In the APM exam, you could be asked to evaluate an organisation’s reward scheme, or a proposed reward scheme being considered by an organisation.
This article recaps the characteristics of effective reward schemes, and how you could use these as a framework to help you assess the reward schemes described in an exam scenario.
A previous technical article, 'Reward schemes for employees and managers', discussed the nature of reward schemes and the factors which could affect their effectiveness and their impact on employees’ behaviour.
Objectives of reward schemes
As the previous article highlights, the key objectives of reward schemes include:
Conversely, poorly designed reward schemes could create several risks for an organisation, including:
Strategic risk |
Arising from the misalignment of reward strategy to the organisation’s goals. This can lead to the inability to attract and retain the employees needed for success. |
Behavioural risk |
Arising from the misalignment of reward strategy to the required employee behaviours. This can lead to rewarding inappropriate or unproductive activity and behaviour. |
Financial risk |
Arising from inadequate reward cost management. This can lead to poor value for money from the reward scheme, and potentially lower profitability or even cause loss. |
Legal and ethical risk |
Arising from non-compliance with organisational and societal values and legal and regulatory requirements. This can lead to employee claims or regulatory actions, which can have financial and reputational effects on the organisation. |
(Based on: CIPD, 2012)
In your APM exam, you could be asked to assess an organisation’s existing reward scheme, or compare a proposed reward scheme against the existing one.
A key part of that assessment should be judging how well the reward scheme being described fulfils the objectives of effective reward schemes; in particular, the extent to which the scheme supports the organisation’s goals and helps to align employees’ goals with these.
Equally, an important part of your assessment could involve judging how well a scheme demonstrates the principles of effective standards and reward schemes, as identified in the Building Block model (see later example).
In this article, we will look at two illustrative examples of reward schemes, and we will discuss some of the key issues affecting the appropriateness of those schemes, illustrating the sorts of things you should consider if you are asked to make a similar assessment in your APM exam.
Insura is an insurance company which sells a range of insurance products (eg motor and home insurance) directly to customers. About a quarter of Insura’s sales are made through its website but the majority are made through its contact centre by contact centre agents, who are employees of the company.
The contact centre provides a point for all interactions between customers and the company, including customer service as well as sales. The quality of service provided by contact centre staff, and the amount of time customers have to wait to speak to an agent, are both seen as important factors influencing customer satisfaction. Customer satisfaction levels, in turn, influence a customer’s decision about whether to buy or renew an insurance policy.
Staff turnover rates in Insura’s contact centre have increased significantly in the last two years, with a number of staff saying that they are leaving because they have found better paid jobs with other companies. Insura views the high staff turnover rate as a major cause for concern because the loss of experienced contact centre staff could adversely affect the quality of service it provides customers; for example, because experienced staff could be more knowledgeable in advising customers on products, or in resolving queries, and can therefore do so more effectively than less experienced staff.
Two of the contact centre’s stated goals for the coming year are:
To support this, a reward scheme has been proposed for the contact centre, with agents being eligible for a bonus of up to 20% of their salaries, based on their performance against two key targets:
Customers are asked to complete a short survey at the end of a call giving a satisfaction rating. Insura’s IT systems collect the scores and assign them to the agent handling each call.
The average call length for the last year was 12 minutes. However, the target is for agents’ average call length to be below 10 minutes.
You have been asked to assess how effectively the proposed scheme meets the objectives of reward schemes, specifically how well it supports the contact centre’s goals.
Thinking about the key objectives of reward systems (which were mentioned at the start of this article) could provide a useful framework for your assessment; in particular, whether the proposed scheme supports the contact centre’s goals by aligning employees’ goals with these.
Supporting the call centre’s stated goals
Customer satisfaction
The first of the stated goals is: increasing customer satisfaction. Therefore, to be effective, the reward scheme needs to help improve customer satisfaction.
However, including a target to reduce the length of calls could encourage agents to rush calls, because they are rewarded for doing so. Rushing calls may lead to a decline in customer satisfaction because the agent may not have taken time to explain points clearly to customers, or to answer any questions the customer had.
The notion that ‘What gets measured gets done’ is one that you may have seen elsewhere in your APM studies, but it is relevant in this context too. If agents know they are being assessed on how long their calls are, they are likely to pay greater attention to this – to help ensure they are eligible for their bonus.
Equally, though, reducing the length of calls should enable agents to deal with more customers, and thereby reduce the amount of time a customer has to wait to speak to an agent. This may have a positive effect on the satisfaction as caller will not want to hold on for the next available agent for too long.
Therefore, introducing the reward scheme could potentially lead to two contradictory impacts in relation to the centre’s objective to improve customer satisfaction. However, the risk that it encourages of agents to rush calls should be seen as a significant risk of the proposed scheme.
Staff retention
The centre’s second stated goals is to improve staff retention, so to be effective, the reward scheme needs to help achieve this. (More generally, the impact that a reward scheme has on recruiting and retaining staff is also one of the key objectives of reward schemes, so is an important factor to think about when assessing potential schemes.)
Helping to recruit and retain employees
Although monetary rewards aren’t necessarily sufficient to attract employees to a job, or to retain in it, in this scenario the level of pay does appear to be an important factor in Insura’s problems in retaining agents. A number of agents have left the company because they have found better paid jobs with other companies.
As such, introducing the reward scheme could be seen as a direct response to the objective to improve staff retention. If staff receive their full bonus that would, in effect, increase their pay by 20%.
However, it is important to remember that although staff might be eligible for a bonus of up to 20% there is no guarantee they will get the full bonus. As is the case with any bonus scheme, it is discretionary. Therefore, the prospect of a (guaranteed) higher salary elsewhere might prove more attractive, and still encourage agents to leave for jobs in other companies.
Equally, although 20% might seem quite a generous bonus for operational staff, we don’t know the extent of the pay gap between Insura and the other firms which agents are moving to. If the gap is greater than 20%, the bonus wouldn’t affect the agent’s decision.
Nonetheless, we would expect that, overall, introducing this bonus scheme should help to reduce staff turnover, even if we cannot be sure of the extent.
Another important issue to consider when assessing reward schemes, is the way employees’ performance is assessed, and – consequently – employees’ eligibility for performance-related rewards, such as bonuses.
Here again, the previous technical article, 'Reward schemes for employees and managers', provides some useful context; in particular with reference to the Building Block model (Fitzgerald & Moon, (1996)) and the principles which that model identifies for designing effective standards (targets) and rewards.
Many reward schemes are based on employees achieving pre-determined targets, so when assessing the overall effectiveness of a reward scheme it will often be necessary to consider the targets set, as well as the characteristics of the reward scheme itself.
Principles of effective standards:
Principles of effective rewards:
Figure 1: Building Block model (Fitzgerald and Moon, 1996)
In some exam questions, the ‘standards’ and ‘rewards’ elements of the model could be useful frameworks to use when assessing the effectiveness of a reward scheme.
Consider the following example.
Deeboard Services (‘Deeboard’) is a listed company, which provides facilities management services, where it manages activities such as cleaning and security on behalf of its clients. Deeboard’s mission is 'to give the shareholders maintainable, profitable growth by developing the best talent to provide world-class services with maximum efficiency'.
The idea of an employee share ownership plan (ESOP) has always been at the heart of Deeboard’s remuneration schemes. Deeboard’s aim, in promoting ESOP is to support an entrepreneurial culture, and the ESOP scheme is a key differentiator for Deeboard in the market for new employees.
The current reward system grants shares based on an individual’s appraisal by their line manager against vague categories such as leadership and entrepreneurship. The results of this scheme have been that only about 5% of staff received their maximum possible bonus in previous years and half of them received no bonus at all. Increasingly, this has led to the staff ignoring the reward scheme and describing it as 'only for the bosses’ favourite people'.
In response to this, the board has been discussing methods of analysing and improving the reward system at Deeboard. The CEO has provided you with the details of a potential scheme the board has been considering.
Under the new scheme, employee’s performance targets will be derived from strategic KPIs depending on the employee’s area of responsibility. Each employee will have five targets, set by their line manager in consultation with senior management, and the employee can get up to 50% of their basic salary as a cash bonus (10 percentage points for each target achieved).
Use the characteristics of effective rewards in Fitzgerald & Moon’s building block model to assess the effectiveness of Deeboard’s existing remuneration scheme, and the proposed scheme.
The building block model identifies the three characteristics of effective rewards as: clarity, controllability, and motivation. So, a useful approach to a question like this would be to take each characteristic in turn, and then assess how well the scheme demonstrates it.
Existing scheme
Clarity – 'the current system grants shares based on an individual’s appraisal by their line manager against vague categories such as leadership and entrepreneurship'. The use of 'vague categories' as the basis of appraisal suggests it will not be clear to staff how their performance is being assessed. It may not be clear for the line managers who are making the assessment either, which will compound the problem with the lack of clarity.
Controllability – Similarly, performance is being assessed against vague, high-level categories such as leadership and entrepreneurship, but these are unlikely to be areas which have much relevance to the majority of facilities management staff (as they will be cleaners and security staff), or to be areas they can influence.
Motivation – The motivation aspect of reward can often link to the achievability of targets set. The fact that over half of the staff have received no bonus at all, and only 5% received the maximum bonus, suggests that the targets set at Deeboard are – at best – very challenging, and – more likely – verging on being unachievable. Once staff think that targets aren’t achievable, they will no longer be motivated to try to achieve them. This is the case at Deeboard, with staff increasingly 'ignoring the reward scheme'.
The fact that the scheme is perceived as being 'only for the bosses’ favourite people' also suggests staff have concerns about the fairness of the scheme. Equity (fairness) is another of Fitzgerald & Moon’s principles of effective standards, which does not appear to be being upheld in this scenario.
Overall, therefore, the existing scheme doesn’t appear to demonstrate any of Fitzgerald & Moon’s characteristics of an effective reward scheme.
Proposed scheme
Clarity – Whereas performance under the existing scheme is assessed against 'vague categories', the new system has more clearly defined targets; five targets set by the employee’s line manager. Therefore, employees should be clearer about how their performance is being assessed.
Controllability – the targets although derived from the strategic KPIs, will be tailored to the employee’s area of responsibility, so this should also improve controllability.
The fact that targets are based on strategic KPIs, should also help to align employee’s goals with the organisation, which is one of the key objectives of effective reward schemes in general.
Motivation – The scenario noted that the opportunity to own shares in the company (through the employee share ownership (ESOP) scheme) is an important factor in differentiating Deeboard from its competitors and helping to attract employees. However, the proposed scheme removes the share element, and only offers a cash bonus, so in this respect it could be seen as reducing motivation. This change also reduces the alignment with shareholder returns and focuses more on the short term.
Having said that, a bonus of up to 50% of salary seems a significant amount (especially for non-managerial staff), and so the size of the potential bonus should increase staff motivation in trying to achieve it.
Overall, in this scenario, the proposed scheme does appear to be more effective than the existing scheme.
While we would hope that new reward schemes being proposed by an organisation in exam questions will be more effective than existing schemes, there is no guarantee this will be the case. If, in your APM exam, you are asked to assess a proposed reward scheme alongside an existing scheme, don’t automatically assume the proposed scheme will be better than the existing scheme. It might well be. But you need to reach that conclusion by evaluating the detail of the scheme and assessing how effectively it demonstrates the objectives and principles of an effective reward scheme, rather than assuming it will be better, just because it is new.
In the worked example we have just considered – Deeboard – the existing reward scheme relies on a manager’s appraisal of an employee’s performance to assess their eligibility for shares.
This highlights one further issue to think about when assessing reward schemes: the way performance is assessed, and – in particular – the use of appraisals in the assessment process.
If an employee’s bonus is based on a manager’s assessment of their performance this increases the potential for subjectivity in the process. For example, one manager may assess an employee’s performance differently to the way another manager might assess it. In turn, this reduces the fairness (equity) of the process.
Two important considerations in this respect are that:
In any APM question, the detail of your answer always needs to be guided by the information in the scenario. The detail of your assessment of the reward scheme needs to be based on the information provided in the scenario – about the scheme, and about the organisation in which it is being used.
However, this article shows how you could use some overall approaches to help structure your answers: by assessing how well a proposed scheme demonstrates the objectives of an effective reward scheme; and by assessing how well a proposed scheme demonstrates the characteristics of effective standards and rewards.
References
Written by a member of the APM examining team