We continue to live and work in a period of unprecedented change. The way work is designed, where and when it is performed, and by who, has evolved rapidly. New approaches to the way the workforce is managed are required to support these changes, including how the workforce is rewarded.

Three key focus areas for reward management in 2022 are outlined below. Each identifies opportunities for organisations to improve alignment of reward management to business and workforce needs.

1. Strategic use of total rewards

The emergence of the digital economy pre-pandemic – followed by the disruption and rapid transformation that has occurred during the pandemic, has led to significant shifts in operating models and ways of working. This has also placed a lot of pressure on organisations to improve productivity and efficiency or face getting left behind.

This is happening at a time when low unemployment and skill shortages are now starting to place upward pressure on salaries – strong demand across several industries for job families including cyber security, technology, engineering, healthcare, risk and finance has seen increased movement and bidding for talent.

With limited budgets to fund salary increases, organisations are not able to simply ‘chase’ market remuneration movements across all areas of the workforce. Instead, a more segmented approach needs to be applied, with a focus on areas where talent is critical to strategy and sustainability, and/or where the return on investment is high.

Where increases in salary need to be more conservative, organisations should be looking for new ways to utilise total rewards and the employee experience as a means for attracting, engaging, and retaining talent.

Adopting a more strategic approach to total reward goes beyond the traditional mix of cash and non-cash rewards to include aspects of the work environment and employee experience that people extract the most value from. To get this right you need to understand the diverse mix of extrinsic and intrinsic motivators across the workforce, and how these can be segmented and addressed through different reward and benefit programs.

Over the past decade workforce preferences and expectations more generally around career and rewards have been shifting. The overall employee experience, including “how, where and when I work, my development, and my connection to my employer’s purpose and social contribution to community” have become higher order needs for employees.

In 2022, what the hybrid work model looks like, and how well it is implemented is likely to be a critical factor influencing attraction and retention of talent. Effectively integrating this into the broader total rewards approach and employee experience will be a point of differentiation.

2. ‘Decluttering’ remuneration management

A common source of frustration and challenge for clients that still abides in 2022, is the need to continue working with outdated rigid remuneration structures and policies. These are often blamed for creating an unnecessary clutter of tasks and activities that drive inefficiencies within HR teams, and a less than ideal HR service delivery experience for the business.

Greater flexibility is needed to align remuneration strategies and processes to support new ways of working including the way agile work teams and contingent workforces are rewarded.

A few considerations for ‘decluttering’ reward management in 2022 include:

  • Where job evaluation or similar classification systems are utilised, move away from absolute job size determining pay levels or ranges. Consider using broader job architecture and benchmarking approaches that allow for reasonable changes in job design, accountability or expectations without the need to change remuneration.
  • De-link traditional performance management systems that are overly compliance led from pay decision-making.
  • Simplify remuneration policy and decision-making frameworks to make them more efficient and effective to work with – focus governance on critical activities, key risks and areas of compliance.
  • Provide greater autonomy for leaders to align rewards to their business areas operating rhythm and the way they utilise and manage the workforce e.g. providing project, agile or team-based rewards tied to milestones and delivery.
  • Make smarter use of data and technology to automate processes and provide actionable insights to guide reward decision-making.

One of the challenges is the degree of change required to support the ‘decluttering’ of reward structures. Existing management structures and policies are often so entrenched that they have a significant impact on culture and how things get done, making them hard to undo.

The benefits of getting it right are cumulative and can be a trigger to unlocking improved workforce performance and productivity.

3. Incentive plan health check

The way incentives are being used by organisations has been changing in recent years. In some industries and occupations, they have been removed or used in a more limited way (for example front line workers in financial services). This has been largely driven by concerns around the potential negative impact of incentives on employee behaviour and the impact on customers.

In other industries where these concerns are not shared, incentives have continued to be relied on to offset limitations around salary increase budgets. This has also allowed a portion of the overall investment to be used to retain critical talent.

Whilst incentives still form an important part of the total reward equation for many organisations, it is important to ensure they are ‘making a difference’ and are serving their intended purpose. A key test and rationale for the ongoing use of incentives is the ability to clearly link and correlate increases in incentives being paid to increases in performance.

Where this can’t be established there is a possibility that incentives may not be making a material difference. Worse still, where a plan has been in place for a number of years and making limited impact but still paying out regularly – it can become seen as expected or an entitlement by staff.

Given the past few years have been abnormal, as you start planning for the 2022/2023 cycle, it may be a good time to undertake a health check of your existing incentive plans to ensure they are well aligned to your business and people needs.

Reward and remuneration areas of focus

Undertaking an incentive health check should include the following areas of focus:

  • Pay mix: Is the pay mix providing an incentive opportunity that is competitive and meaningful enough to drive desired results?
  • Gateways and hurdles: Is there a minimum level of performance and behaviour needed to trigger the plan?
  • Scorecard design: Do you have the right mix of financial and non-financial measures?
  • Target setting: Are targets being set in line with the required performance expectations at Target and Stretch?
  • Participation rate: What percentage of plans participants receive an incentive payment?
  • Payout: What is the average incentive payment as a percentage of target incentive?
  • Performance pay ratio: What is the relationship between increases in pay and performance? What share of the overall spend on incentives is directed towards high performers?
  • Engagement: Are staff motivated and engaged by the plan – are they actively participating in the plan?

As you work through 2022, if you want to discuss any of the above areas of focus, or ways KPMG Rem Desk can help you with your remuneration management, feel free to contact our team.

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