Organisational Change Management Volume 2

Rewards and Performance

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. Most organisations design complicated executive reward and compensation programs as a way

- to attract staff to their organisation

- to retain staff in the organisation

- to motivate executives to higher levels of performance

. Most programs help to attract and retain staff; but are not as effective in motivating staff. To motivate performance there are 3 key factors

i) money

ii) feedback

iii) social recognition

Although each has a significant impact, when combined they are most powerful in impacting on performance. The last 2 (feedback and social recognition) are linked with human issues, such as

- fairness and accuracy of informal feedback

- a culture that encourages a level of risk-taking and high-performance

- an emphasis on formal performance reviews of the staff member's strengths

- internal communications

- having a manager who is knowledgeable about performance

- the caliber of the executive team, ie quality of leadership and environment created by the senior executive team

It is claimed that these factors can lift performance by up to 25%

. Usually rewards are linked to meeting budgets. The budgeting process has many more negatives than positives. The main negative is the compromise that occurs so that the figures in the budget are more readily achievable. There is a need to separate budget and rewards, and have rewards based on other criteria, ie

"...Compensation for individuals and businesses is not linked to performance against budget. It is linked primarily to performance against the prior year and against the competition, and takes real strategic opportunities and obstacles into account..."

Jack Welch as quoted by Jack Welch et al, 2005

Furthermore, the budgeting process can encourage lying. People will deliberately underestimate what they can achieve. If likely to achieve to the budget estimates, there is a tendency to defer revenue and increase costs so that the negotiations for the next budget estimates are easier.

Need to be careful of rampant incentive culture (performance and reward functions) 

The Royal Commission into Australian financial institutions (2018) has emphasise the need for organisations to implement more sustainable approaches to remuneration and managing human capital generally. 

The bad behaviour is linked to the philosophy of putting "more pay at risk" for executives as the basis of improving performance. Once this philosophy, ie at-risk reward, is entrenched at the senior level, it is cascaded throughout the organisation as preordained KPIs 

"...Attracting a certain percentage of one's annual, or long-term, target incentive, supplemented by a plethora of bespoke sales-based plans at customer-facing levels. (It should be noted that incentives refer specifically to rewards linked to defined outcomes, in contrast to after-the-fact bonuses).

Following the GFC and various financial scandals, the backlash against excessive executive pay (even though the equity-based incentive plans endorsed by investors had often delivered these excesses), and the growth of the sustainable investment movement, executive performance metrics were changing.

Long-term incentive performance periods were lengthened from 3 to 4 to 5 years (as if executive tenure and performance can neatly map to investment time horizons) and scorecards gave increased weight to factors like customer satisfaction, employee engagement and workplace health and safety..."
 

Amanda Wilson 2018 

This was a more holistic approach has its downsides, ie 

financial thresholds dominated, ie usually they had to be met before any incentives were payable 

still-hefty base payments schedules were kept

NB People needed to have a better understanding of human capital theory and psychology of incentives. Some issues that needed considering 

it assumed an unrealistic linear view of the world, there it was possible to predict the impact an executive would have on corporate performance, using after-the-fact adjustment to account for unforeseen variables. 

close mindedness (new opportunities were ignored and risks downplayed as the rewards were at risk which would emphasise whether you were a winner or loser) 

an over-reliance on incentives encouraged short-term focus; there are too many unknowns to take a long-term focus 

- incentives can lead to the gaming of results, ie creative accounting tricks to increase the chances of pay-out 

numbers dominate, ie "what I earn defines me" mentality; other factors like happy, productive workforce, generally meeting or exceeding customers' needs, etc are of secondary importance compared with financial performance 

blindness to relativities of what others are being paid

"...There is voluminous and compelling research that demonstrates incentives actually diminish intrinsic motivation and frequently have unintended consequences..." 


Amanda Wilson 2018

Incentives can be very effective for the  short term with clearly defined objectives; executive earning equity rewards can provide alignment with shareholders who own the stock. 

(sources: Narelle Hooper, 2004a; Jack Welch et al, 2005; Mike Hanley, 2006c)

 

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