Get smart - measure and reward success holistically

01 December 2009 8:47am

Employers that fail to measure and reward success holistically could be damaging their company's long-term health, says Mercer human capital principal Martin Turner.

The GFC has shown that defining success too narrowly can have a disastrous flow-on effect, Turner says.

"In the financial services sector, particularly in the UK, the way the bonus system was structured encouraged excessive risk-taking - essentially gambling on the market going a particular way. When it did, it was fantastic, but when it didn't, the system almost collapsed," he says.

"One of the reasons for that was an excessive focus on one or two metrics for growth at the cost of sustainability."

As the economy recovers, employers must set about "rebalancing the unintended consequence" of this approach. "If the executives' remuneration packages are structured around achieving profitability, the danger is that the long-term health of the organisation might be damaged by an excessive drive for profitability," Turner says.

According to Turner, this lesson applies to numerous sectors. In an industrial context, an unhealthy focus on cutting costs could drive an employer to reduce staff levels and capital expenditure on machinery. This might boost profitability for one or two years, but in the long-term, the overall quality and value of the product will suffer, Turner says. In a corporate context, a poor capital-replacement program could lead to recruiting short-cuts which reduce capability and creativity.

"Profitability is important, but it should be balanced by some other metrics," he says. A healthy metric mix will also include areas such as attraction and retention of key talent and capital investment.

Decide who gets - and who deserves - what

Turner says that in 2010, the talent shortage will become more evident, and retention will be increasingly important. Employers will not necessarily need to increase salaries, but they will need to be "smarter" with their allocation of benefits.

A holistic approach to rewards means really getting to know your workers. What an "ageing baby boomer" is looking for will be different now than it was fifteen years ago, and what Gen X and Gen Y workers want will be different again. Reward programs that have been around for a decade or more will be out-dated and potentially ineffective.

"An offering of cash, super and subsidised health insurance" is probably not going to be very attractive to your typical Gen Y who is more likely to be interested in flexibility, the capacity to move quickly through different roles, and opportunities to enhance their CV, Turner explains.

"Segmentation" helps determine not only who is offered which rewards, but also how they are distributed, Taylor says.

"Look at segmentation and ensure there is adequate differentiation between the 'better' employees and the 'okay' employees. That's a consistent message that comes through from employee-engagement surveys. Employees are looking for differentiation."

Executives should be no exception. Individual rewards must be tailored "so there's a balance between executive's self-interest and the protection of shareholder interests." It is not just about what the employee wants; it is about balancing those two interests.

Finally, be "up-front" about rewards and benefits, Taylor says. Communicate frequently and openly. Organisations that are more open in their communication typically enjoy better levels of employee engagement.

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