate whole. continued contro- cal – and not just at the executive level. Firms are locked in a Where do we go from here? the Director’s Pay Report only productivity from the many – in other words, compli- 2011/12 incomesdata.co.uk versy will only attract further attention from regulators and tournament of technical escalation on all fronts. The result is he crisis in reward, if you believe it is a crisis, and the IDS Pay Report ance with rules and effort towards targets, both conceived the public alike and, as many remuneration directors believe, mutually assured abstraction of reward practice to the point is an opportunity, however, to re-evaluate the IDSPay.co.uk by the few. Work is no longer physical for the many, but nei- inhibit further the ability of organisations to align reward where it is no longer grounded in the imperatives of the busi- role of reward in both value creation and value ther is it liberated (or empowered, to use HR speak). PHoToGRaPH: THe GuaRDIan • Hay Group data comes practice to business priorities. Indeed, the government is ness, but aligned instead to generic market norms and so- preservation. As Rahm Emanuel, mayor of chi- from the report Which Way Our workplaces are still characteristically bureaucratic – due to publish proposals this month aimed at curbing exces- called best practice. It is a path to non-alignment between cago, said of the current financial crisis when Now For Reward? work is performed by the many against the highly prescribed bit.ly/haygroupreport sive boardroom pay (see panel, left). reward and strategy. Worse still, institutional research indi- he was Whitehouse chief of staff: “Never let a good crisis go standards of the few. This is no bad thing for the many Potentially worse still, shareholders who perceive them- cates that many companies merely follow the herd down the to waste.” • Can Pay Be Strategic? organisations for which the bureaucratic model remains fit A Critical Exploration of selves as disempowered by their “agents” (a posh academic path of technocracy and normative practice adoption when In my opinion, firstly and most obviously, organisations Strategic Pay in Practice for purpose. But it is certainly not appropriate for all organi- term for executives), will become more activist on reward, faced with uncertainty over reward outcomes. After all, how should seek to embrace the many. This is not simply a reward is published by Palgrave sations – and fewer still if we are truly moving into the infor- Macmillan demanding a greater and ultimately binding say on pay. wrong can something be if everyone is doing it? Very wrong issue but, fundamentally, a work issue. Human capital in the mation age. 42 ⁄ JANUARY 2012 PEOPLEMANAGEMENT.cO.uk JANUARY 2012 PEOPLEMANAGEMENT.cO.uk ⁄ 43
  • 3. SPECIALIST HR As an example, I recently asked a class of senior managers on a corporate change executive education programme if AverAge totAl they felt they had permission from their executive to take eArnings A ownership for business transformation. The timid response yeAr for was, at best, ambiguous; at worst, it was a straight “no”. A ftse 100 Human capital in the post-bureaucratic future must be director radically different. The competitive environment will Source: IDS increasingly demand new capabilities of our organisations beyond mere excellence of execution. competitiveness will be a function of the capability of the many to autonomously acquire, share and integrate new knowledge with existing practices to realise high-value innovations. This is a model of urable and, therefore, relatively easy to incentivise. Perhaps collective enterprise and not lone-wolf entrepreneurialism. it is also because important aspects of the work lack mean- Permission will simply not feature. Of course, there will ing? But are highly leveraged incentives the only means always need to be a degree of hierarchy and managerial co- though which effort can be secured? ordination in our organisations, because efficiency will Arguably, the relationship between contemporary work always matter. It is just that it will progressively matter less and personal fulfilment is weak, and will only become more than other capabilities and, by extension, the few will also ‘current reward so as work becomes increasingly specialised, routine and, practices, matter less. current reward practices, especially individual ultimately, depersonalised. especially incentives, are standing in the way of this transformation and individual This is not a reward issue, but reward is being used as a organisations need to move on or, I fear, move out. incentives, are crutch for both weak leadership and, perhaps, intellectually There are better means for achieving desired reward out- standing in the and morally impoverished work. In this vein, reward is part comes than relying on financial reward and appealing to way of this of the problem and will never be the solution, no matter how individual self-interest. Work should be a reward in itself transformation. much money is put on the table. It is destructive and will only because it is intrinsically engaging – not least because it organisations continue to court controversy. That does not mean we need makes a demonstrable and positive difference to the worlds need to move on to revert to past practice, but we do need to look to the future of our people, customers and communities. As psychologist or, i fear, and ask how reward might be – must be – different. Frederick Herzberg famously said: “If you want someone to move out’ do a good job, then give them a good job to do.” about the author • dr Jonathan trevor is director of the To a large extent, average banking pay is so out of kilter Centre for People and Organisation, Cambridge Judge Business with average industry pay because the work output is meas- School, University of Cambridge How use of variable pay differs according to seniority Source: Hay Group annual bonus spot recognition scheme share options long-term incentives ExEcutivEs sEnior ManagEMEnt ManagEMEnt 33% 23% 8% 6% staff 2% 42% 10% 47% 12% 35% 25% 56% 17% 57% 8% 18% 44 ⁄ JANUARY 2012 PEOPLEMANAGEMENT.cO.uk