Effective Reward Strategies
Reward Strategy in practice – the Lloyds TSB experience
London Councils – September 2007
Tim Fevyer, Compensation & Benefits, Lloyds TSB
Historic way of working…
• Start with a grand plan– Adopted a ‘classical’ approach to strategy development– Top down, heavily planned and very rational– Ordered and rigid
• Start with a grand plan– Adopted a ‘classical’ approach to strategy development– Top down, heavily planned and very rational– Ordered and rigid
• The centre has all the answers– What the offer should comprise– Who should get what
– What individuals’ pay adjustments should be
• The centre has all the answers– What the offer should comprise– Who should get what– What individuals’ pay adjustments should be
• Focus on pay– Pay to get people in– Pay to keep people– Pay to increase performance
• Focus on pay– Pay to get people in– Pay to keep people– Pay to increase performance
Historic way of working…
• Outcomes
– Sheep-dip approach to package design
– Reward is done to you (missing ownership)
– Broad-brush decision making (un-equal pay)
– Value of reward spend is wasted
– Over reliance on a pay ‘panacea’
• Outcomes
– Sheep-dip approach to package design
– Reward is done to you (missing ownership)
– Broad-brush decision making (un-equal pay)
– Value of reward spend is wasted
– Over reliance on a pay ‘panacea’
Base pay context: pre-1980s
• Low competition
• Few products
• Privilege to be a customer!
• Homogeneous workforce
• Jobs for life
• Strong hierarchy
Base pay choices: pre-1980s
Time based progression line
– People get a service based increase
– Increase mainly determined by cost of living
Everyone progresses to top of scale over time
Ignores performance, ignores worth & value
Generates significant, unjustifiable, pay disparity
Everyone progresses to top of scale over time
Ignores performance, ignores worth & value
Generates significant, unjustifiable, pay disparity
Base pay context: the 80s and 90s
• Deregulation
• Greater competition
• More products – sales emerge
• Greater customer choice and expectation
• Increasing diversity of the workforce
• Jobs less secure
Base pay choices: the 80s and 90s (stage 1)
The ‘fixed matrix’
– People rated according to their performance
– Rating then determines their pay adjustment
People rewarded every year for something they did in one year
Risks ignoring true worth or value
Unjustifiable pay disparity remains
People rewarded every year for something they did in one year
Risks ignoring true worth or value
Unjustifiable pay disparity remains
3.0%Performance Rating 3
4.5%Performance Rating 2
3.0%Performance Rating 3
4.5%Performance Rating 2
Base pay choices: the 80s and 90s (stage 2)
The ‘variable matrix’
– People rated according to their performance
– Rating determines the adjustment range
Enables market position to be factored in
Still risks unjustifiable pay disparity
Still reward people every year for something they did in one year
Enables market position to be factored in
Still risks unjustifiable pay disparity
Still reward people every year for something they did in one year
3.00%
4.50%
98% to 102%
92% to 97%
Position in scale:
3.75%Performance Rating 3
5.25%Performance Rating 2
3.00%
4.50%
98% to 102%
92% to 97%
Position in scale:
3.75%Performance Rating 3
5.25%Performance Rating 2
In reality…
• Outcomes much more fluid, emergent, responsive
• Create overall framework, within which responses are flexible
• Consider: internal politics, cultural norms, what actually works
• Start with a few simple questions for the business:
What are we in business for?
What are our core objectives?
What are our people goals?
How does our reward strategy support the above?
What changes could be made to make it even better?
Where do we find the answers?…
• Design
– Spend much more time talking to people– Plan for initiatives adapt to their implementation– Incorporate inherent flexibility– Aim for locally owned change
• Decision making
– Pay decisions made where the information is– No centrally dictated pay adjustments or matrices– Local decisions Central framework– Shifting emphasis of Line, HR and the centre
Is money the answer…?
• Traditionally pay was the answer to everything
• Found its impact limited…unless you get it wrong!
• How long do pay increases last?
• Are people ever happy with pay?
• Focus on what really drives engagement
Implications…
MarketPositioning
IndividualContribution
RewardingPerformance
FlexibilityTotal Reward
Customer FocusMarketing
• Get the basics right but then focus on what really does make a difference
Where should we pitch base pay?
0% 20% 40% 60% 80% 100%
Below market
About market
Above market
Percentage of employees
Planning to leave Not planning to leave
Source: Watson Wyatt Total Reward survey 2004
Proportion of employees actively considering leaving their current job in the next 12 months categorised by perceived market positioning
What high performing organisations do…
• Base pay typically managed around 50th percentile
• Then highly differentiated according to contribution
• Business success shared with those who make a difference
• Consider and use total reward…not just pay
• Clearly communicated and marketed coherent total offer
• Clear vertical line of sight to business goals
Source: Bespoke Hewitt research 2004
Towers Perrin HPO research 2003
• Base pay typically managed around 50th percentile
• Then highly differentiated according to contribution
• Business success shared with those who make a difference
• Consider and use total reward…not just pay
• Clearly communicated and marketed coherent total offer
• Clear vertical line of sight to business goals
Source: Bespoke Hewitt research 2004
Towers Perrin HPO research 2003
Managing individual contribution
– Three simple questions•Paid less than contribution?...increase pay•Paid equal to contribution?...move pay with market•Paid more that contribution?...don’t adjust pay
Local decision making within a frameworkof the relevant market and pay pot
Local decision making within a frameworkof the relevant market and pay pot
£
100% marketmedian
90%
120%
Getting pay right - markets
National market for allNational market for all
National market for mostFunctional market for some
National market for mostFunctional market for some
Functional markets for manyNational market for someGeographical markets for some
Functional markets for manyNational market for someGeographical markets for some
The cultural shift…
I’m paid to perform and if I get an increase it will be because the market
has moved, or I bring extra value beyond normal expectations.
I’m paid to perform and if I get an increase it will be because the market
has moved, or I bring extra value beyond normal expectations.
I’ve performed well this year so I should get a salary increase
I’ve performed well this year so I should get a salary increase
Variable Pay – rewarding performance
• Base pay reflects individual contribution
• Variable pay reflects annual performance
• Business performance determines the pot
• Individual performance determines the allocation
• Overall opportunities linked to relevant market
What really makes a difference?
MarketPositioning
IndividualContribution
RewardingPerformance
FlexibilityTotal Reward
Customer FocusMarketing
Flexibility: managing to needs
• The best companies need talent with a diverse range of backgrounds, skills, mindsets…
• Meeting diverse needs through flexible reward can:– increase value to individual and company– encourage people to join – encourage people to stay – help people feel better about the company
• Overwhelming call for flexibility
• Held together within a consistent framework
Stage 1 Stage 2 Stage 3 Stage 4
Focus onBase Pay
Offer definedby Salary
Focus on main ‘tangible’ elements
Offer defined by Total Comp’
Focus onBase and Bonus
Offer defined by Total Cash
Focus on all main package
elements
Offer defined by what it’s like to
be here
Total Reward: managing the whole
Base salary
Variable pay
Recognition
Stock
Health care
Retirement
Savings
Time off
Career development
Learning experiences
Performance management
Succession planning
Training
Pay Benefits
Learning and Development Work Environment
Leadership
Culture
Involvement
Diversity
Work/life balance
Total Reward
Base salary
Variable pay
Recognition
Stock
Health care
Retirement
Savings
Time off
Career development
Learning experiences
Performance management
Succession planning
Training
Pay Benefits
Learning and Development Work Environment
Pay Benefits
Learning and Development Work Environment
Leadership
Culture
Involvement
Diversity
Work/life balance
Total RewardTowers Perrin Total Reward Model
Customer Focus: employee treatment
Take Up by Grade
0%
20%
40%
60%
80%
1 2 3 4 5 6 7 8
Grade
Per
cent
age
Take
Up
Take Up by Age
0%
20%
40%
60%
80%
16 - 24 25 - 29 30 - 39 40 - 49 50+
Age
Per
cent
age
Take
Up
Take Up by Length of Service
0%
20%
40%
60%
80%
<1 year 1 - 2 years 3 - 5 years 6 - 10 years 11+ years
Length of Service
Per
cent
age
Take
Up
• 70,000 employees: not one homogeneous group
• Identifiable groupings with low participation levels
• Framework for further research
• Springboard to segmentation
5 key segments with clear differences in:- what they value;- where they spend money;- what they like doing.
Customer Focus: segmenting employees
May be settingup a home
More computer literateLive for now
Not financially astute, little debt, few financial products
Interested in things that will improve quality of their life:- spending money;
- looking good; - enjoying themselves.
Entry Bands
Age under 29(young free and single!)
Implications:Bullet-point type toneMost information posted onlineShort, simple, to the pointDon’t cover detail or how things workShow how it benefits them
Implications:Bullet-point type toneMost information posted onlineShort, simple, to the pointDon’t cover detail or how things workShow how it benefits them
Marketing: managing the messages
• Do people value it? How do you know?
• Do people know about it?
• How is it communicated and positioned?
• Base it on business needs
• Focus on what really makes a difference
• Find out what really makes a difference
• Talk to people about design
• Involve people in bringing it to life
• Create the framework but build inherent flexibility
• Push decision making closer to the answers
• Market and brand it - don’t just communicate
• Keep reviewing and refreshing it