Of reward and relevance - getting the reward system right

Written by Etienne Borg Cardona, 11 February 2014

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In an increasingly competitive business environment where the pressure on costs is an ongoing struggle, the attraction and retention of above-average talent has become a major challenge for management.

It is hard to argue with the fact that recruiting the best talent will directly reflect in top line results, or that this top talent requires top remuneration, typically with a reward-based component. The problem in many cases is designing a reward package which will attract top talent while providing an incentive to drive precisely those goals the company is out to achieve.

Recent shareholder and indeed public outcry against exaggerated executive bonuses, in many cases more than justified, reflect a perception that reward systems seem to have lost all logic. Whatever the results, it is argued, executive compensation have lost all connection not only with underlying results, but, more worryingly, with the objectives these reward systems should have been designed to drive.

This is not a new problem – in 1975 professor of management at Michigan University business school Steve Kerr penned an article for the Academy of Management Executive titled “On the folly of rewarding A, while hoping for B”. It may not have had the most elegant of titles but would become a classic management paper.

 In the article, Kerr draws examples from politics, public administration, health, academia, business consulting and commerce where reward systems put in place to drive a particular goal have spectacularly resulted in a diametrically opposite behaviour.

To take one example from a non-business environment, while WW2 GIs had every incentive to finish the job in the hope of finally returning home, their counterparts later in the Vietnam theatre, with the introduction of tours of duty, had a very real incentive to avoid engagement and stay alive until the tour of duty ended.

Another example from academia - universities rewarding lecturers exclusively for success in having research publications published in eminent journals run the risk of encouraging staff to neglect their teaching responsibilities.

The article goes on to table a list of situations comparing “We hope for…” to “but we often reward” situations, highlighting how easy it is for misguided reward systems to undermine an organisation’s culture and results through insufficient attention and review when designing reward systems

Admittedly, this is no easy task – to work properly systems need to be designed such that the goals are sufficiently achievable to avoid the reward being ignored through over-aggressive setting of goals, yet the bar needs to be set high enough to generate a culture of stretching to achieve reward goals. Finding the balance is sometimes more of an art than a science.

Underpinning this, the deliverables needs to be clear, the link of objectives to rewards easy to understand and to monitor, and eventually the payment of rewards must be timely and predictable.

All the above is not without difficulty, and a number of iterations may be necessary to arrive at a reward system that is effective and relevant, yet fair. It does however more than justify that boards do take the time to study this area with care as the attraction, motivation and retention of the organisation’s top talent must surely rank up there in its strategic priorities.  

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