Case study 6.

2
Designing reward systems by MARK W. GILMAN
Despite there being many different reasons for the introduction of pay for performance
essentially, for employers, it is about raising productivity. Yet companies use not only pay, but a
diverse range of methods to do so, despite the fact that recent research argues that they are very
rarely linked in a way which might be described as a ‘productivity enhancing strategy’. This
raises some interesting questions for the HR manager concerning which reward system is going
to be more appropriate for the organization and its employees, what are its components and how
does it fit with other elements of the productivity increasing measures to ensure that one
compliments the other.
In this chapter we have highlighted not only the differing combinations of rewards
available but also some of the differing internal and external pressures faced when deciding how
to pay employees. Despite this, it is still common for employers to concentrate on performance
related pay schemes as their major form of reward. While a number of employers say that they
have had a positive experience of tying pay to performance, there are a number of pitfalls
including encouraging different behaviors to those it was supposed to encourage. Below are a
number of examples of recent schemes introduced by companies from a range of different
sectors to meet a range of different priorities.
The first, reintroducing an across the board increase, had a concern for overall pay
equality; the second, despite being in the same industry, was moving in the opposite direction
with a concentration on pay for performance; the third, had to deal with employee market power;
the fourth with a lack of flexibility, the fifth with consistency across European operations and the
final one not wanting to pay employees extra for what they should already be doing. In doing so
companies were utilizing similar schemes in different ways, attempting to balance internal and
external factors and the requirements of the differing stakeholders.
Yorkshire Water implemented a new pay and performance management system in 1998,
the scheme was considered ahead of its time and even credited with helping to turn the business
round. It featured individual performance-related pay that offered employees the chance of
consolidated merit awards, and formed the basis of a series of two-year pay deals.
However, unions representing the company’s 2,200 skilled, technical and professional
staff were unhappy with the individual performance element of the system. They were
particularly concerned that an employee whose performance was poor in one year – leading to a
zero pay increase – suffered not just in that year but for the remainder of their career and into
retirement. Their calculations showed that a 40-year-old employee, who missed out on a pay rise
in that one year, while colleagues got a 3 per cent rise, would lose between £30,000 and £40,000
in pay and pension.
As a result of this and other concerns, Yorkshire Water and its recognized unions have
now negotiated a new agreement which came into effect in 2005. It will include an inflation-
linked increase for all employees until 2010, and non-consolidated individual merit bonuses.
These non-consolidated bonuses are paid quarterly, and their value is known in advance. For
2005/06, for example, each quarterly bonus is worth £250 to an ‘over-achiever’ and £150 to an
‘achiever’. A system of consolidated bonuses is also available to those who consistently over-
achieve, along with consolidated ‘progression increases. The move to the new scheme has been
accepted by the unions, which say that their members are happier with the new approach.
Severn Trent Water operates 3,000 sites and employs around 5,000 staff. Frontline
employees fall into two groups including head office staff and contact center employees and
process and maintenance workers. Reward practices were considered out of date, with little
provision for the desired flexibility or link to performance. Performance-related pay had been
attempted for some of these groups in the past but had proved unsuccessful. The HR department
had to devise an alternative model that provided clear performance-related progression for staff
but at the same time retained a banded pay framework.
The company employed the Hay Group to provide consultancy services, enabling them to
gain valuable insights into other reward practices and options but decided that they wanted to
create their own pay model. In its first two years up to 2004 the scheme involved an across-the-
board pay increase, as it had done previously, and a performance-related increase. It was made
clear that the basic pay increase would not be an entitlement and was not guaranteed –
employees still had to meet the specified performance criteria.
From 2006 a new framework was negotiated linking pay to company profit targets and
improvements in safety performance and attendance levels. A published formula shows how the
amount of money available for next year’s pay increase can be enhanced by outperforming in all
three areas.
 In 2008, HR managers at Yahoo Europe were given the challenge of dampening down
employee pay expectations. The company focused on rewarding only its best performers so that
there were no expectations of linking pay to inflation or to what the employees themselves
thought they were worth. The problem for the company was one in which global economic
conditions are leading to recession but employees are well aware of their own value and hence
perceive themselves to have a degree of market power to demand higher pay.
The company has introduced ‘forced rankings’, where managers have to identify who
their best and worst performers are. The company have commented that a significant proportion
of employees will get zero in this year’s pay round while performance will be rewarded more
than normal. The company are hoping to get employees and managers to take accountability for
their own performance and differentiate between strong and weak performance.
In 2002, insurance firm, DAS Legal Expenses decided on an overhaul of their pay
scheme after line managers complained that the scheme offered little flexibility. The new scheme
is based on an appraisal system built around four core values – excellence, respect, improvement
and cooperation – which, when broken down to individual targets, provides managers with both
structure and a degree of flexibility.
The scheme operates by scoring employees on a quarterly basis from 0 to 14 for each
aspect of their performance, and weighting the scores according to the perceived importance of
each aspect to the department in which they work. Results are then compiled over the course of a
full year ahead of the next pay review date. Although the merit element of pay rises can then be
determined according to appraisal ratings, the system also includes room for collective
bargaining with the Amicus trade union over the pay rise sum to be allocated to each grading.
The scheme is generally judged to be a success because it provides clarity to employees
about company goals and their contribution to achieving them, and because it gives senior
managers regular performance metrics that rapidly show up problems.
At business travel management consultancy Carlson Wagonlit, merit pay is linked to a
programme of performance reviews that take place at least once every year for each employee. A
similar system operates for managers, who receive a bonus based on company and individual
performance.
An intriguing aspect of the Carlson Wagonlit scheme is that the key competencies were
developed by employees in the UK, rather than by consultants or the HR department, and have
since been adopted for use throughout the company’s European operations – although union
resistance is likely to mean that these are not used to determine pay outside the UK.
Sterilization products manufacturer Isotone, reviewed its reward systems after doubling
its turnover and employee numbers in a takeover two years ago. Although It decided that
performance-related pay was not right for it, the company does now have a performance related
Bonus scheme. The company considered that rewarding managers with additional increases to
their salary for jobs they were already paid to do was undesirable. Instead, they wanted to reward
for increased responsibilities only.
There had been a prior subjectively allocated performance bonus, but the new bonus is
decided via a performance review based on key values and reviewed by a senior manager. The
company say that the scheme has involved a considerable culture shift in how pay and
performance is viewed.

Source: Adapted from Attwood, 2005; IRS, 2004; Personnel Today, 2008.
Questions
1- Are the above companies utilizing the appropriate reward system? Should they be using
other rewards as part of their overall package? What would you advise for these
companies?
2- Take an example of a company that you know and design a reward system explaining the
reasons for your design and ensuring that it incorporates the company’s culture, strategy,
employees, etc. Would you use the same system for all employees within the company?