For decades, designing rewards programs was a relatively straightforward exercise, largely confined to finding the right mix of compensation and traditional benefits, such as health insurance and vacation time. Those days are over. Leading organizations now understand a more personalized, agile, and holistic rewards system is essential to attracting, motivating, and developing talent. So why are so many companies falling short, even as they realize their rewards programs are outdated?
People Matters interviewed David Knopping, Partner and President, Rewards Solutions at Aon and Alex Cwirko-Godycki, Partner and Chief Commercial Officer, Rewards Solutions at Aon to understand how organizations can adapt to today’s changing rewards landscape.
Q: To start things off, how do rewards systems compare across regions like the US, India, South East Asia, Africa, etc.? What are some of the key similarities and what are some of the stark differences you’ve noticed?
David: Speaking very generally, if you look at most of the places you mentioned – India and across Southeast Asia for example – organizations tend to be heavily focused on base salary, or fixed income. In some cases, allowances are a big part of the equation, but this varies from country to country. Then comes variable pay, usually in the form of annual cash incentives, which again, can vary in terms of its prevalence and weight within a typical total rewards package.
However, what’s missing to a large extent in these places, and certainly relative to the U.S., is equity compensation – things like stock options and restricted stock units. In the U.S., especially in the technology sector, but also in other industry segments as well, there is a much greater emphasis on using equity as a tool to drive performance, improve retention, and provide wealth creation opportunities beyond the executive level.
This dynamic is starting to change in larger markets like China and India due to the influence of start-ups and home-grown technology giants, who have scaled incredibly fast and are now becoming major talent players themselves in places like Silicon Valley. This is how pay practices start to mix across geographic and industry lines, and those practices will continue to trickle out to non-technology companies over time. Additionally, as more non-U.S. companies list their shares on U.S. exchanges, they tend to adopt some U.S. pay and governance policies. Again, this leads to a blending of practices.
Q2: How are high performing tech companies like Facebook, Google, Netflix, etc. designing and redesigning pay and performance?
David: If you look at those companies, along with other well-performing and highly innovative firms, their first goal is often to make pay a ‘non-issue’ for current and prospective employees. They aim to be uber-competitive at all times across the three main staples of compensation– base salary, variable incentives and equity. And to accomplish that, they are continuously monitoring the market, evaluating the effectiveness of their programs and looking for ways to deliver pay in innovative ways.
Each of these companies also understands they have a unique value proposition to offer employees and they work hard to align their pay programs to that proposition. Some emphasize flexibility by giving people choices about what benefits they receive, and on rare occasions, how much equity they receive or the mix of equity they receive. Others separate themselves from the pack by emphasizing pay fairness or offering rich benefits, like extended maternity leave or generous paternity leaves, that go well-beyond statutory mandates. We also see examples of aggressive re-hire polices where engineers can leave and come back within six months with no questions asked, or rotational opportunities within the business to build career opportunities.
Alex: To add, early last year, our colleagues completed an interesting study on this exact question. They examined high-performing technology companies, defined by looking at revenue growth, shareholder returns and a reputation for innovation, relative to the broader technology market. Some of the stark differences we found include: high-performing companies are far more focused on differentiating pay for high performers and high-impact talent, they are more likely to offer retention and recognition awards, more likely to provide bigger pay increases for both promotions and lateral career moves into different functions, and they tend to invest more energy into targeting their use of equity awards by function and location. In sum, even though they usually have plenty of resources to go around, they are extra focused, relative to the rest of the market, on investing in the whole employee experience, particularly for pivotal talent.
Q3. What are some of the most pertinent challenges to existing rewards systems today?
David: The most pressing challenge in my view, certainly with respect to the U.S. and Europe, is that companies are rightfully having to take a hard look at their rewards structures because of issues like pay equity, pay transparency and fairness. The pace at which these issues have taken a hold of the market over the last 24 months is dramatic, and the momentum is only building. Interestingly, in India, people have been fairly open about pay with co-workers for a long time, so the concept of pay transparency isn’t really new.
Yet, whatever the cause, be it recent social change or long-standing cultural norms, on a global basis, companies quickly need to get comfortable with a more open approach to communicating how pay decisions are made. In turn, this forces companies to re-evaluate the most basic tenants of their rewards programs— from job architectures to job levelling to how pay is benchmarked internally and externally. Making transparency and fairness a priority really forces you to rethink the fundamentals.
Alex: Next on the list would be the ongoing challenge of meeting skills shortages around the world. This isn’t a new issue, but it is a persistent one. From machine learning to artificial intelligence to user experience design roles, among others, companies in every industry, not just the technology sector, are fighting over a finite pool of talent that isn’t growing as fast as demand. This places a lot of pressure on companies to pay more and more.
However, companies increasingly realize that paying more isn’t the only answer, or even the right one. Talent, especially skilled talent, is extremely selective today. They want to work for companies that offer strong cultures, interesting missions, a track-record of innovation, career growth opportunities and where they feel their work will be valued. It’s a high bar. The key is to hone a holistic view of what they’ll gain from working at your company and to ensure your rewards programs reinforce those promises.
Your internal talent supply cannot be over-looked as well. More and more companies are turning inward to fill gaps longer term. They identify employees with core digital competencies who can be “new skilled” with a little time and investment.
Q4. What is the Future of Rewards and how can it impact the business bottom line?
David: The future of rewards is actually a combination of the two challenges we just discussed; it’s about paying people for their skills and doing so as objectively as possible. Skills, especially in a world where the business landscape is changing rapidly, are the ‘new oil’ of the digital age. And for companies, finding ways to quickly and nimbly acquire and retain talent with the right skills at the right time should be a key focus. However, it’s difficult to do this well when it isn’t always clear what skills you really need today vs. two, three or five years from now.
Some forward-looking companies are starting to realize this, and are investing in better tools to track, assess and develop skills for their employees. It is a considerable challenge for all of us. I don’t think everyone has figured that out entirely.
Alex: I’d add that adaptability is also a key skill to watch. In this day and age, employees have to be ready and willing to adapt regularly to stay relevant. Again, this is where assessment tools and investments in training come in. The question is, can you as an organization even identify all of the people with the skills you need, plus those with the capacity to learn, and then reward them accordingly to boost their retention and incentivize the right behaviours?
Q5. What role should the C-Suite play in developing new rewards system? And what questions should they be asking along the way?
David: People, and by extension, compensation, are often the biggest expense for any company, so I think it behoves every member of the C-Suite to care deeply about rewards. The C-Suite should work to together to ask questions like: Are we getting a good return on our rewards investment, and specifically, are we retaining the people who matter most to our success? What’s more, as issues like pay equity, pay transparency and digital transformation become more important, the C-Suite needs to recognize that change is coming; your business strategy and workforce will demand it. So, you also need to ask yourself some fundamental questions like do we have the right rewards philosophy and structures in place to keep adapting?
Alex: To build on these points, especially the reference to digital transformation, this is where CHROs have a real chance to step forward – they must play a central role in any digital strategy. When people talk about digital transformation, there is a natural tendency to focus on choosing and implementing new technologies. And while important, often, these technology-related decisions are the relatively straight-forward part of the process. However, people – both your existing employees and the new talent you need to onboard – are the ones who must execute change. As such, CHROs need to be front and centre in setting future workforce strategies and pushing their organizations to adopt the rewards programs required to attract and retain talent on evolving basis. HR leadership, along with technology, finance and operational leadership, needs to be involved from the start.
David: Some additional questions to consider, a check-list if you will, include:
- Do we have the people and skills we need for the future? How to assess for those skills?
- Are we aware of what it takes to compete for those skills, both in terms of compensation benchmarks and talent availability?
- Is our leadership team aligned on how we'll manage careers and pay for our IT and technology talent relative to the rest of the organization? And depending on how important technology is to your strategy, the answer will vary.
- How can our rewards programs make us more innovative?
- How can rewards support our unique value proposition? Money isn’t everything, your culture and mission matter a great deal. What can you do to make your rewards programs as supportive as possible of those two things?