· 7 min read · Features

HR reward special 1/7: Change is afoot in the reward and benefits market and HR directors need to get involved

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No longer thought of as ‘work’s perks’, employee benefits and reward have moved from ‘a nice thing to do’ to becoming a core part of the employment proposition.

Wages, salary, bonuses and even shopping vouchers and incentive schemes have evolved from a hygiene factor, or 'a way of saying thank you to hard-working staff', to a much more strategic focus, linked to pensions, the economy, the war for talent and financial education – from high-level pay and remuneration discussions, to non- tangible benefits employers use to incentivise staff, from the bottom of the business right up to the top.

But the difficult situation for HR directors is that, when it comes to conversations about bonuses and executive remuneration, HR advice has not always been sought by the board - as evidenced during the bonus brouhaha in the financial sector. Pensions decisions are quickly moving into the realms of the finance and legal departments, while healthcare has morphed into a bigger strategy in its own right.

With larger employers having separate employee benefits teams within the HR (or finance) departments, to take on the bulk of the benefits administration, the threat for the HR director is that he or she could lose the strategic edge on pay, bonus and pensions decisions at board level, while becoming out of touch with the more grass-roots benefits.

Pay and reward make up the single biggest cost to most employers. The private sector faces the threat of another recession, while the public sector grapples with budget cuts. Without a proper plan of action and with no focus on measurable results, reward risks becoming an albatross around the employer's neck.

In short, reward is moving from the realms of HR strategy into those of people strategy, leadership, talent and performance management. To ensure business growth - and survival - it is no longer confined to the domain of the reward manager or even the HR director, because the issues it creates touch every aspect of business, from finance to facilities. The threat looms that the wrong decisions will be made by the wrong people.

The challenge for the HRD is to ensure their reward plans have the ear of those that matter in the C-suite. But evidence suggests this might be easier said than done. So how can HR directors ensure 'reward' gets the attention it deserves on the board, as the economy remains precarious?

Joris Wonders, head of the UK reward practice at HR consultancy Towers Watson, thinks the problem stems from reward being seen by board members solely as a cost.

"Boards need to look not just at how reward costs are managed," he says, "but how they are measuring the value of that spend. For example, I don't know if boards are discussing reward as much as other business issues such as IT or infrastructure - they need to see reward as an investment."

Richard Baker, MD and founding member of Robert Half International Executive Search in the UK, explains the HR director would not - and should not - be a permanent member of a remuneration committee.

"The remuneration committee has got to be independent of the business," he says. But he adds: "The role of HR directors, as the custodians of fair play in a business, is to advise the remuneration committee and they should push to be invited to meetings. Here there is a role for the HRD, not to set policy, but to provide empirical data.

"In the past, staff in the finance sector have been rewarded for taking huge risks and this is unfounded. The HRD can have a role beyond this to make recommendations to change things. The HRD should be working with departments such as procurement and finance to make sure the reward and benefits systems in place are cost-effective, fair and still attract and retain the best people."

Baker admits, though, that HR can no longer 'ring-fence' reward and benefits, because the strategies around it belong to more than one department in the modern workplace.

But he argues this doesn't mean there are not other aspects of HR strategy HRDs can bring forward to have an impact and an influence.

He explains: "HR directors know how workplace trends are forming and they know that people in generation Y would now perhaps choose to take work/life balance benefits before bonuses.

"They also know that, as high as the cost of reward might be, recruitment costs can be greater. HR directors need to benchmark reward against peers and they could come up with strategies to recruit better staff, but in lower numbers, so pay could remain competitive, but pay costs would be saved overall."

Wonders agrees: "HR directors become part of the reward agenda by ensuring reward is not just a cost, but grounded in the strategic objectives of the business. They need to pose the questions as to whether their employer's reward is creating the right behaviours and outcomes from staff.

"The key for the HR director is the integration. HR directors need to make sure reward is working in harmony with other strategies, such as talent management, and that reward is aligned with the talent needs of a business. In short, the HR director wouldn't discuss discrete elements of reward, but needs to understand the entire total reward package. Taking reward cost out in a way that will have minimal effect on the business is the conversation HRDs should be raising up a level."

But Angela Wright, a senior lecturer in HR management at Westminster Business School, admits some areas of reward have been "dragged from HR".

She explains some HR directors have moved into the role through a performance-management career path and have shied away from reward, giving more decision-making power to finance departments. But she is quick to add that HR has something unique to offer to the board when debating reward strategy.

"A lot of value is given to reward, but not a lot of money," she says. "HR directors' task is to create as much perceived value among employees, but to do this they need to have a handle on the whole package of rewards - and the forces at play in it.

"HR directors need to have analytical skills to be able to respond to a financial argument and ask searching questions - as well as the intuition on reading how reward is perceived in the organisation. This skill can't be underplayed."

John Harding, financial director at consultancy Jelf Group, believes the final decisions about bonuses, compensation and reward strategy should lie with the finance director in businesses and ideally the CEO, but there is a role for HR directors to play in effecting change.

"For me, the role of the HR director is around the branding of reward - but they can't expect to be invited to remuneration committee meetings if they are not sure of the worth of the pension and benefits. HR needs to be able to bring something to the table in an advisory capacity. HR needs to come up with ways to effectively cut costs, but also generate more value to the business.

"As the FD, I have a say on pay and reward and I will look to HR to give me influencing factors - I won't always listen, but it depends on how strong an argument they can put forward."

What the experts agree on, however, is that the way reward is administered and considered is changing in private businesses and public sector organisations: the days of uncapped bonuses on the one hand and carriage clocks for long service on the other, are most probably consigned to history.

But Richard Crouch, head of HR and organisational development at Somerset County Council and vice president of the Public Sector People Managers' Association (PPMA), believes innovative HR is the key to strategic success in the reward landscape of the future.

He explains: "Different colleagues in other organisations are doing different things. Some public sector organisations are still exploring performance-related pay and this is not something we are looking at.

"But the time has come to be strategic and sophisticated on reward, when cash is short and headcount is going down. As employers, we have to keep incentivising those we want to retain and this is a difficult path to tread. But the direction of travel is changing."

Crouch believes that while pay, bonus and pensions used to be the key focus for employers when it came to reward, investing in these methods now might not be the most strategic direction anyway. Increasing the pay bill might not be an option for employers either - especially in the public sector.

"There has been a process of change over the past two years," he explains. "This has led to a hardening of leadership, mirrored in both the public and private sectors. The balance has tipped too far now and it looks like we are set to be in austerity for the long haul.

"We asked our staff what is important to them in terms of reward. They were not interested in bonuses, performance-related pay, recognition and incentives or monetary tokens. They saw reward as being thanked personally and more freedom to operate at work. This requires a back-to-basics psychological contract.

"So, from my perspective on reward in the public sector, the challenge is one of branding and linking reward back to a psychological contract for employees - perhaps looking at reward as being through helping people in their communities, rather than money and prestige.

"This is where HR is needed on the board."

But given the financial element of compensation, HR directors have been reluctant to approach finance departments with numbers and, as such, have perhaps had to take the back seat when devising reward strategy. But Nicky Dempsey, a partner in the compensation consulting practice at auditors Deloitte, doesn't under- estimate the advisory role HR directors can take in leading the direction of reward.

"HR directors need to have a voice on reward," she asserts. "This is not optional.

"There are two ways they can do this: either by acting as an internal objective adviser to the CEO or the remuneration committee; or by acting as the 'shop steward' for management. In my experience, the more successful position is as the adviser to the chief executive."

In larger organisations, there is often a different reward and pay strategy for senior staff than for more junior roles. Dempsey believes that while HR should be an advisor on senior remuneration, for junior compensation the HRD needs to drive this.

She adds: "If an HR director has cost constraints, every pound they are spending needs to be aligned with the overall talent strategy. They need to be aware of how much they are spending on reward, that they are rewarding for the right things and that they are communicating and creating the right conversations within the business. If a bonus scheme changes, the HR director is the one who must ensure this will have a positive effect on organisational performance."

Rather than a cost to the employer, reward can be the fuel to drive forward people strategy, to motivate the workforce into growth, to attract passive talent and retain high potentials and to incentivise innovation and performance.

So, like a high-end company car, people strategy is being fuelled by a reward strategy. The CEO is in the driving seat, but the HR director needs to be beside as navigator, poised, not just to observe the road ahead but further into the horizon, to predict any upcoming bumps and hazards.

The CEO may be driving the organisation, but the HR director has the challenge of navigating the strategy.