August Industry Articles: Rewards, Labour Costs, and Selecting Leaders

PwC – Psychology of Incentives

• Executive compensation has doubled over the past decade, and while there may be individuals who can justify what they have done, collectively they’re not worth twice as much as they were ten years ago.
• Hutton makes a number of recommendations in the report but a central concept is that of the earn-back, whereby chief executives and other senior managers put aside a percentage of their salary each year and are only awarded this if they hit certain pre-agreed targets.
• Bonuses linked to organisational performance are just what you should be doing when you’re trying to respond to difficult times
• Recently there has been admiration for the John Lewis style of partnership, where employees of all levels take a share of profits, at some firms sharing a bonus after the firm made record profits
• The challenge for HR practitioners over the next few years will be to overhaul both executive pay and wider rewards programmes that will enable them to attract and retain top talent without paying vastly over the odds or rewarding mediocrity

• Over time, compensation policies have gotten woefully out of whack, such that wages for some workers in some jobs greatly exceed what the market says those jobs are worth.
• If management lets these long serving workers go, not only would the company lose their wealth of institutional knowledge, but a troubling message would be sent that loyalty goes unrewarded. In addition based on age and tenure there could be legal implications to such a move.
• Equally problematic is the an inconsistent approach to setting salaries within the company. This can result in huge differences in compensation among similar job categories because line managers, not human resources professionals, are making decisions about wages.
• Simple broad-stroke wage reductions will not do the trick, because they fail to address the structural problems with compensation in most businesses.
• Retooling labor cost invovles a multifaceted and tailored program that is less damaging to workers and less risky to companies than typical cost-cutting efforts. With proper execution, net labor savings of 15 to 20 percent are possible, because this approach goes beyond the need for immediate savings and confronts systemic and sometimes dysfunctional wage and salary practices.
• Retooling Process
   – Find Useful Salary Data
   – Develop appropriate job categorization and responsibility adjustments
   – Offer voluntary seperation packages to specific employees
   – Involuntary separation and performance management
• Setting the direction for the initiative, aligning it with the company’s overall strategic thrust, and making sure that the commitment to the program remains strong so that wage normalization doesn’t fizzle out over time are the responsibility of senior leadership.  Senior leaders need to be ready to embark on a lengthy and extremely disciplined campaign — one that will determine the morale, skills, talent levels, recruitment potential, performance, productivity, and costs of its workforce for a very long time.

• By integrating two unique databases: McKinsey’s granular-growth database, with information on the growth performance of more than 700 companies, and a database that contains performance appraisals of more than 100,000 senior executives We found that leadership quality is critical to growth, that most companies don’t have enough high-quality executives, and that certain competencies are more important to some growth strategies than to others.
• Excellent leaders are few and far between. Only 1 percent of the executives in our sample achieved an average competency score of 6 or 7 out of 7 (although excellence in a single competency was more frequent). Just an additional 10 percent had an above-average score of 5.
• Growth Competencies (most impact to least, out of 1)
   – Market insight (0.9)
   – Customer impact (0.8)
   – Strategic orientation (0.5)
   – Change leadership (0.4)
   – Developing organizational capability (0.4)
   – Results orientation (0.4)
   – Team leadership (0.3)
   – Collaborating and influencing (0.1)
• Since such a small percentage of executives had above-average scores across all competencies, trying to jump-start growth by looking for great “all-rounders” is a risky bet. An alternative approach is for companies to cultivate specific competencies correlated with growth in their existing teams or to seek new talent with the needed skills.
• If your company is seeking a launching pad to improve performance, the analysis shows that one competency drives the greatest gains: delivering customer impact (defined as the capacity to understand customers’ evolving needs).
• To achieve stronger growth, companies must not only assemble a critical mass of talent, which will require attracting and retaining an “unfair” share of excellent leaders, but also align these leaders’ roles and skills with the companies’ growth strategies