1.

Reward Management
The term 'reward management' covers both the strategy and the practice of pay
systems. ... Reward linked to performance. The link may be daily, weekly, ...
www.hrmguide.co.uk › ... › Performance and Compensation - Cached - Similar

Performance Management: You Get What You Request and

Reward
Performance Management Resources

By Susan M. Heathfield, About.com Guide

Performance management encompasses the most important people issues in your

organization. Performance management includes the entire relationship you have with
the people you employ.

Performance management is the process of creating a work environment or setting in

which people are enabled to perform to the best of their abilities. Performance
management is a whole work system that begins when a job is defined as needed and
expectations are clearly communicated to the employee. It ends when an employee
leaves your organization.

A performance management system includes the following components.

• Develop clear job descriptions.

• Select appropriate people with an appropriate selection process.

• Negotiate requirements and accomplishment-based performance standards,

outcomes, and measures.

• Provide effective orientation, education, and training.

• Provide on-going coaching and feedback.

• Conduct quarterly performance development discussions.

• Design effective compensation and recognition systems that reward people for
their contributions.

• Provide promotional/career development opportunities for staff.

• Assist with exit interviews to understand WHY valued employees leave the
organization

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January 10th 2010

 1. peter vince | performance and reward management
The effectiveness of an organisation's performance and reward management can
have a major impact not only on morale and productivity but also its ability to ...
www.petervince.co.uk/performance.htm - Cached - Similar

Capabilities | Performance and Reward Management

Performance management is concerned with measuring individuals' effectiveness in their

roles, understanding their aspirations and determining which development actions would be
most appropriate.

Reward management is about understanding individuals' motivating factors, and determining

the level of pay, bonus and other rewards they receive. In some organisations the links
between the two are strong and explicit, while in others they are kept deliberately separate.
Work in these areas can be prompted by evidence of employee dissatisfaction, such as high
turnover or poor morale, or by the desire to drive a change in some aspect of employees'
behaviour.

Work in this area usually includes

• Understanding the overall objectives and structure of the organisation, and the
factors that have prompted the review of performance and reward
• Understanding how the current performance and reward management systems work,
how they are perceived, and what effect they are having
• Agreeing what behaviours and capabilities should be rewarded, and what reward
elements and approaches should be used, for which employees
• Defining and agreeing new systems, any effect on roles and responsibilities, and the
implementation timing and approach
• Implementation, including communication and training, and any necessary changes
to business processes and information systems

The effectiveness of an organisation's performance and reward management can have a

major impact not only on morale and productivity but also its ability to attract and retain staff.
Many companies have found that far from complementing the stated aims of the business,
their performance and reward systems were actually driving counter-productive behaviour.

Two case studies deal specifically with this area: 'Establishing a new performance management
system' and 'A review of an existing rewards and motivation system'.

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Reward and performance management programmes failing to keep pace with

demands facing businesses
Mike Berry07 September 2007 14:53

Reward and performance management programmes are not keeping pace with the demands facing businesses today,
according to a study by professional services firm Towers Perrin.

Despite enormous shifts in the business landscape over the last decade, most companies have made minimal changes in the
design and delivery of their base pay, incentive and performance management programmes.
As a result, current programmes do not appear to be meeting talent and people management needs effectively, the research
concluded.
Towers Perrin surveyed more than 600 HR and compensation managers at organisations in 21 countries.
Although many of those surveyed said their reward strategies were designed to retain and attract talent (73% and 57%
respectively), few of the actual tactics they reported were consistent with this focus.
"Overwhelmingly, we found that companies are making very incremental changes in reward and performance management
programs," said Jim Crawley, principal at Towers Perrin. "What makes this of concern is that business changes have been
anything but incremental."
Some of the trends highlighted in the study include:

• Minimal customisation of rewards beyond the sales function.

• Increased use of company-wide results in variable pay – surprising, given the relatively small number of employees
who can materially influence corporate results.
• More than two-thirds said their organisation had no formal method for measuring the return on their considerable
investment in rewards.
• Four in 10 said their systems did not effectively equip managers to identify, develop and reward high-performers or
deal with poor performers.

Crawley said: "It's encouraging to see that companies are emphasising performance and talent retention. On the other hand,
what they're doing to reward and improve performance is not particularly effective, or in line with overall business performance
and strategy."

1. Reward and performance management programmes failing to keep

pace ...
Reward and performance management programmes are not keeping pace with the
demands facing businesses today, according to a study by professional services.
www.personneltoday.com/.../reward-and-performance-management-programmes-
failing-to-keep-pace-with-demands-facing.html - Cached - Similar

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For the ppt

1. [PPT]

Performance Management and Reward:

File Format: Microsoft Powerpoint - View as HTML
Performance Management and Reward. Phil Pavard. Head of Human Resources
GMPTE. Let's Talk About Me. 35 years in HR (or Personnel as we used to call it) ...
www.lfhe.ac.uk/membership/sdcs/sdc2006/sdc06keynotepp.ppt - Similar

2. [PPT]

Performance Management and Reward:

File Format: Microsoft Powerpoint - View as HTML
Performance Management and Reward. Phil Pavard. Head of Human Resources
GMPTE. Let's Talk About Me. 35 years in HR (or Personnel as we used to call it) ...
www.lfhe.ac.uk/membership/sdcs/sdc2006/sdc06keynotepp.ppt - Similar
There Are Too Few Greedy “Fat Cats” Among
Corporate Shareholders
By econometrician

Corporate abuse, particularly management’s outrageous compensation packages, would all

stop, if the owners of these firms, the shareholders, asserted their greedy personal interests.
Why do corporations pay lavish compensation packages to incompetents and allow rivers of
cash to flow away from dividends or reinvestment opportunities that might enable longer-
term growth? Why do boards of directors — the shareholders’ agents in management —
rubber stamp such activities? The problem, at least in part, is that most shares and the voting
proxies that come with them are controlled by institutional functionaries with little or no
interest in corporate governance. Boards and shareholders rubber stamp management
initiatives that aim less at enriching the firm than at enriching those involved. If more
shareholders had a direct interest in the long-term success of the firm, they would force
boards and managements to behave differently.

Some 40 years ago, Wall Street fret over what it called the “institutionalization” of
investment management. The growing prominence of pension funds and mutual funds had at
last outweighed the influence of individuals in the stock and bond markets, and many
wondered what it would mean to have large pools of money managed by a relatively small
number of professionals instead of a relatively large number of individuals. Most of the
commentary of the day worried that trading activity would accelerate. It did. It worried that
group think would create investment fads and dangerously extend trends. It has. But in all
that active conversation, few thought about the effect on corporate governance. Now that
effect is clear, too.

Because the professionals who manage these large pools of money seldom hold shares for
long, they have little interest in corporate governance. They have a distaste for corporate
politics anyway, and even if they wanted to participate, the business interests of their firms or
institutions would hold them in check. Neither do these professional mangers have the
resources to consider all the issues before corporate boards and vote the proxies accordingly.
To be sure, some public pension funds do get involved in corporate governance, but usually
over the issues of interest to the politicians who control them and not over the long-term
health of the company in which they own shares. They push more on green initiatives than
on compensation packages. Even the unions, which through their pensions own wide swaths
of corporate America, ignore their power as shareholders. (They seem to prefer direct
political power to reach ends that they might achieve more effectively and certainly more
cheaply through voting their shares.)

While these disinterested professionals control more and more shares, boards and
managements face less and less discipline. When individuals had more power, rich and
greedy “fat cats” had a passionate interest in the long-term success of the firms in which they
held shares. They balked at huge pay packages for incompetents, voted their shares
accordingly, and called attention to such goings on at annual shareholder meetings. Now the
professionals at institutions do not even bother to attend such meetings. Neither do they vote
much against management, providing a green light for the abuse about which everyone
complains.

1. Thanks for the comment. You might like to know that a fellow blogger
(http://labourandcapital.blogspot.com) deals with these very issues in the UK in far
more depth than me.

You’re right that the short-term nature of the majority of shareholdings tends to leave
share ‘owners’ little interested in the long-term (by definition, they’re only interested
in a quick profit). I think something like 60% of UK shares are now held in the hands
of short-term institutions – a huge turn around in the last decade from a position when
pension funds held a much greater portion of shares and when they could, as a result,
have a much greater influence. That might not have been noticeable at the time and it
might not have seemed much, back then – but the decline in what influence such
institutions did manage to wield is, with hindsight, a major part of the problems being
experienced now.

I have to say I don’t know what is the answer to that, apart from some sort of
restriction on the proportion of a company’s shares that can be held for short-term
trades. I’m aware that that, in turn, is likely to create its own problems via providing
encouragement for short-term trade markets, which in turn, is likely to lead to the
need for such markets to be banned… And so it goes. But how we get there (company
management being accountable to shareholders who hold long-term interests as the
key) from here is a tough question. It’s here that the waste of talent encouraged by the
distorted banking salaries market (with most talented individuals heading for the
financial services sector rather than ‘proper’ jobs, applying their ingenuities to the
development not of economies but of ever more complex financial services products
that only they and their peers understand) is to blame and that’s why, ultimately, we
need to control the rewards market for such individuals.

Trade unions, by the way, have usually held only a few shares in key companies so as
to make a nuisance of themselves at AGMs: a sensible strategy, I think, in the light of
them never being in a position to wield sufficient shares to cast a real influence in
comparison to the proxy votes held in the pocket of the chief executive and in the
light of motions on, for example, executive remuneration anyway being advisory only
(at least, this is the position in the UK).

Introduction

Over the last year or so, there has been considerable concern about the remuneration of
company directors in the UK. This concern, which has been fairly widespread among
shareholders, employers, politicians and the press, has focused on three elements within the
executive remuneration package. These are:
(1) the size of basic pay increases; (2) the large gains from share options, particularly in the
recently privatized energy and water utilities; and (3) the compensation payments to
directors on loss of office.

Front-bench spokesmen for the Labour Party have threatened that, when Labour is returned
to office, it will introduce statutory ...

Executive Remuneration in need of a major

makeover
Executive pay has changed beyond recognition during the last decade or so of
economic growth, as previously modest infrequent bonuses have transformed into
incentives that now form the majority of the total pay package of a senior executive.
The current downturn, together with the turmoil in financial services, has brought the
subject firmly into the spotlight. It has provoked widespread public anger about pay
practices with regulators already issuing codes of practice that require appropriate
reward structures that avoid incentives for excessive risk-taking. There is also a
greater willingness among shareholders to vote against the remuneration reports of
companies adopting practices that they do not approve of.

Gerald Seegers, PricewaterhouseCoopers SA partner and human resources tax

specialist, says that executive pay models have largely failed to meet either of their
key objectives - motivating executives, and aligning their reward with shareholder
outcomes - and some serious changes are required.

PwC highlights in its May 2009 report “Preparing for the challenge ahead - The
future of executive reward” that one of the key factors in this imminent transformation
is that new executive reward models are required. Seegers says we need to
challenge the use of the more traditional Total Shareholder Return and Earnings Per
Share performance measures in long-term incentive plans, as these standard
models do not produce the desired results. “Incentive designs should rather be
tailored to the needs of that specific business and also kept relevant and simple,
both in the number of elements and in their design. Executives should effectively be
made significant shareholders in the business through shareholding requirements
and increased use of restricted share options without performance conditions, with
long-term holding periods to generate closer alignment of interests.”

Companies must also tackle the contentious question of ‘pay-for-performance’.

Seegers says there is cynicism among shareholders that companies pay executives
regardless of performance, exercising their discretion to pay out even when the
formula does not yield the desired result. “There is a clear need to ensure that the
relationship between pay and performance is robust. Key to this is that companies
must demonstrate when the financial success of a business is as a result of the skills
of the senior executive team - and conversely, where luck played a role. A pay-for-
performance approach requires differentiation of these two and caution should be
taken that such a remuneration policy does not encourage excessive risk- taking to
boost performance.”

The unending upward momentum of executive remuneration also needs to come to

an end. “The business responsibilities of executives have increased dramatically,
prompting greater rewards; stronger corporate profits have made these higher levels
of pay more affordable; and a talent war has supported this trend” notes Seegers.
“However companies must stop trying to be at the median of the corporate
remuneration scale and rather pay relative to the market, based on their own
circumstances. Not everyone can be at the median. They should also first look
inwards for talent as a more cost effective approach.”

Reward packages must also be considered in their totality. Executive reward is

multifaceted, typically including fixed short-term pay in the form of salary and
benefits; fixed long-term pay in the form of pension; variable short-term pay in the
form of annual bonus; and variable long-term pay in the form of deferred bonus and
long-term incentive awards. With the exception of salary and benefits, all of the other
components of reward introduce uncertainty. However the remuneration committee
must place a value on these different elements, which can move significantly in value
over time, when making decisions on incentive awards. They must give thought not
just to the value of reward today, but to the potential payouts and the impact on
future retention value. Robust valuation methodologies involving specialist advice
may be required to do this effectively.

Seegers says the remuneration committee will need to become more challenging
and should not be afraid of exercising its discretion. “Committee members may have
to increase their reliance on appropriate and truly independent advisers and
specialists, improve their own knowledge, and cease being overly dependent on
historic data which has limited relevance. Pegging of pay to market levels has
introduced a systematic upward shift in the market itself, with pay for performance
decisions being lost in the general upward movement of the market as a whole. The
primary driver of reward decisions must always be the specific circumstances of the
business and its stakeholders - and data can never provide the answers in isolation.”

In the clampdown and changes that will occur to executive remuneration, Seegers
says it is important not to lose sight of the value that skilled executives performing at
the top of their game do create for shareholders. “There is the danger that poorly-
designed reward programmes lead to disengagement and discouragement.
However, there is the legitimate requirement for companies to be able to justify
executive pay decisions and demonstrate that they have made such decisions
robustly and objectively. While there will always be a school of thought believing
executive pay is excessive, many of the challenges over pay levels can be mitigated
through greater transparency of the decision-making process and demonstrating the
link between pay and performance. The remuneration report has to move beyond
being a mere compliance document to an effective communication tool, explaining
and justifying policies, rather than merely presenting facts.”

This had led Regulators around the world, and others concerned with financial
stability issuing codes of practice requiring appropriate reward structures that will
transform the governance and design of executive pay.

Executive Remuneration
In recent years, executive remuneration has been the focus of considerable attention from the
public, media, academics and policy makers alike. It is a quintessential corporate governance
issue about which there are many different views and opinions. In this section of the ECGI
website, we set out some of the arguments and provide links to academic and other material
that can shed light on the debate, notably proprietary research that examines the international
system of senior management remuneration, from a regulatory and corporate governance
perspective.

At the European level, regulation aims to harmonise disclosure. Member states have transposed this EU regulation to
different extents. The US and European approaches portrait several divergences in regulation and practice, but also
similar and common initiatives that aim to create a global best practice environment.

The debate on executive remuneration can be approached from various angles: as optimal pay structure for aligning
pay with performance in order to reduce agency costs; as a regulatory issue with the objective of remedying any
system flaws; and as a public policy concern. The debate is also multi-jurisdictional, reflecting the changing dynamics
of remuneration, regulation and corporate efficiency in different governance systems.

The objective of this topic page is to share ideas, highlight issues, put forward opinions and raise debates for further
reforms in the light of current business practice. The ECGI itself does not take a position on these matters. Rather, the
purpose of the Institute is to generate research, stimulate debate and disseminate best practice. In these pages
therefore, you will find links to proprietary ECGI research and other references to material on this important topic. They
are continuously developed as new information becomes available.

Rewards for failure

'Rewards for failure' directors' remuneration - contracts,
performance and severance

Comments from the CIPD on the DTI consultation paper September 2003
Charles Cotton, CIPD Adviser Reward.

Introduction

This is the response to the Department of Trade and Industry's (DTI) consultation
document: 'Rewards for failure' Directors' remuneration - contracts, performance and
severance from the Chartered Institute of Personnel and Development (CIPD), the
professional body for those involved in people management and development. Our
response is based on the input and feedback that we have received from our 48-
branch network and from our specialist forum of over 1,600 UK reward practitioners.

Context
Economics dictates that when an item is in short supply then you have to expect to pay a high price for it.
This fact also applies to directors and chief executives; there are not enough talented individuals out there
who can both manage a company and provide it with entrepreneurial leadership. This has led firms to
adopt an almost 'whatever it takes approach' to recruit and retain such people. The rewards are high
because the stakes are high.

Until recently, in the rush to get these talented individuals, there has not been a great deal of attention
given by companies or shareholders to the issue of what happens if such individuals fail to be successful,
or if, having succeeded for a time, prove to be less successful in a different economic or business context.
It was assumed that directors would not want to fail because if they did it would ruin their ability to get a
similar job elsewhere and this would be a sufficient deterrent.
However, with a depressed stock market coupled with the Government's Directors Remuneration Report
Regulations more attention has been given to this issue and there has been an increase in the willingness
and ability of shareholders to oppose the reward and severance packages of executive directors (EDs)
where they believe they are not justified. And concern over the size of executive pay-offs has led to the
Government's consultation document on 'rewards for failure'.

Our position
However, the CIPD believes that by focusing on severance, shareholders and other stakeholders are
looking at the wrong end of the pipe, looking at what is coming out rather than what is going in. If ED
remuneration is to be successfully linked to performance and large payoffs in case of non-performance
avoided then there needs to be a clearer articulation in the initial contract of what will be paid in the
different circumstances. Non-executive directors, sensitive to the views of relevant shareholders, should
control more clearly the relationship of remuneration and rewards for success and failure.

Companies and shareholders need to examine and evaluate the effectiveness of their remuneration
committees, the independent decision making body that decides executive pay and the nominations
committee that determines their contract of employment, including clauses on severance payments. Are
they up to the task? The Higgs report and the subsequent New Combined Code on Corporate Government
recommends that to ensure that they are, companies need to give more attention to how NEDs are
recruited and selected, inducted, developed and appraised.

Attention should also be given to how the total reward package, including salary levels, pensions, share
options, bonus payments and benefits for EDs are determined by remuneration committees in the first
place and how the package is linked to performance.

Also, there has to be careful balance to ensure that that remuneration package meets the needs of the
organisation, its EDs and its shareholders. If this not achieved, individuals may be put off from becoming
EDs, reducing the supply and so increasing the size of the reward package needed to attract people to
such positions. To achieve this careful balance the CIPD believes that packages should be:

• Competitive - the total reward package offered by an organisation to its EDs need to be
competitive enough to attract and retain talented individuals. However, firms need to ensure that
they are not offering more than they need to. Where firms use market pricing to determine the
salary level NEDs should be aware that this can lead to an upward ratcheting effect. They should
also consider looking at using more than one source of market pricing data. Other aspects of the
total reward package such as benefits and pensions also should be examined and justified.

It is not necessary to be competitive on every aspect of the reward package and not effective just
to follow fashions in reward. In a poorly performing company, it may be necessary to attract EDs
from more highly performing organisations. The fact that to attract them they need to be highly
incentived and rewarded should not mean that everyone else's package has to ratcheted up in
line. Or the fact that they will only join if they have an extended period of notice (such as two to
three years) should not mean that they should not come down to one year's notice after that initial
period.

• Performance-based - a lot of attention has focused on the size of the reward and redundancy
package for EDs. However, what is more important is that attention should be given to what is
being rewarded and recognised. Reward packages at board level should be linked to performance
and there should be clear alignment of interest between directors and owner/shareholder via
directors receiving part of their remuneration in shares of their company. Companies will need to
judge what proportion of shares an ED is expected to hold to ensure that the level of risk being
taken is appropriate for the that role.

Remuneration committees have to decide which of the various performance measures in existence
are most appropriate. In the past, ED pay was linked to simple measures of shareholder value and
share price. In the future, remuneration committees need to consider more sophisticated ways of
linking rewards to short and long-term measures and be prepared to justify why they have chosen
the performance measures that they have. They should consider at the outset, what will happen if
an ED fails to deliver the required level of expected performance. As the Combined Code on
 Corporate Governance states: 'The aim should be to avoid rewarding poor performance.' Setting
an effective structure of rewards at the outset of a director's employment should help to avoid the
dilemma of how to compensate EDs who are removed due to poor performance.

• Integrated - the directors' reward policy needs to be set in the context of the organisation's overall
reward strategy.. For instance, what will the impact be on staff commitment to an organisation if
they receive a low or no pay increase while the directors of that company receive a large increase?
This is one of the reasons why the professional input of an organisation's senior HR professional is
so important to the design of executive reward arrangements.
• Transparent - so that shareholders and staff understand why an executive is being awarded a
particular reward package, the process for determining rewards needs to be clear and
understandable. All elements that make up the reward package should be reported and justified.
• Independent - it is important that the decision-making body, the remuneration committee consists
of independent members in order to promote trust among shareholders and staff,. At least one
member should be HR/reward trained and qualified and the remuneration committee should have
access to various sources of independent and quality reward pay and benefits data and
appropriate guidelines, e.g. National Association of Pension Funds/Association of British Insurers'
guidance on executive contracts and severance.

The remuneration committee also has to be well informed and experienced in such matters.
Members need to question and challenge executive reward decisions to ensure that they are
practical and appropriate to the needs of the organisation and its market. The committee should
consider whether the size of the package is justified in light of business and individual
performance. Remuneration committees need to move away from an undue focus on market
practice and following competitors, towards best fit, ie what is appropriate in their particular
context.

Companies should regularly evaluate what skills and knowledge are required by remuneration
committee members to be effective in determining the size of the reward package, and in linking
the reward package to performance. If there is shortfall, then firms should reduce this either by
appointing new members who meet the requirements, or by developing existing members. More
consideration should also be given to how new committee members are recruited, selected and
inducted.

• Timely - if organisations are to engage in meaningful way with its shareholders over its
remuneration policy for directors it needs to give them sufficient time to make a reasoned
judgement.

With regard to the law on directors' pay, the CIPD is in favour of a minimum-legislative framework to set
boundaries and prevent abuse. We supported the remuneration report regulations, which have clearly had
an immediate impact, though we believe more time will be needed to evaluate the longer-term impact on
shareholder activism and corporate behaviour and performance. On the latest consultation document from
the Department of Trade and Industry 'Rewards for failure' directors' remuneration - contracts, performance
and severance, our position is as follows:

1. Views are sought on whether, and if so how, best practice on compensation and severance
payments could be limited by: restricting notice periods (and therefore severance) to less
than one year; capping the level of liquidated damages.

Members believe that while companies should be free to negotiate the notice period that they
believe is most appropriate for their sector, region and size of organisation they believe that in
most cases, this will be around the 12-month mark, may need to be higher, at least in the early
stages of a contract, where there are recruitment difficulties. Should this be the case, firms must
be able to justify how and why they came to that decision to their shareholders and other
stakeholders.

In general, our members are against prohibiting listed companies from agreeing notice periods of
more than one year. They fear that this could put some employers at a disadvantage as they
compete with private companies and subsidiaries of foreign owned companies to recruit talented
individuals at home or from abroad.
 Members also agree with the concerns raised in the DTI's consultation document that shorter
notice periods could result in an increase in base pay and may encourage short-term strategic
thinking by directors.

Liquidated damages, involves agreeing - at the start of the contract - the amount that will be paid in
the event of severance of the contract. The DTI notes that such clauses are not uncommon and
that 'some' consider that these clauses, while welcome in principle, usually set the damages at too
high a level. The ABI/NAPF guidelines do not regard this approach as desirable where the level of
liquidated damages cannot be varied to reflect underperformance, and recommend arbitration.
Another proposal to counteract this problem is that there should be a recommended restriction or
'cap' and the DTI asks for views on this approach. Our fear is if they are used and capped then it
could just increase payments to that level.

2. Views are sought on whether, and if so how, to encourage the use of phased payments to
limit the total severance or compensation payment.

Our members strongly believe that companies should actively consider the spreading the cost of
severance payments over the term of the unelapsed contract for the length of the agreed
severance period or until the individual finds new work.

However, they are against legislation forcing companies to adopt this approach as there may be
rare instances lump sum severance payments, rather than phased awards, are more appropriate,
for instance where companies and directors want a 'clean break'. To prescribe the method of
payment would be to deny the firm the flexibility to do what is appropriate in the light of the
prevailing circumstances.

Our presumption is that employers should phase payments, however in those circumstances
where they believe such an approach is not appropriate, they should justify their approach to
shareholders.

3. Views are sought on how improvements in best practice might be most effectively
promulgated (eg by Institutional shareholder guidance, amendments to the Combined
Code).

Members are against a legislative approach. They believe that disclosure and investor guidelines
coupled with better educated and informed NEDs are more effective ways of setting standards and
holding the remuneration decisions of companies to account.

4. Views are sought on other best practice options that would have the effect of limiting
severance payments in cases where a company has performed poorly.

Members thought that the option of offering severance pay that is the lower of 12 months salary or
the present value of shares (based on past equivalent annual salary when starting in the job) is
worth considering in more depth. Some practical issues would need to be worked through
(indexation of the share formula in the light of subsequent salary increases, for instance). The
biggest problem with this approach would be to establish a clear correlation between the director's
personal contribution and share price movement.

However, members believe that there is a difficult balance that companies need to address when
designing a severance package on the one hand that compensates an individual for both loss of
office and income and on the other hand that ensures that they are not rewarded for failure. For
instance, an executive could be brought in to turn a company around. They may perform very well,
but the firm could still founder. In such circumstances, then a generous pay off that reflects their
contribution in trying to turn the company around would be appropriate.

5. Would it be possible, and if so in what ways, to legislate for directors' contracts to include
provision that require the board to take into account underperformance in determining
severance payments and which would avoid the potential for litigation.
 Members believe that the government should not legislate in this area given the legal and practical
difficulties raised in the DTI's own consultation document. For instance, as our profession is well
aware, while it can be possible to measure individual performance, there are many influences on
overall business performance. Or in the words of the consultation document: 'It might be very
difficult to establish a causal relationship between the performance of an individual director and the
performance of a company as a whole.' The only people who will probably benefit from such a
move will be the legal profession. However, as Higgs says, boards need to establish effective
performance management and review arrangements at board level.

6. Should companies legislation provide that the statutory period for a director's contract
would be limited to one year's duration, or three years on first appointment, as
recommended by the Company Law Review?

Members agree with this recommendation from the Company Law Review. There may be
instances where a longer period may be called for due to recruitment difficulties.

7. Should companies legislation provide for the prohibition of rolling contracts having a
notice or contract period in excess of the period permitted by section 319, as recommended
by the Company Law Review?

See response to question 6.

8. Should companies legislation provide for the prohibition of covenants that provide for more
compensation than would be available under a one year or three year term contract, as
appropriate?

See response to question 6.

Conclusion

• The directors' remuneration report regulation has clearly had an impact on

shareholder activism.

• The CIPD does not believe that the case for legislation on 'rewards for failure'
at this stage is proven.

• Typically, we would expect notice periods to be no more than one year in

length.

• The Institute does believe that firms and shareholders need to examine the
whole issue of executive remuneration, especially the performance element,
rather than just the issue of severance.

• What also needs to be examined is the context in which executive

remuneration is decided and performance agreed. How are members of
remuneration committees recruited, selected, inducted, developed and
appraised?

• The CIPD believes that transparency over executive remuneration is

important. At the earliest possible opportunity, there should full disclosure to
shareholders of the reward and remuneration packages of EDs
1. THE DETERMINANTS OF EXECUTIVE SALARIES: AN
ECONOMETRIC SURVEY ...
by DH Ciscel - 1980 - Cited by 180 - Related articles - All 2 versions
lishing the level of the executive's reward? Pro- ponents on both sides of this issue-
the .... fraught with serious theoretical and econometric problems. ...
www.jstor.org/stable/1924267

Summing Up
Pay for performance: Why do we assume so much and know so little? Pay for performance is an important
element of good management, judging from responses to this month's column. The question of what kind of
pay for what kind of performance, however, becomes much more complex, suggesting a practice in need of
further examination. Taken to an extreme, it leads to a conclusion such as that of Renat Nadyukov:
"Sometimes we forget why we pay people." Sivaram Parameswaran concurs, saying, "in the compulsion to stay
on par with other players, we lose track of real value and performance."

Generally speaking, respondents favored schemes designed to reward long-term as well as short-term
performance, encourage retention, recognize special needs of an organization, be based on the achievement of
both financial and non-financial objectives, and in general create value for shareholders. However, there is a
sense, expressed by John Ippolito, that there is a lack of perception in boards of directors of "what constitutes
'creating value' in the enterprise … many boards are too ready to turn over the keys to the incoming CEO—
then watch the stock price to see if he or she did a good job."

Ashok Malhotra favors "reasonable incentives for short-term performance" and "higher incentives for long-term
performance." The rationale, as Mark Evans explains, is that "a CEO must develop and implement strategies
that provide long-term sustainable outcomes to the benefit of shareholders." However, Gary Johnson cautions
that "Because excitement is so critical to success, pay for performance value can be diminished the longer the
time delay for receiving performance pay."

Xu Jian comments that "competitors hire (our employees for their) competence. So beyond paying for (their)
performance, why don't we think more about (paying to retain them) for (their) competence?" Pallavi Marathe
concurs, saying that "Salary and retention are interlinked these days … (the latter) is also of utmost
importance." Jim Chorn asks, "Do you give (mid-range managers) larger incentives in the hope of retaining
them?"

Special needs sometimes dictate pay in relation to expected performance. Veronica Serrano suggests that this
occurs when "extraordinary performance or major business change is required." Whether this is the case or
not, several voiced the need to link pay to both financial and non-financial performance measures. As Ellis
Baxter put it, "… sanity is paying for what you want to have done…." Karla Ortega commented that "… a well-
structured compensation plan communicates corporate objectives to your employees…."

The perverse effects of pay for performance were also targeted. Sylvia Lee pointed out that "we want
knowledge sharing but reward knowledge hoarding." In commenting on executive pay, CEO Nari Kannan noted
that CEOs seek "less loss on the downside, more gains on the upside. The company's goals are the (opposite)."
Claude Des Rosiers warned that "There are enough challenges to get people in an organization to work
together (without compounding the problem by paying for individual performance)."

Ira Kay and Steven Van Putten report, based on extensive data, that they have found a correlation between
executive pay and long-term total returns to shareholders. But CEO pay increased substantially even in low-
performing firms in their study. Their book represents a useful effort to shed light on the issue. But is there
another subject as important as this one about which we assume so much and know so little? How do you
explain this? What do you think?

To read more:
Ira T. Kay and Steven Van Putten, Myths and Realities of Executive Pay (Cambridge University Press, due out
summer 2007).

How Should Pay Be Linked to

Performance?
Published: June 1, 2007
Author: Jim Heskett
 1. Emerging paradoxes in executive leadership: A theoretical ...
by CC Manz - 2008 - Cited by 1 - Related articles
... depends on the next generation of leaders and how they champion, reward, ....
Specifically these efforts have resulted in a collection of theoretical, ... problems
can emerge when adherence to such classic business values are not ...
linkinghub.elsevier.com/retrieve/pii/S1048984308000349

What is total rewards?

Total Rewards: All of the tools available to the employer that may be used to attract,
motivate and retain employees. Total rewards include everything the employee perceives to
be of value resulting from the employment relationship.

Throughout history, employers have been challenged with attracting, motivating and
retaining employees. From the simplest barter systems of centuries past to the current
complex incentive formulas of today, the organizational premise has been the same: Provide
productivity and results to our enterprise and we will provide you with something of value.

Historical Snapshot

In the earliest years that the fields of compensation and benefits were recognized as
professions, practice was based largely on formulas that served the entire employee
population in an organization. Salary structures were just that -- rigid and highly controlled --
and benefits programs were designed as a one-size-fits-all answer to a homogenous work
force.

In the 1970s and 1980s, organizations recognized that strategically designed compensation
and benefits programs could give them the edge in a rapidly changing environment.
Organizations were responding to:

• Global economic development and the emergence of multinational firms

• A much more competitive business environment
• Diversification of the work force to include workers who didn't fit the sole breadwinner, head-of-household model of
the '50s and '60s
• New government mandates related to employee benefits
• Rapidly rising benefits costs that prompted flexibility in programs to reduce costs.

Suddenly, the relatively simple compensation and benefits programs of the past were
requiring consideration of their strategic impact and relationship to one another. Integration
became a key, and compensation and benefits professionals emerged as critical strategic
partners in their organizations' leadership -- a position still occupied by leaders in the field
today.

Companies have experienced unprecedented challenges including:

 • Dramatic changes in the workplace, including increased awareness of conflicts caused by family, home and work
demands.
• Workforce demographic changes that challenged the traditional working-father, stay-at-home-mother model of
previous decades.
• Fewer resources available for pay increases.
• Substantial increases in health-care costs in some countries.
• Rapid decline of defined-benefit pension plans as a financially viable retirement model.
• Tremendous advances in technology and the emergence of new business opportunities.
• Geographic movement of many manufacturing and service roles.
• Advancement of pay-for-performance practices.
• Unprecedented mergers, acquisitions and global competition.

Collectively, these forces and others caused business leaders to scramble for ways to improve
efficiency, effectiveness and marketplace viability. HR professionals -- particularly those
specializing in compensation and benefits -- were challenged to contain costs and contribute
to improved business results. These professionals were at the forefront of designing and
implementing programmatic changes that have shaped the next generation of compensation
and benefits. The results have included improved alignment of pay and performance, tighter
controls on benefits costs, and more relevant and valued employee rewards programs.

Forward-thinking professionals realized that programmatic advances would not be enough.

While program efficiencies and cost controls have been pivotal for survival, many
organizations have recognized that an integrated and enriched "value exchange" between an
employer and its employees can accelerate velocity and success.

The concept of total rewards emerged in the 1990s as a new way of thinking about the
deployment of compensation and benefits, combined with the other tangible and intangible
ways that companies seek to attract, motivate and retain employees. Flexible companies and
start-ups were able to deploy these concepts rapidly, while other organizations have struggled
with entrenched organizational structures, practices and culture that have slowed or prevented
progress.

Since the 1990s , various total rewards models have been published. While each approach
presents a unique point of view, all of the models recognize the importance of leveraging
multiple programs, practices and cultural dynamics to satisfy and engage the best employees,
contributing to improved business performance and results.

Increasingly, it has become clear that the battle for talent involves much more than highly
effective, strategically designed compensation and benefits programs. While these programs
remain critical, the most successful companies have realized that they must take a much
broader look at the factors involved in attraction, motivation and retention. And they must
deploy all of the factors -- including compensation, benefits, work-life, performance and
recognition and development and career opportunities -- to their strategic advantage.

WorldatWork Total Rewards Model

As the association representing the professions comprising total rewards, WorldatWork has
served as a focal point for intellectual-capital development and dialogue about this topic. In
2000, after facilitating discussion with leading thinkers in the field, WorldatWork introduced
a total rewards framework intended to advance the concept and help practitioners think and
execute in new ways. The model focused on three elements:
 • Compensation
• Benefits
• The Work Experience
o Acknowledgement
o Balance (of work and life)
o Culture
o Development
(career/professional)

o Environment (workplace)

Up to this point, the association had focused solely on compensation and benefits. Yet,
specialists and generalists alike agreed that compensation and benefits -- while foundational
and representing the lion's share of human-capital costs -- cannot be fully effective unless
they are part of an integrated strategy of other programs and practices to attract, motivate and
retain top talent. Thus "the work experience" aspect of the first WorldatWork total rewards
model included aspects of employment that may be programmatic or part of the overall
experience of working. For instance, recognition (acknowledgement) may be part of a formal
rewards program or may be as simple as a thank-you from the boss or co-worker. Workplace
flexibility (part of work-life) may manifest itself as a formal telework program or as having a
culture and practices that embrace work-life flexibility.

As companies were exposed to total rewards, understanding of the concept advanced rapidly.
In fact, the concept has become the practice in many companies. Today, professionals
primarily use the terms "total rewards," "total compensation" or "compensation and benefits"
to describe the collective strategies deployed by their companies to attract, motivate and
retain the talent needed to be successful.

During the past several years, the concept of total rewards has advanced considerably.
Practitioners have experienced the power of leveraging multiple factors to attract, motivate
and retain talent; high-performing companies realize that their proprietary total rewards
programs allow them to excel in new ways. At the same time, human resource professionals,
consulting firms, service providers and academic institutions have made significant
contributions to our understanding of total rewards.
Elements of Total Rewards

There are five elements of total rewards, each of which includes programs, practices,
elements and dimensions that collectively define an organization's strategy to attract,
motivate and retain employees. These elements are:

• Compensation
• Benefits
• Work-Life
• Performance and Recognition
• Development and Career Opportunities

The elements represent the "tool kit" from which an organization chooses to offer and align a
value proposition that creates value for both the organization and the employee. An effective
total rewards strategy results in satisfied, engaged and productive employees, who in turn
create desired business performance and results.

The elements, as WorldatWork has defined them, are not mutually exclusive and are not
intended to represent the ways that companies organize or deploy programs and elements
within them. For instance, performance management may be a compensation-function- driven
activity or may be decentralized in line organizations; it can be managed formally or
informally. Likewise, recognition could be considered an element of compensation, benefits
and work-life.

Context for Total Rewards

The WorldatWork model recognizes that total rewards operates in the context of overall
business strategy, organizational culture and HR strategy. Indeed, a company's exceptional
culture or external brand value may be considered a critical component of the total
employment value proposition. The backdrop of the WorldatWork model is a globe,
representing the external influences on a business, such as:

• Legal/regulatory issues
• Cultural influences and practices
• Competition

The Exchange Relationship

An important dimension of the model is the "exchange relationship" between the employer
and employee. Successful companies realize that productive employees create value for their
organizations in return for tangible and intangible value that enriches their lives.

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Context of Total Rewards

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Model Definitions

Total Rewards
Total rewards is the monetary and non-monetary return provided to
employees in exchange for their time, talents, efforts and results. It
involves the deliberate integration of five key elements that effectively
attract, motivate and retain the talent required to achieve desired business
results. The five key rewards elements are:

• Compensation
• Benefits
• Work-life
• Performance and Recognition
• Development and Career Opportunities

Total rewards strategy is the art of combining these five elements into
tailored packages designed to achieve optimal motivation. For a total
rewards strategy to be successful, employees must perceive monetary and
non-monetary rewards as valuable.
Compensation
Pay provided by an employer to an employee for services rendered (i.e.,
time, effort and skill). Compensation comprises four core elements:

• Fixed pay -- Also known as "base pay," fixed pay is nondiscretionary compensation that
does not vary according to performance or results achieved. It usually is determined by the
organization's pay philosophy and structure.
• Variable pay -- Also known as "pay at risk," variable pay changes directly with the level of
performance or results achieved. It is a one-time payment that must be re-established and
re-earned each performance period.
• Short-term incentive pay - A form of variable pay, short-term incentive pay is designed to
focus and reward performance over a period of one-year or less.

• Long-term incentive pay -- A form of variable pay, long-term incentive pay is designed to
focus and reward performance over a period longer than one year. Typical forms include
stock options, restricted stock, performance shares, performance units and cash.

Benefits
Programs an employer uses to supplement the cash compensation that
employees receive.

• These programs are designed to protect the employee and his or her
family from financial risks and can be categorized into the following three
elements:

• Social Insurance
o Unemployment
o Workers' compensation
o Social Security
o Disability (occupational)
• Group Insurance
o Medical
o Dental
o Vision
o Prescription drug
 o Mental health
o Life insurance
o AD&D insurance
o Disability
o Retirement
o Savings
• Pay for Time Not Worked -- These programs are designed to protect the employee's
income flow when not actively engaged at work.
o At work (breaks, clean-up time, uniform changing time)
o Away from work (vacation, company holidays, personal days).

Work-Life
A specific set of organizational practices, policies, programs, plus a
philosophy, which actively supports efforts to help employees achieve
success at both work and home. There are seven major categories of
organizational support for work-life effectiveness in the workplace. These
categories encompass compensation, benefits and other HR programs. In
combination, they address the key intersections of the worker, his or her
family, the community and the workplace. The seven major categories are:

• Workplace flexibility
• Paid and unpaid time off
• Health and well-being
• Caring for dependents
• Financial support
• Community involvement

• Management involvement/culture change interventions.

Performance and Recognition

Performance
A key component of organizational success, alignment of organizational,
team and individual performance is assessed in order to understand what
was accomplished, and how it was accomplished. Performance involves
the alignment of organizational, team and individual effort toward the
achievement of business goals and organizational success.

• Performance planning - is a process whereby expectations are established linking

individual with team and organizational goals. Care is taken to ensure goals at all levels are
aligned and there is clear line of sight from performance expectations of individual
employees all the way up to organizational objectives and strategies set at the highest
levels of the organization.
• Performance - is the manner of demonstrating a skill or capacity.
• Performance feedback - communicates how well people do a job or task compared to
expectations, performance standards and goals. Performance feedback can motivate
employees to improve performance.

Recognition
Acknowledges or gives special attention to employee actions, efforts,
behavior or performance. It meets an intrinsic psychological need for
appreciation for one's efforts and can support business strategy by
reinforcing certain behaviors (e.g., extraordinary accomplishments) that
contribute to organizational success. Whether formal or informal,
recognition programs acknowledge employee contributions immediately
after the fact, usually without predetermined goals or performance levels
that the employee is expected to achieve. Awards can be cash or non-cash
(e.g., verbal recognition, trophies, certificates, plaques, dinners, tickets,
etc.).

The value of recognition plans is that they:

• Reinforce the value of performance improvement

• Foster continued improvement, although it is not guaranteed
• Formalize the process of showing appreciation
• Provide positive and immediate feedback

• Foster communication of valued behavior and activities.

Development and Career Opportunities

Development
A set of learning experiences designed to enhance employees' applied
skills and competencies; development engages employees to perform
better and leaders to advance their organizations' people strategies.

Career Opportunities
A plan for an employee to advance their own career goals and may include
advancement into a more responsible position in an organization. The
organization supports career opportunities internally so that talented
employees are deployed in positions that enable them to deliver their
greatest value to their organization.

Development and career opportunities include the following:

• Learning Opportunities
o Tuition assistance
o Corporate universities
o New technology training
o Attendance at outside seminars, conferences, virtual education, etc.
o Self-development tools and techniques
o On the job learning; rotational assignments at a progressively higher level
o Sabbaticals with the express purpose of acquiring specific skills, knowledge or
experience.
• Coaching/Mentoring
o Leadership training
o Access to experts/information networks -- association memberships, attendance
and/or presentation at conferences outside of one's area of expertise
o Exposure to resident experts
o Formal or informal mentoring programs; in or outside one's own organization.
• Advancement Opportunities
o Internships
o Apprenticeships with experts
o Overseas assignments
o Internal job postings
o Job advancement/promotion
 o Career ladders and pathways
o Succession planning

o Providing defined and respectable "on and off ramps" throughout the career life
cycle

An Integrated Total Rewards Strategy

Culture
Culture consists of the collective attitudes and behaviors that influence how individuals
behave. Culture determines how and why a company operates in the way it does. Typically, it
is comprised of a set of often unspoken expectations, behavioral norms and performance
standards to which the organization has become accustomed. Culture change is difficult to
achieve because it involves changing attitudes and behaviors by altering their fundamental
beliefs and values. Organizational culture is subject to internal and external influences; thus,
culture is depicted as a contextual element of the total rewards model, overlapping within and
outside the organization.
Source: Schein, E. (1990) Organizational Culture, American Psychologist, February, Vol. 43,
no. 2, 109-119

Environment
Environment is the total cluster of observable physical, psychological and behavioral
elements in the workplace. It is the tangible manifestation of organizational culture.
Environment sets the tone, as everyone who enters the workplace reacts to it, either
consciously or unconsciously. Because they are directly observable and often measurable,
specific elements of the environment can be deliberately manipulated or changed. The
external environment in which an organization operates can influence the internal
environment; thus, environment is depicted as a contextual element of the total rewards
model, overlapping within and outside the organization.

Attraction
The ability an organization has to draw the right kind of talent necessary to achieve
organizational success. Attraction of an adequate (and perpetual) supply of qualified talent is
essential for the organization's survival, and it is one of the key planks of business strategy.
One way an organization can address this issue is to determine which "attractors" within the
total rewards programs brings the kind of talent that will drive organizational success. A
deliberate strategy to attract the quantity and quality of employees needed to drive
organizational success is one of the key planks of business strategy.

Retention
An organization's ability to keep employees who are valued contributors to organizational
success for as long as is mutually beneficial. Desired talent can be kept on-staff by using a
dynamic blend of elements from the total rewards package as employees move through their
career lifecycles. However, not all retention is desirable, which is why a formal retention
strategy with appropriate steps is essential.

Motivation
The ability to cause employees to behave in a way that achieves the highest performance
levels. Motivation is comprised of two types:
 • Intrinsic Motivation -- Linked to factors that include an employee's sense of achievement, respect for the whole
person, trust, appropriate advancement opportunities and others, intrinsic motivation consistently results in higher
performance levels.
• Extrinsic Motivation -- Extrinsic motivation is most frequently associated with rewards that are tangible such as pay.

There also are defined levels of intensity with regard to motivation:

• Satisfaction -- how much I like things here

• Commitment -- how much I want to be here
• Engagement -- how much I will actually do to improve business results.

Another key plank of the business strategy, motivation can drive organizational success