Pick n Mix - How to reward your employees! Part 2

In part 1 we discuss the debate over whether reward should be based on employee performance or driven by wider market or a combination of the two. Now lets cover the advantages and disadvantages of a market lead approach and if an organisation can have a hybrid of the two.  

Advantages of Market led approach to retain talent and engage motivate employees

The main advantage of adopting a market-led approach is that it gives the opportunity for employers to really compete in attracting talent, particularly where there is a talent shortage. However, if the culture and quality of the role are missing, no matter how good the salary is, it’s unlikely organisations will be able to retain talent and engage and motivate employees.

Disadvantages of Market lead approach to retain talent and engage motivate employees

The market is ever changing so adopting a purely market-led approach to reward would create challenges when trying to maintain a level of structure. Longer serving employees may end up earning significantly less, based on when they were hired. This may increase attrition as key employees may feel disengaged and demotivated and choose to move to a new employer to improve their reward package. There would be the added challenge of creating a gender pay gap as salaries would be based on a point in time and what the market demands were at that time.

One of the challenges of performance related pay is that the budget needs to be substantial to enable a decent differentiator. If you have a 3% budget, in practice you are limited with how much you can reward high performers which instead of being a motivator can become a detractor. However, where there is a significant budget performance-related pay can drive the right behaviours within the business. Reward, of course, is not simply a salary increase and can be shares or bonuses.

Of course, not everyone can be a high performer and it’s essential that managers are fully trained and understand the framework of performance related pay. If used correctly with proper understanding and training it can be a very effective tool in terms of motivation and engagement. However, where the focus is simply on pay, development can be forgotten and often development is more valuable than a cash incentive to employees.

There is a balance as whilst employers compete to attract new talent at a high cost this can have a negative impact on current employees if they discover that the new hire is earning a higher salary than someone who has been with the business for a number of years and can impact employee engagement negatively.

Can an organisation have a hybrid of the two and how would that work?

Many organisations today work on a hybrid of the two by utilising salary and reward benchmarking data to align their wages. Where there is a gap in salary and/or total reward they plan to address over a 2-3 year period via performance-related pay and the introduction of new benefits such as gym membership and health and wellbeing initiatives. Training and Development are often missed when discussing reward, however development is a key area and where a good development framework is in place it will retain employees.

To what extent is this determined by individual sectors or roles within the business? Can companies adopt a mix and match approach?

Currently, the technology talent market is in demand and as such organisations need to adopt a market-led approach to reward for these skills if they want to attract and retain talent.

How can this work when businesses are global and operate in many different markets?

It’s certainly more of a challenge to align the reward framework within global organisations as each country operates within their own local market. That said, it is possible to have a general framework, for example, align salary review processes and guidelines for bonuses. However, when it comes to other reward elements such as private healthcare, this needs to be considered within the context of the country.

Can these models work in the context of bonus or just along the lines of base pay?

These models can work with both base pay and bonus. Indeed, many organisations favour variable pay in their performance related pay as if handled properly it can drive the right behaviours and deliver results.