Great expectations but what’s really changed in Reward?

Following the unprecedented changes of the last couple of years with the Great Resignation, Hybrid Working and the Cost-of-Living Crisis - in April this year KPMG asked companies about their evolving approach to reward – and 143 shared their views.

In this article, we examine key insights from our respondents, what other employers might learn from their changing approaches to employee reward, and what emerging issues HR teams might put on their ‘to do’ lists. 

Pay is still the most important factor in employee attrition and retention across all sizes of companies (54 percent of our respondents). This is closely followed by better career pathways (50 percent), more flexible work location (50 percent), more flexible hours (50 percent), and increased recognition (46 percent).

Employee expectations have changed. Most organisations are allowing hybrid working (where possible) but forward-thinking companies are reviewing their whole approach to reward. Around 42 percent of companies have transformed the overall employee proposition to create a compelling offer to enable them to attract and retain employees more easily.

When we asked what elements of reward are getting more and less important overall, wellbeing was overwhelmingly top with 71 percent of companies. In-year recognition (48 percent) and annual recognition (47 percent) were second and third.

At the other end certain benefits are getting less traction: 34 percent of companies stated car allowance and 29 percent stated lunch allowance is getting less important. 

Could the apparent decline in the value placed on these 'traditional’ benefits, and a move towards experiential aspects of total reward, be driven by more flexible working by employees who are able to work remotely – or are there broader causes?

When it comes to attraction and retention, large companies (with more than 5,000 employees) are far more likely to splash the cash using retention bonuses (49 percent versus 22 percent in smaller companies) and sign-on bonuses (42 percent versus 19 percent). It’s also easier for them to promote better career pathways (62 percent versus 44 percent).

However, smaller companies (with fewer than 1,500 employees) are more likely to be flexible – on hours (53 percent versus 27 percent in larger companies), on work location (56 percent versus 45 percent), and on additional holiday (20 percent versus 13 percent). Smaller companies are also more likely to be reviewing the overall proposition (47 percent versus 40 percent).

Could larger companies learn something from the smaller ones? If they don’t, will larger employers find themselves outflanked by nimbler competitors whose flexible approach to reward attracts more and better talent?

Over the years we’ve often heard that performance management and pay for performance aren’t effective. Despite this, only 22 percent of companies stated performance management ratings are getting less important, with 34 percent saying they’re becoming more important.

41 percent of companies said that employee performance-based bonuses are getting more important, with only 11 percent saying they’re getting less important.

Also, 69 percent of companies still use annual performance ratings, 86 percent stated individual performance is the biggest driver of pay increases, and 83 percent of companies use individual performance as a determinant of bonus pay-out.

Why is this? Well, what’s the alternative?

1. Greater use of discretion – this allows managers flexibility but from a governance and equal pay perspective it could be problematic, as it’s easier for bias or inconsistency (unconscious or not) to creep in; or
2. No pay for performance (e.g., pay on market rate and no bonus or profit share type bonus). This is often what we see in the public sector. But in this scenario how do we reward excellence? If we don’t, great performers are likely to feel under-appreciated, recognise their ability to earn more – and leave. There are a couple of options 1) accelerated career progression which may not be possible or desirable in all cases, or 2) A much more significant recognition programme.

As outlined above we’ve seen a growth in recognition. But our feeling is that it could be used more extensively as an element of P4P. Instant recognition is very powerful, the workplace is becoming more agile, so having most reward on an annual basis is starting to feel out-dated.

Despite the recent US and EU legislation on pay transparency, only 47 percent of companies have considered pay transparency (56 percent in the UK and 39 percent in the rest of Europe). A majority of companies don’t publish pay information – 71 percent stated they don’t publish pay levels in job adverts and 78 percent stated they don’t publish pay scales/ranges and don’t plan to do so in the next year. Interestingly in the EU (where new legislation is coming in) 83 percent don’t publish pay in job adverts, so have a long way to go.

With changes to legislation there’s a very strong interest in pay transparency. However, businesses with operations in the EU clearly aren’t ready for the upcoming changes (the directive transposes into national law in 2026). While changes to legislation are some way off, there’s potentially a lot to do. Organisations need to ensure that their people structures (grading and pay structures) are robust before publishing pay information. This type of review can take time, especially for larger employers. So starting to look at this sooner rather than later is advisable.

A large proportion of companies (52 percent) incorporate ESG measures in their executive incentive plans. Particularly for listed companies, driven by requirements from large institutional investors, 71 percent (as opposed to 42 percent in unlisted companies) incorporate ESG measures in executive incentive plans. However, ESG has not been widely incorporated in all employee reward, with only 22 percent of companies using ESG in compensation although 24 percent are considering introducing it.

We’re also likely to see further legislative changes (e.g., around equal pay, ESG etc). So having an effective reward underpin makes it easier to adapt and ensure compliance. 

Employee attraction and retention are also likely to continue to be an issue over the next several years as (especially in the UK) there does not seem to be a short-term fix to labour supply. Employers will need to continue to evolve packages to remain attractive, especially as the economy picks up.

Taking the insights from our recent survey, questions employers should ask as they consider how their employee value proposition should evolve include the following:

• How do we know if our balance between pay and career progression on one hand, and flexibility and recognition on the other, works for our retention strategy?
• Do employees value their overall reward package and do we understand how their needs and desires are changing?
• Does our employee package match up to more progressive organisations in the market?
• Does our workforce see a strong link between pay and performance and how can we get the most out of instant recognition?
• Do we have effective structures in place to allow pay transparency to current and prospective employees?
• How can we demonstrate to stakeholders that our approach to reward supports our ESG strategy – have we put our money where our mouth is?

If you want to understand more on how your approach to total reward should evolve, please contact Scott Cullen or Susie Zhu.