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A rewarding crisis?

Themes: Corporate governance and ethics

Reward policy is increasingly complex, impossibly technical, focused on too few people, and has serious unintended consequences. We need a new approach to liberate value across the organisation. In this article first published in, Dr Jonathan Trevor explores reward and how it can look in the future.

Dr Jonathan TrevorReward is controversial. Whether it’s banking bonuses, fat cat pay for failure, or even MPs’ expenses, reward is always in the news, always an emotive issue and everybody, always, has an opinion – most often negative. This, of course, is not new. The better part of the 20th century saw industrial action dominating domestic media reporting as Britain tore itself apart through class conflict, with pay disputes and picket lines marking the literal front line between unions and management.

Whether then, now or in the future, reward (or pay if you’re old school) has the potential to induce conflict and consume value like few other features of modern society. Popularly seen as a force for ill, can reward be a force for good or are practitioners destined always to live in controversial times? The nature and role of reward in organisations has shifted dramatically over the course of the past 30 years. The majority of the early to mid post-war period (late 1940s to early 1970s) was characterised by the “golden era” of industrial relations, in which management and employee representatives (typically trade unions) sought collectively to represent and mitigate the pluralism of interest inherent within the employment relationship. The focus for all was the limitation of risk posed by conflict within the employment relationship, whether lost productivity on the one hand, or lost wages and job insecurity on the other.

Until the 1980s and sweeping reform at the hands of the Iron Lady as well as an exasperated nation, conflict containment was the order of the day, and consensus, as difficult as it can be, was the means through which relative harmony was secured.

The new order

More recently, we have invested instead in the notion that reward is a key element in securing performance and value creation. Management unilaterally, so the theory goes, chooses reward strategies, practices and processes that best support the strategic direction of the organisation. Reward, when managed strategically, is a powerful means through which employers promote employees’ line of sight with managerial goals, align effort and secure desirable behaviours. It is still a critical element of attracting and retaining talent, but its role as the behavioural lever is its real value. Unity of interest is the new order of the day, and incentives appealing to the financial self-interest of employees at all levels, from the bottom to the top (especially), have become the primary means through which it is secured.

However, managing reward in the strategic sense is far from straightforward. A central theme of my recent book Can Pay be Strategic? A Critical Exploration of Strategic Pay in Practice is that strategic reward systems are often extremely difficult to manage because of their complexity. Indeed, for many organisations, research indicates that attempts to use reward strategically can prove to be more of a liability than a benefit, producing conflict rather than unity. Conflict in this context is not as obvious as striking miners challenging police armed with batons and water cannon. It is much more dangerous than that, organisationally, because it is discreet and ever present. It takes the form of employee disengagement and disenfranchisement, which ultimately results in employee attrition and the withholding of all important discretionary effort. As a result, reward specialists believe that an overhaul of performance-based rewards is necessary, given the many acknowledged challenges and unintended consequences experienced when attempting to link pay to performance.

This should not be interpreted as a rejection of performance pay per se, but perhaps as recognition of the many additional factors that discreetly influence performance outcomes beyond the control of management. Successive studies over the past decade indicate that employees consistently rate financial reward as less important than other factors, including their relationship with their immediate superior, progression opportunities and the reputation of the firm. Performance pay is merely one element of the package that directs employees’ best effort, behaviours and skills.

Meaningfully integrating financial and non-financial elements into a coherent proposition as “total reward” remains a challenge because it requires wide involvement across the organisation by line managers, HR functions (beyond reward) and employees themselves. Further, my research reveals that concerns over talent attrition are driving reward decisions much more than any other consideration, including performance. Perhaps unsurprisingly, the highest performing individuals are not always the highest paid. High performance does not necessarily equal high reward. Additional powerful factors within the labour market are influencing decision-making. But if firms are not paying for performance, what are they paying for?

This is the thorniest item currently dominating the reward agenda. The issue is talent – or rather, what constitutes talent in the contemporary environment. It is all too easy to speak in platitudes about people being a company’s most important asset, but, in reward terms, talent refers increasingly to the very few and not the many. Companies are prioritising their top management populations more than ever and will do anything to hold on to those precious few because, it is perceived, corporate competitiveness depends upon it. The implication is that value flows from the few at the top – not the many who are destined merely to follow.

The fear is that the talented few will leave if denied the possibility of significant financial incentives. Perhaps this explains why, according to IDS, in 2011 the average increase in total earnings for FTSE 100 directors was 49 per cent, while average employee pay rises have been well below the rate of inflation. Indeed, over the past decade, executives’ and bankers’ remuneration has increased by hundreds of per cent over “Main Street” pay. It could be argued that incentives and bonuses are being deployed not to align performance, but to attract and retain the talented few. Performance is the secondary concern in reward – a talent “logic” that favours the few and not the many has supplanted it.

Why does it matter?

This is both surprising and worrying for a number of reasons. First, many would argue that we are making a transition from an industrial age to the uncharted territory of the technology enabled. Necessarily, our organisations are 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 information age, in which innovation reigns supreme. Here, value is found throughout the networked eco-system, in which reside the liberated talents and capabilities of the many – not purely those of the talented (or lucky) few at the top of the corporate pile.

What reward looks like in future organisations is not yet clear, but investing solely in the few would seem a perversion of the empowering logic of the information age. There are also significant reputational risks attached to current reward practices. The perceived shortcomings of executive and banking pay are damaging to the legitimacy and credibility of the corporate whole. Continued controversy will only attract further attention from regulators and the public alike and, as many remuneration directors believe, inhibit further the ability of organisations to align reward practice to business priorities.

Potentially worse still, shareholders who perceive themselves as disempowered by their “agents” (a posh academic term for executives), will become more activist on reward, demanding a greater and ultimately binding say on pay. Over recent years, reward has become impossibly technical – and not just at the executive level. Firms are locked in a tournament of technical escalation on all fronts. The result is mutually assured abstraction of reward practice to the point where it is no longer grounded in the imperatives of the business, but aligned instead to generic market norms and so-called best practice. It is a path to non-alignment between reward and strategy. Worse still, institutional research indicates that many companies merely follow the herd down the path of technocracy and normative practice adoption when faced with uncertainty over reward outcomes. After all, how wrong can something be if everyone is doing it?

Very wrong in fact – just because it appears to work elsewhere does not ensure relevance in all contexts. Equally, overly technical reward systems are fundamentally ineffective – how can they be motivational if they cannot be understood? However, this all pales next to the most worrying consequence – systemic conflict arising as a result of iniquity. Like the late 1970s and early 1980s, will we witness widespread civil unrest because of the perceived inequality made possible by a culture of reward that favours only the few? 2011’s viral riots in the UK’s cities perhaps offer a glimpse of the future if we maintain our current trajectory.

Where do we go from here?

The crisis in reward, if you believe it is a crisis, is an opportunity, however, to re-evaluate the role of reward in both value creation and value preservation. As Rahm Emanuel, mayor of Chicago, said of the current financial crisis when he was White House Chief of Staff: “Never let a good crisis go to waste.” In my opinion, firstly and most obviously, organisations should seek to embrace the many. This is not simply a reward issue but, fundamentally, a work issue. Human capital in the past was characterised by busy hands and feet. We desired only productivity from the many – in other words, compliance with rules and effort towards targets, both conceived by the few. Work is no longer physical for the many, but neither is it liberated (or empowered, to use HR speak). Our workplaces are still characteristically bureaucratic – work is performed by the many against the highly prescribed standards of the few. This is no bad thing for the many organisations for which the bureaucratic model remains fit for purpose. But it is certainly not appropriate for all organisations – and fewer still if we are truly moving into the information age.

As an example, I recently asked a class of senior managers on a corporate change executive education programme if they felt they had permission from their executive to take ownership for business transformation. The timid response was, at best, ambiguous; at worst, it was a straight “no”. Human capital in the post-bureaucratic future must be radically different. The competitive environment will 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 collective enterprise and not lone-wolf entrepreneurialism. Permission will simply not feature. Of course, there will always need to be a degree of hierarchy and managerial coordination in our organisations, because efficiency will always matter. It is just that it will progressively matter less than other capabilities and, by extension, the few will also matter less. Current reward practices, especially individual incentives, are standing in the way of this transformation and organisations need to move on or, I fear, move out.

There are better means for achieving desired reward outcomes than relying on financial reward and appealing to individual self-interest. Work should be a reward in itself because it is intrinsically engaging – not least because it makes a demonstrable and positive difference to the worlds of our people, customers and communities. As psychologist Frederick Herzberg famously said: “If you want someone to do a good job, then give them a good job to do.” To a large extent, average banking pay is so out of kilter with average industry pay because the work output is measurable and, therefore, relatively easy to incentivise. Perhaps it is also because important aspects of the work lack meaning?

But are highly leveraged incentives the only means though which effort can be secured? Arguably, the relationship between contemporary work and personal fulfilment is weak, and will only become more so as work becomes increasingly specialised, routine and, ultimately, depersonalised. This is not a reward issue, but reward is being used as a crutch for both weak leadership and, perhaps, intellectually and morally impoverished work. In this vein, reward is part of the problem and will never be the solution, no matter how much money is put on the table. It is destructive and will only continue to court controversy. That does not mean we need to revert to past practice, but we do need to look to the future and ask how reward might be – must be – different.