Key points
- - Besides company performance, incentive schemes should also take into consideration individual as well as group achievements.
- - A company's reward system reflects its culture. So, think before offering financial incentives.
- - Thoughtful rewards can be just as effective as expensive ones.
- - A standard transnational reward system rarely works because it has to be relevant to the local employment market.
Rewards and incentives is a reasonable looking subject that is devilishly difficult to implement in a satisfactory manner. After all, who can argue against rewarding work in proportion to its quality or quantity? Yet to retain their effectiveness, reward and incentives schemes are undergoing a fundamental redesign.
Everywhere from hotel rooms to commodity trading floors, redesigned incentives are rewarding employees with goods or services rather than cash. Teamwork and revenue growth are being emphasised over individualistic, short-term efficiency increases.
What prompted this reform is a paradox noted by Swedish economist and sociologist Hans L. Zetterberg. He warns that while reward and incentive programmes, "Can increase performance above that attained in a fixed pay plan, the result is not always higher performance. In fact, numerous studies have shown that reward and incentive pay plans can also result in a restriction of output and cause employee relations problems."
According to Zetterberg, traditional, individualistic incentives are problematic because, "The performance standard must be clearly defined and measurable if such a plan is to be useful. Also, the job must be relatively stable, output required from the job must be consistent and inputs to the job should arrive in such a way that the employee can work continuously."
Non-linear work destroyed old incentive schemes
Unfortunately, this assumption was only true in the early twentieth century's manufacturing dominated, assembly line era. In those work environments, inputs came in at a predictable rate, tasks were specialised and employees were dedicated to the production of a singular product or service.
Contrast this to today's modern day office jobs such as marketing, finance, software development or customer service. They dominate employment, but none of them have a linear, input-output, assembly-line structure. Today's employees multi-task between several different roles - and prioritising one deliverable can adversely impact the output of another. Furthermore, in office-based environments, ‘inputs' are neither an inventory of supplies nor do they flow down conveyor belts at a predictable rate.
Instead, individual employee output often depends on numerous tasks performed by a number of co-workers. These can be anything from delegated clerical tasks upon which an entire project depends on to foreign tax policies that accountants must obtain from overseas subsidiaries with a language barrier. For reasons ranging from management priorities to office politics, timely delivery of these essential inputs is far less reliable than the delivery of raw materials on a conveyor belt.
Traditionally, this timely, efficient coordination of complex, internal inputs is the responsibility of management. And that is why Zetterberg reminds us that, "Opponents (of reward and incentive schemes) claim that performance is a function of work and management practices rather than employee effort."
Difficult to measure performance
To complicate matters, it is notoriously difficult to measure performance in new service sector industries. For example, ‘Is the programmer's coding speed falling or was the IT architect late in handing over a system component?' ‘Is the courier driver delivering goods more quickly or has traffic improved?' Similar complexities arise when designing incentives for everyone from magazine editors to call centre staff.
Moreover, badly designed incentives can create negative, long-term effects. This is particularly true of efficiency-based schemes. For example, under an incentive to cut costs, a budget cutting exercise's effect on profitability is immediately positive since, over the short term, revenues stay constant while expenses fall. Over the long-run however, revenue losses caused by cost-cutting's effect on productivity may exceed short-term cost savings.
Perhaps it is with these and many other considerations in mind that Tex Gunning, Group vice president, South East Asia and Australasia of Unilever cautions that, "If you get into the subject of rewards and incentives, you will encounter difficult issues."
Unilever: Growth is our KPI, morale precedes productivity
With all of these considerations in mind, Unilever Best Foods Asia's rewards and incentives programme is an outgrowth of its organic, community-based approach to human resource management. According to Gunning, "The whole debate about rewards and incentives has to be put against the meaning a company offers its employees. If we offer meaningful jobs and meaningful lives, productivity and performance will follow. Morale precedes productivity." Organisational culture itself is a silent, yet extremely powerful incentive.
Furthermore, Gunning believes that non-monetary incentives are far more important to long-term staff performance. He warns that, "If companies take a quid pro quo attitude towards money, the culture will inevitably break down." This is because once the novelty of a particular financial incentive wears off, it no longer motivates employees. He adds that, "This manifests itself when you are not growing and must keep throwing more money or continuously restructure to keep them motivated."
Gunning believes that, "Transforming people and their productivity is not based on the hope of a trip (incentive travel). It is ultimately based on communication, teaching, learning and dialogue. Great businesses are first and foremost supported and made from a great organisational culture. Growth is our KPI."
Stress work-life balance, non-financial incentives
Along with the organisational culture itself, non-financial incentives are stressed. Gunning adds that, "We offer Unilever's wide range of goods to company employees." With Unilever manufacturing hundreds of consumer products including, toiletries, cosmetics, detergents, margarine, snacks and health food, this represents a significant non-monetary inducement to work productively and not move to competing companies. A very low rate of turnover is one factor Gunning cites as a key indicator of Unilever's reward and incentive strategy.
Even non-financial incentives must be designed in a way that does not destabilise either the company or employees' work-life balance. According to Gunning, an example of an inappropriate incentive would be, "Where you work your guts out to get three days in Hawaii, but do not even get to see your family."
While rank and file staff bonuses have an individual performance component, a strong emphasis on collective performance and long-term growth reflects that, "Our culture is collective and none of us are as smart as all of us put together."
Shanks Sharkar, vice-president of human resources for Unilever Asia adds that for motivating upper management, "The variable component of their salaries is based on a mixture of individual, departmental and company performance including earnings per share. Bonuses can be converted into stock options." However, in order to encourage management to factor Unilever's long-term interests in their decisions, "Options usually have a three- to five-year duration."
Gunning reminds us that, "Abraham Maslow taught us that there is a hierarchy of needs and the need for money or security is near the bottom. We focus on the top of the hierarchy of needs pyramid."
Hilton Hotels: Using branding, targeting in incentive strategy
Just like Unilever, Hilton International Asia Pacific takes an integrated approach to incentives, but one which reflects the hotel industry's unique characteristics. According to Sindy Tsui, Hilton's regional director of human resources for Asia, "Our current strategy began four years ago when we wanted to reinvigorate Hilton's brand not just with consumers, but also our own employees. ‘Esprit' was made into both an internal and external brand and we realised that to inspire quality service, we had to treat our staff as respectfully as our guests." For this reason, Hilton's motto of ‘Give back what life takes out' is both a B2C and B2E (business to employees) value."
At the executive level, bonuses are a function of personal, divisional and company-wide performance, with the latter two emphasised more than the former. However, to motivate rank and file staff, Hilton wisely chooses incentives that accentuate those core competencies vital to the international hotel business: the CRM of its service staff.
To encourage productivity and loyalty in this these workers, Hilton introduced Starbonds. Tsui explains that whenever hotel staff in emerging Asian markets perform, "an act of outstanding customer service, they are rewarded with a US$5 Starbond." Service staff receive Starbonds for actions such as "Caring for an upset customer, picking up someone's spilled luggage contents, or the 50 staff in Shanghai who hauled buckets in the rain but kept smiling as they catered an outdoor embassy event."
Those $5 Starbonds however, are far more strategic and multi-faceted than is immediately apparent. First of all, Hilton is faced with a paradox -it must deliver a consistent level of service across national cultures which have very different approaches to customer care. In Asia, emerging markets that have the steepest customer service learning curve are, by coincidence, also the ones where US$5 has the greatest purchasing power. Consequently, the incentive power of Starbonds is strongest in those emerging markets where there is the greatest need to improve customer service.
In addition, although they have a value comparable to an employee's daily salary in many emerging markets, Tsui adds that, "Starbonds are swappable for exchangeable goods purchased by Hilton at a discount and available to employees at cost." These goods are anything a hotel routinely purchases in bulk such as kitchen equipment, alarm clocks, furnishings, or stereos.
Hence, just as Unilever leverages its manufacture of consumer goods, Hilton uses its buying power to convert Starbonds into a far more motivating, yet cost-effective, non-cash incentive. Tsui reports that Starbonds have successfully raised the quality of service and that, "Room attendants in Hanoi proudly show me photos of all the household goods they were able to purchase through the Starbonds they had earned."
Similarly, the Esprit brand which encompasses the Hilton's HR strategy is extended in markets where Starbonds are not as effective. For example, in Japan where high living standards means that Starbonds are not as great an incentive, "We sponsor Esprit brand Visa and Mastercards for our employees through local banks." Hence, Hilton's staff incentive schemes are first branded with names such as Esprit or Starbonds, then customised to the unique circumstances of national markets.
BP: rebalancing emphasises team efforts
Much like Unilever and Hilton, BP's global operations have long met the challenge of creating transnational reward and incentive systems. According to Michael Bennetts, BP's CEO & director for supply and trading in Asia Pacific and the Middle East, "BP has a global reward framework. This provides a skeleton which regional offices in countries around the world can flesh out in a way that is relevant to their local employment market."
Essentially, the distinctions in BP's bonus system reflect the three components of its workforce; executives, traders and support staff. Bennetts explains that, "For our top 600 executives, about 40% of renumeration is performance-related. We employ a mix of short and long-term metrics based on the annual plan, the five-year plan and draw linkages between the two." To ensure the taking of a long-term, strategic perspective, stock options offered to BP's decision makers are based on results over a three year period.
Bennetts adds that for non- trading and other staff, "The bonus can equal anywhere from 14 percent to 24 percent of salary, depending on the employee's performance. Of this total two thirds is based on group performance with the other third rewarded for individual employee performance."
Bennetts explains that, "The two-third team component was introduced in 2004 to motivate staff to work for the overall good of the company. Prior to that, the bonus had a one-third team component." This adjustment was made because, "When we had a large individual component to rewards and incentives, people focused on their individual numbers rather than overall performance."
In fact, incentives to take on a team approach have been applied in that most individualistic of departments, BP's trading floor. Bennetts explains that even though commodity trading has a reputation for being an individualistic activity, "At BP, we need to reconcile trading's individualistic nature with the co-operative aspect of trading for the collective good of BP."
In addition, incentives are fine-tuned by departments. For example, BP's traders and trading floor staff work longer days than other employees so every week or two, staff from Massage at Work, a local massage services provider, are called in to relieve stress-induced aches and pains.
On the other hand, travel-based incentives offered to BP's marketing department would not be as relevant to traders, "Since trading teams travel overseas for conferences anyway. But in some of our marketing businesses, if our target is X and they achieve X+30%, then they're off to the Gold Coast or some other similar spot."
Organisational culture is an incentive
Despite the fact that Unilever, Hilton and BP operate in widely different industries, below their different incentive policies, common underlying principles exist. The fact that BP's top level incentives can be as high a proportion of salary as the Starbonds of Hilton's hotel service staff reflects different areas of critical core competency in each industry's structure.
At all three companies, incentives are a high proportion of total compensation at upper levels, where responsibility can be clearly identified. Only in Hilton's case where the Starbonds system easily identifies specific actions can individual incentives become a large proportion of rank and file salary.
Whether its Hilton's hotel nights, Unilever's consumer goods or BP's trading floor massages, companies understand that a $100 stereo motivates staff more than an equivalent amount of extra cash. Provided products are obtained at a lower cost than their retail price, non-cash incentives can enhance productivity as effectively as they boost employee morale. In this respect, organisational culture itself is a key incentive.
Most importantly, all three companies find that positive effects of incentives are accentuated when they are designed to favour teamwork and long-term growth over an individualistic pursuit of short-term efficiencies. ‘Work as a team, get rewarded as a team and do it for the long-term' is the message effective reward and incentive programmes give to employees.
BOX OUT
Five Steps to fine-tuning your reward & incentive programmes
- Emphasise growth. Whether it be additional sales, additional production or acts of customer care, growing the pie necessitates teamwork between different employees and their respective departments.
- Avoid having too many efficiency incentives. When management is rewarded too lavishly for economising, cash outlays that emphasise growth, long-term investment or innovation are often the first to go. A company's long-term health can be undermined as essential staff are cut by managers eager to earn bonuses.
- Use non-financial rewards & incentives. A $500 cash bonus costs the company $500 and employee forgets about it after it is deposited in the bank. Giving staff $500 TVs that cost $200 wholesale saves $300, yet motivates staff every time they change CDs.
- Balance your individual and group incentives. Is one overemphasised at the expense of the other? Too many individual incentives create a dog-eat-dog company culture while a preponderance of group incentives can lead to apathy.
- Review your incentive schemes every time new jobs are introduced, existing roles are redefined or a work process is changed. The dynamics of reward and incentive schemes can be profoundly affected by workplace changes.
