A ripping yarn

Twenty years ago it all seemed so simple. Managers sat in their ivory towers and decided what people were paid. Employees, bereft of their unions, humbly accepted

Of course, employee reward was never quite like that. But reading some of the prescriptions for “strategic” human resource management, you would be forgiven for thinking this was how the world worked. In fact, employee reward is more like a richly woven tapestry. It’s a work of many hands; it’s also a work in progress. Like all craftwork, tug too sharply on one thread and the entire artefact will be damaged. A holistic perspective is needed to get a proper sense of the task and its product.

Our new CIPD core text, Employee Reward: Alternatives, Consequences and Contexts, reflects this complexity. It stresses the importance of pluralistic relationships in reward determination, an approach that will help modern organisations attract and develop talent and improve their performance.

The CIPD encourages its members to be “thinking performers”. This means getting the job done while acting responsibly and engaging in continuous professional development (CPD). So it is important that members weigh up alternative approaches in context.

A coat of many colours

State-of-the-art approaches to reward reflect continuity and change. In the following we look at both so readers can understand the complexity of the process.

HRM and “strategic reward” arrived in the 1980s. It was a time of structural economic change and a political drive to recover managerial prerogative. The “new pay” era meant pay was matched to individual performance. Employee reward was to be aligned with managerial priorities.

During the 1990s, a war for talent meant employers needed a “compelling employment proposition” to engage the most able people. By 2000, demands emerged for more ethical standards to moderate the outcomes of these flexible economic strategies, after a series of corporate scandals.

Earlier in the 20th century, unions were expected to act as guardians of employees’ – and to some extent the wider public’s – interests. Their reduced status has opened up a gap, which has been plugged to some extent by increasing regulation of reward through legislation. This includes: the minimum wage, limits on working hours, leave provisions, efforts to tackle continuing disparities in achieving equal pay for work of equal value and “comply or explain” requirements on board remuneration committees.

But reward is not only about the balance between flexibility and regulation. Back in the 18th century, philosopher and social reformer Jeremy Bentham stated that the legitimacy of people’s actions is determined by their consequences for others. His point was that to overlook the social justice consequences of reward decisions lacked reason. Reward strategies need to be located in context.

So it is helpful to think about employee reward determination in terms of what, some 50 years ago, labour economists referred to as an “effort bargain”. Employers may offer compelling rewards – but what an employee gives in return, individually or as part of a group, depends on a process of continuous negotiation.

Under new reward scenarios, this is no longer normally union-management bargaining over beer and sandwiches. Instead it takes the form of day-to-day interaction: the relationship between supervisors and the people whose voluntary contribution they are seeking to harness to achieve corporate priorities.

That interaction is not simple – even if pay and performance are explicitly linked. At the end of the 1960s, industrial relations academics Tom Lupton and Dan Gowler, in their classic book, Selecting a Wage Payment System, pointed out that management lacks the means to control every aspect of what a worker does. And even if this were feasible in today’s conditions, it could be counterproductive. Henry Ford’s original offer of a car in “any colour as long as it’s black” would now be unlikely to deliver competitive advantage. So front-line employees are expected to tailor products and services to diverse customer demands – and have to be allowed to take the initiative.

Moreover, the manager cannot limit subordinates’ ideas about what a reasonable effort bargain ought to be. As Ian Kessler, of Oxford University’s Saïd Business School, indicated in last year’s Human Resource Management: A Critical Text, managerial strategy needs to be balanced with equity in the continuous process of effort-for-reward trading.

Sewn-up thinking

Lupton and Gowler suggested that we think in terms of “reward systems” rather than a one-off bargain determined in a vacuum. There are many material and ideological factors influencing whether or not reward is seen as legitimate: actions inside an organisation – from boardroom to shop floor – and outside it, form an ever-changing context in which managerial decisions are judged.

Experienced practitioners recognise the risks of reward management ideas which assume that control of all aspects are gathered into managerial hands, and which overlook the alternative interpretations of contexts and strategies among different managers within the enterprise.

We suggest that among these influences on reward are management style, the degree of emphasis on short or long term performance, the nature of the organisation, the relationship with employees, the influence of investors, legal and social pressures and unions, staff expectations and experiences and the supply and demand for labour.

To see some of these influences in operation, you need look no further than the media. Search online for newspapers using the terms “employee” and “pay” or “reward”, and you will get 1,000 hits for stories published over the past year alone: articles blaming the credit crunch on City bankers’ bonuses; expressions of concern about impending public-sector pay disputes and inflationary pressures; and reports that the share of pay enjoyed by female executives replicates the gap reported at other levels in the corporate hierarchy, in spite of 30 years of equal pay laws.

The employee reward theory summarised here helps make sense of what we read. There were two good examples in our news search.

The first raises questions about incentive pay and performance quality. In November 2007, The Times printed a prophetic article, “Time to reform the way bankers are paid”, calling for a major overhaul of investment bankers’ remuneration. Big annual bonuses were said to encourage financiers to speculate with shareholders’ money in a performance cycle disconnected from long-run investor returns.

One year’s fall, say, in the wake of the sub-prime market fiasco or the current equity fluctuations, can destroy accumulated shareholder value: Citigroup’s market value collapse was estimated at $50 billion in a two-week period in autumn 2007.

A second example focuses on comparisons between top pay rises awarded to other staff and concerns about inflationary pressures. The 2007 Guardian Executive Pay Survey describes payments to chief executives as up by “an inflation-busting” 37 per cent over the preceding year. The report shows CEOs receiving almost 100 times more than staff; this led Brendan Barber, the TUC’s general secretary, to query the credibility of judging CEOs as having been so much more productive than the people under their leadership.

Barber’s stance is not really surprising. In the 1960s and 70s, union-negotiated wage premiums were criticised on the grounds that they were disconnected from an ability to pay and so were inflationary. Barber’s critique echoes a 1993 review by prominent industrial relations academic Lord Bill McCarthy. He noted that as executive reward levels rose, company profits often fell.

Thread count

The principles outlined here help us to understand these developments, and explain why the consequences may be perceived to fail Bentham’s legitimacy test. Evidence from the press demonstrates the limits to specifying the effort bargain. US economist Michael Jensen and his associates blame misplaced corporate governance priorities among stock market institutions for incentives that lead managers to act in ways that are damaging to the long-term value of shareholders’ assets.

Calls for commitment to sustaining and sharing in the value of the business over an extended period are valid. But they may be frustrated where mutual obligations between employer and employee are limited to an occasional economic exchange, rather than a more multifaceted relationship, mindful of psychological and social factors.

Outside the boardroom, declining willingness among employers to guarantee pensions further emphasises the risk of contradictory messages in current total reward bundles.

So reward is much more complex than is often made out. Not only that, it forms the core of the employment relationship. Like working on a tapestry, reward management depends on skilful technique balanced with artistry. Engaging employees in using their knowledge and skills to create organisational value means walking a tightrope between control, to ensure business priorities are met, and motivation, so they make discretionary effort. Pay determination through collective bargaining may have become much less common. But employment relationships, in which managing reward is embedded, remain critical to success.