Charles Cotton CIPD: Rewards bring risks that must be managed

The economy dominates the news at the moment, but how will the economic climate affect bonuses and other rewards?

One possible consequence is that employers are more likely to examine their pay bills, which can account for up to two-thirds of total costs, and ask questions such as: who are we rewarding, what performances, skills, attitudes and behaviours do we want in return, and is the way we reward employees reflected in their contribution?

I would argue that regardless of the economic backdrop, employers should be doing this anyway, but the downturn should focus the minds of those who are not.

One area of attention will obviously be bonuses which have been making headlines due to large City payouts and so-called rewards for failure. The idea of bonuses is that they are earned and therefore only awarded if the individual or organisation involved has been successful. This is the ultimate way of aligning reward with performance.

Yet, as the experience of City employers shows, this may be easier to say than do. For instance, City bonuses have been criticised for aligning pay with individual performance but not with sustainable performance. Because the labour market in the City was so tight, in some cases, traders were encouraged to move to organisations that guaranteed bonuses for a couple of years. While some employers were trying to align short-term and long-term performance by deferring bonus payments or paying some of [these] in shares, others were quite willing to buy out the deferred awards that individuals had accrued to try and tempt them to join.

To some extent, tensions between individual and collective, short-term and long-term, and output and input, are not unique to the City. So, when reward professionals are being sold the many benefits of variable pay they must recognise that there is no [universal] solution, that there are tensions that must be acknowledged and risks that must be managed.

Perhaps that could be another consequence of the downturn – a more realistic understanding of what reward can and cannot do. If it is not a exactly strategic lever, then it is [at least] a risk that needs to be actively managed.†

Charles Cotton, reward adviser, Chartered Institute of Personnel and Development