After the austerity of the 2010s, the pandemic, and now the cost of living crisis, the pay and benefits offered to employees are on the move. Dr Duncan Brown, co-author of the Handbook of Reward Management Practice, examines the fairer, more compassionate reward strategies that are emerging to help drive engagement and high performance.
Pay and especially benefits used to be regarded as a specialist and somnolent area of management practice, administering the “pay and rations” for employees. Michael Armstrong’s Handbook of Pay Administration first edition was your go-to guidance.
Six editions of the handbook later, crises from Covid to Ukraine and the rising cost of living have propelled reward professionals from their back rooms to a regular board room presence.
They have responded by getting agreement from boards to fund super-charged wellbeing policies and EAP helplines, with enhanced sick pay and mindfulness apps. There has been widespread use of “golden hellos”, formerly reserved for the likes of investment bankers and City lawyers, and new initiatives, such as one-off bonuses and free food provisions to help employees with the cost of living.
Mine and Armstrong’s seventh edition of the Handbook of Reward Management Practice is a complete rewrite of our last edition in 2019. The book contains updated versions of all Michael’s design chapters on job evaluation, grading structures, flexible benefit plans and wellbeing programmes.
Reward strategies
In-depth: Are UK pay increases too large or too small?
But our new book can justifiably claim to be a profile of contemporary reward management strategies, which are playing an increasingly important part in ensuring organisational success in our now knowledge-driven economy, where the bulk of employers’ investments are in their people.
As we summarise in our concluding chapter, how well an employer’s rewards are managed “is now being recognised as a major contributor to the achievement of the organisations’ strategy, heavily influencing the engagement and performance of the workforce”.
As we chatted to the reward directors and academics in researching this new edition, gathering details of changes to their pay and benefits practices, a deeper set of questions soon emerged, focusing on the future. Where next?
Should reward professionals be leading a return to the approaches of the 2010s, as these recent crises hopefully recede? For many employers, in the age of austerity and low inflation, these approaches focused on individualisation and the market, with minimum cost and maximum work flexibility implemented to increase shareholder returns.
Collective contribution
Or in a more uncertain, wider ESG and stakeholder-influenced, skills-short environment, are different people and reward strategies called for, majoring more on fairness and security, collective contribution, and compassion?
The last decade witnessed a huge growth in low-paid, low-skilled jobs filled especially by young and female workers employed on precarious short-term contracts, while shareholders and individuals’ incentive plans fuelled a continuing escalation in executive remuneration. Market-driven recruitment further widened pay differentials in male-dominated occupations such as IT and finance.
Armstrong’s Handbook of Reward Management Practice 7th Edition is published by Kogan Page on 3 November 2023. More details
The focus in employee benefit plans switched away from collective security through defined benefit pensions, sick pay and insurance plans to individual choice and flexibility.
These trends were not driven by some isolated, uncontrollable economic market force, Adam Smith’s “invisible hand”, but by a plethora of individual employers, remuneration committees and HR leaders’ decisions.
HR and reward professionals were the people who set the as-low-as-possible pay levels, with average pay awards consistently around 2%.
We drafted zero-hours contracts that now cover more than one million employees, often unaware that these workers relied on in-work benefits from the state and had kids living in poverty. We contracted out those ancillary lower-paid jobs to agencies, contractors and the self-employed.
Reward professionals designed the executive long-term incentive plans that have inflated differentials and pay inequality; we closed those guaranteed DB pension plans and set up individual DC arrangements where employees carry all the risk.
No wonder Tony Dundon, editor of the Human Resource Management Journal, forecast the demise of the HR function for “selling out” on the employees.
Equity and compassion
What we now have is a demotivated, low-productivity workforce through manifestly “bad work”, long-running pay austerity, the extensive removal of pay and career progression, and cuts to real pay and pensions for most of the UK workforce.
These reward strategies also undoubtedly contributed to more than a decade of anaemic UK productivity growth averaging just 0.3% a year. This, as research from the Institute for Employment Studies (IES) has repeatedly shown, undoubtedly relates to failings in employee motivation and employer leadership.
As the pandemic struck in 2020, employers were forced to respond with policies which, as we document in the handbook, initially focused on widespread investments in the health and safety of their front-line workforce.
How can we create a more equitable, collective, compassionate approach to reward and people management?
But they then widened into support for the wellbeing and especially mental health of their employees locked down and working from home. Improvements in sick pay entitlements over the statutory minimum were common and have been retained in most cases today.
The post-pandemic widespread labour shortages, combined with the current cost-of-living crisis, secured the continuance of these investments in employee benefits to ensure employee welfare and increase labour market competitiveness. Britain’s largest private sector employer Tesco, for example, recently introduced a private medical plan for all of its workforce.
But the deeper questions raised by this situation are:
- Why are so many employees unable to deal with this economic ‘shock’
- What future reward policies are required to engage workforces to high performance in the years ahead?
- How can we create a more equitable, collective, compassionate approach to reward and people management after Covid and avoid just a knee-jerk return to the status quo?
That final question came from a colleague at the first online meeting of a “fair rewards” group I organised for fellow reward researchers and leaders when we were first locked down in 2020. It highlights the thinking that is becoming increasingly evident in the approaches of leading employers.
In the handbook, we highlight five areas of focus in this more balanced, compassionate and caring reward management approach.
- An emphasis on ‘fair’ pay and reward policies, paying people a decent wage, providing career and pay progression opportunities for all, and recognising their growth in skills and added value in their pay. The IES Progression in Employment project highlights how leading employers are supporting the progression of low-skilled workers, ranging from career conversations to skills-based pay.
- A second aspect is the rebirth of job evaluation and a new era of transparent pay structures. We document the spread of pay equity legislation in the US crossing into the recently agreed EU pay transparency directive with strengthened disclosure and equal pay requirements. Major UK employers are already following suit.
- More collective bonus plans and sharing in success. As the Third European Company Survey from the European Foundation for the Improvement of Living and Working Conditions found, greater use of collective pay schemes such as profit and gainsharing coincides with better site and organisation performance.
- Hybrid and shared-risk pension and benefits plans are also increasingly evident, such as the recent collective defined contribution pension (CDC) scheme launched at Royal Mail for example, so as to better share the risks, costs and benefits between employers and employees.
- Greater attention to employees’ mental health and financial wellbeing has moved from a Covid-response to mainstream rewards practice. In many organisations, a variety of new measures include training mental health champions and mental health first aiders.
Financial Times columnist Philip Stevens believes that the “rebalancing of the responsibilities of government, private business and citizens” will be an enduring legacy of the pandemic. Our research indicates that this rebalancing will occur too in reward strategies in the decade of recovery ahead.
As we conclude in the handbook: “It is a more people-investment, fairness-focused rewards model that establishes a stronger foundation, through the emphasis on people’s collective protection and welfare, on which a high-engagement, high-performance workforce can be established and sustained.”
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