Ever-increasing salaries may not be providing the talent companies need to survive.

Executive pay is rising faster than pay for average workers, with figures for top remuneration inflation varying between 12% and 49% in the last year, depending on the figures you choose. Bonuses have come under particular scrutiny, with payouts in the City more than tripling between 2002 and 2008, from £3.3billion to £11.6billion.

Last month, Business Secretary Vince Cable was forced to bring recommendations to the Commons on limiting the growth of executive pay, suggesting that much of the fault lay with remuneration committees. He urged for more information on what benchmarks companies use to set pay as well as how that relates to company strategy and performance.

There is a genuine concern that in the ‘War for Talent’, with its connotations of immense demand for a limited supply of staff worth hiring, UK businesses have found themselves in a spiral of wage inflation for talent tied to a skills gap, rendering cheaper alternatives highly risky de facto non-alternatives. With worry over talent retention driving wage inflation more than performance, remuneration for talent is increasingly being driven by recruitment needs and the subsequent fear of poaching, rather than the ability to do the job.

The question is whether businesses can afford to continue in this way. According to Mercer’s Global Financial Services Incentive Plan Survey, 92% of surveyed organisations have implemented, or plan to implement changes to their incentive programmes in the next six months, with over 40% already changing their written remuneration policy.

Some of these changes are driven by media attention on ‘excessive’ pay, though the issue of talent remuneration is also clouded by executive and CEO remuneration. As noted in a recent discussion on the Today programme on BBC Radio 4, Stephen Hester joined RBS as a respected businessman in a private sector company, and though the protracted reprivatisation of the bank has made him appear to be a public figure, he is not, and his bonus of £963,000, which he declined under pressure, though outrageous in the context of a civil servant or a junior individual, is not for an international business leader.

One of the reasons talent such as Hester has attracted such attention is because RBS has had to cut costs elsewhere – and the question runs whether a business making losses deserves to reward its talent for performance. One response is because so many bonuses are enshrined – a case currently being argued by 104 ex-Dresdner Kleinwort bankers suing their previous employer for €50million in unpaid, but promised, rewards.

Executive pay has risen for a number of reasons, including legitimate retention concerns, a desire to recruit those individuals able to lead businesses out of the recession, a global marketplace challenging salaries for mobile candidates in less successful economies, and slack monitoring of remuneration committees at the high-end.

As far as alternatives go, Mark Szypko, Managing Director, International Compensation at Kenexa notes: “Are we asking whether two ‘B-players’ could provide as much as one ‘A-player’?” Szypko has just released a whitepaper showing that in organisations without a pay-for-performancephilosophy, the diminished engagement level makes individuals twice as likely to want to leave. “If they truly exceed objectives,” he says, “by all means pay them through the roof.”

High-performers should be outperforming their peers, even in a subdued economy. As long as they are, says Marc Bishop, Director of Reward Consulting, Plus HR, “without a shadow of a doubt certain skills and professions carry a pay premium. Good people, that transform large corporations, earn significant shareholder returns, invent valuable goods and services (to society as a whole) and entrepreneurs that take enormous personal risk to create wealth, should always be rewarded appropriately.”

The ‘War for Talent’ has shifted the performance focus from specific skills to an adaptive mindset. As Ann Pickering, HR Director for Telefónica UK states: “Competition for the top talent is becoming increasingly fierce as businesses across the world aim to attract the best of the best from an increasingly global pool of employees. We need the broadest minds, with the flexibility to work across a range of different disciplines. By recruiting based on attitude rather than skillsets, we can guide and grow our people to ensure we have the right talent equipped to help our business keep growing in the right direction.”

There are implications on existing reward structures that seek to attract and retain such specific skills. “It’s not so much about straight performance now as potential,” says Peter Reilly, Director of HR Research and Consultancy at the Institute of Employment Studies. Quality is rewarded, but talent is a label that drives its own cost higher, and pay for performance is complicated by quite what performance is expected of which individual. As Reilly asks: “are we persuading ourselves that these people are transformative? The best salespeople really do outperform the average, and you can see it and measure it,” he says, but simply assembling stars doesn’t guarantee success, regardless of how much you pay for them.

True talent is still hard to find, companies are inflating wages for individuals they don’t want to replace, even if they are not performing any more effectively than in the past. “You have to be very clear about articulating the difference between pay-for-performance and increase- for-performance,” stresses Szypko; “if you are already at the high-end of your salary range you might not necessarily be meritable for a salary increase.”

Top talent need not to be expensive to hire or to keep. As Rebekah Wallis, HR Director at Ricoh UK, explains, even after hiring an in-house recruitment team at wages they would have earned as an independent headhunter, Ricoh made significant savings through future hires. “It has worked exceptionally well,” says Wallis, “When we started about two years ago only about 20% of our recruitment was internal resourcing and it is now up to 80%, and the salaries of that entire team are significantly lower than fees we would have paid to a third party recruitment firm.”

Even if they wanted to, if businesses can’t pay top money they have to look at non-financial rewards. Though this might seem an HR-centric perspective, culture and feel dramatically influence the recruitment and retention decisions. In 2010 Google gave all of its employees a surprise ten per cent pay increase – something the technology giant rightly guessed none of their competitors could match. It is unrealistic to expect all companies to keep up with the same financial clout, and there is a genuine competitiveness offered by non-financial motivations. Reilly cites the example of a study conducted in the nineties where financial services employees were offered compensation for overwork – “the staff replied that more money was pointless when they had no time to spend it.”

In both retaining and recruiting talent, remuneration needn’t dominate strategy. Unfortunately, as Reilly also notes, “it’s much easier to compete on money, and much harder to compete on the intangibles.” Wallis agrees – “We have worked very hard in growing our own talent and identifying people who should be offered opportunities,” she says. “Of course, our top talent is approached by competition, and people have been offered higher money, but even if there is ‘better’ out there in terms of package and remuneration, the combination of strategy and culture in the workplace is often more important.”

Reward is a key element in securing performance and value creation, but its recent label as a divisive and risky influence requires urgent action from HR directors who need to encourage sustainable performance for the good of the whole organisation. Increasing exclusivity of the ‘top talent’ label creates a fallacy that those not already in the group are not up to the task and is driving wages up for an already limited group.

If this wider perspective can be channelled within a culture that continuously recognises and rewards through a variety of means, and if the business delivers on its promises to those new and existing employees who justify extra reward through exceptional and unexpected performance, the recruitment and retention concerns currently driving executive wage inflation could well be avoided.

Bishop agrees: “Where many organisations are going wrong (specifically in the financial services sector) is allowing themselves to get into a position where (quite rightly) highly paid people are dragging up the reward of average and sometimes mediocre people to levels that are not comparable to other sectors for similar skills and performance.

The banks, in particular, have got themselves into a vicious circle of now having to attract and retain talent by paying high levels of reward that by default filters to all areas of the organisation.”

Not all businesses are faced with 104 ex-bankers demanding promised bonuses, and concerns over escalating top pay stretch beyond merely being able to deliver on promises. The potential for pay differentials to disengage the average workforce presents a genuine worry over performance and productivity, particularly where performance metrics could be short-sighted, or even based on cost reductions that equate to redundancies. As Szypko notes, “You don’t want people thinking ‘He got that bonus because he sacked me.’ Incentives work, and we need to make sure we’re incentivising the right things.”

If the talent under scrutiny is performing, high reward is acceptable, but in an economy where even the best businesses are struggling to grow, unjustified reward could derail a workforce. “If your remuneration policy simply focuses on the stars, are you neglecting the other good people in your organisation on whom the stars rely?” asks Reilly. “If you have a limited budget, ploughing it into a limited number of people may solve one problem but can create another.” Particularly with recruitment, as tempting as it is to pay for an expensive lifeline, the danger of forgetting an internal pipeline should not be underestimated.

“There is a short-term view in the City, where client demand rules, and where there is a perceived supply people will pay for that. After the crash of 2008, the cry went out for more audit, risk and compliance, and people were moving for multiples of their previous salary simply because banks didn’t place enough worth on the job before. That has levelled off now, but that was supply and demand, and it has an upward pressure on remuneration, regardless of what the politicians think.

Now, private wealth is seeing a big increase in salaries on the back of banks putting in place new strategies for their high-net-worth clients, and the regulatory requirements within that sector creating new demands for quality bankers. There are always these fits and bursts in various sectors at any time.

As long as everyone is on the same carousel that’s not a problem, but as soon as one competitor jumps off and pays higher rates that will cause a movement in people. There is an arms race, but not always for the same role and not always at the same pace.”

Across the pond

Differing European and US regulation has created an unlevel playing field in financial services, and European banks may find themselves having to pay more to attract top talent to overcome some of the regulated pay structure restrictions they now face, according to Mercer’s Global Financial Services Executive Incentive Plan Snapshot Survey.

Most European banks now have performance conditions – or ‘malus’ arrangements – for reducing or eliminating deferred amounts if there are losses or performance conditions are not met. Many US banks have not. “Put simply, you’re currently more likely to receive your bonus payouts in the US than you are in Europe,” says Mark Hoble, Partner leading Mercer’s UK Executive Remuneration business.

Source: askGrapevine HR – February 2012

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