Rewards Metrics: Engagement versus the Bottom Line

According to a new study, the Reward Next Practices Survey conducted by Hay Group and WorldatWork, companies attempting to measure reward program success plan to increase their focus on employee engagement as a key metric. 

From Hay's release on the study:

According to the study, current reward program performance metrics are more heavily weighted toward financial performance than employee engagement, with companies reporting a current focus of 71% on using financial performance measurements and 40% on employee engagement. Other performance standards, such as customer satisfaction, innovation, talent management and employee engagement are all at less than 40% of current focus by organizations. Of all of these metrics, organizations report a more intense future focus (57%) on employee engagement performance.

I haven't yet seen the full report of the research, but as a WorldatWork member I hope to.  From the release it is a little difficult to ascertain whether we are talking about 1) the metrics used in reward plans or 2) the metrics used to assess the performance of reward plans.  My read is that it's the latter.  Either way, it is an interesting piece of news.

To some extent, I appreciate the need to mix it up and not have financial metrics exert too heavy an influence on the design of our reward programs.  Financials are, after all, backward looking or "lag" metrics in that they measure success that has already taken place.  (And, as someone once said, running an organization on financial metrics alone is like trying to steer a boat by watching its wake.)  Employee engagement, on the other hand, could be considered a forward looking, or "lead", metric in that it intends to measure something that is predictive of success.

Some element of balance in our reward metrics - financial versus non-financial, lag versus lead - is a good thing.  It is this realization, at least in part, that has driven the success of the Balanced Scorecard.

The question that nags at me, though, is whether we should be using employee engagement as the (or even a) primary measure of the success of our reward plans, at the expense of focusing on bottom line results.  To me, it parallels the question of whether we should focus on being the best places or the best high performance places to work.  Are we moving in the right direction here?

This is exactly the point of a lot of recent criticism of HR from our friends over in Finance.  In a recent article at CFO.com, Memo to CFOs: Don't Trust HR!, Rutger University's Richard Beatty criticized HR as spending too much time and effort on satisfying the overall employee base and too little on attracting and retaining top talent. 

Beatty based this conclusion on employee surveys done at IBM and other companies that found little relationship between job satisfaction and performance ratings. Not only is employee engagement very expensive, but "how do you know you're not satisfying a lot of people you really wish weren't there?"

While motivating people is certainly critical right now, it needs to be motivation directed toward accomplishing the things that will keep the employer profitably in business.  If we weight our reward programs too heavily toward engagement and away from the bottom line, eventually the bottom line will go away. Where will we be then?  Not very engaged or satisfied. Perhaps not even employed.

What's your take?  Am I all wet here?

Comments

[Paul Hebert]

Great points Ann.

First of all running a company with only financial metrics is bad - can you say Bear Stearns, AIG, etc, etc.

And running a company based on employee satisfaction is bad as well. For one thing - what is "satisfied"? Is it really the same as engaged? I personally don't think so. Satisfied means don't change anything on your end and I won't change anything on mine. In fact, there has been a meta-analysis of satisfaction and company performance that showed the connection between satisfaction and company performance was largely spurious.

However, engaged is different. I look at the difference between engaged and satisfied like this... when you're satisfied you lean back - when you're engaged you lean forward. Satisfied is like watching TV - engaged is like working on the computer - both screens - one you lean into - the other away from.

But the real problem is picking one thing over another. You wouldn't make every decision in your household based on the budget and you also wouldn't make every decision based on the needs of your spouse (significant other) or children - you balance those. And just like how you manage your household you manage your business.

When times are good you indulge a bit - when times are tight you don't - and you explain and show the family why.

Business is no different. Balance baby, balance.

[Paul Weatherhead]

Ann,

Again, a great blog to stimulate the brain cells! I hope you don't mind me responding to your thought-provoking blog in bite size sections.

For now, I'd like to direct your readers to some other published documents supportive of a balanced focus on financial and non-financial metrics:
-- WorldatWork white paper on "Balanced Scorecard & Pay-For-Performance" at http://www.worldatwork.org/waw/adimLink?id=30331
-- WorldatWork Journal article "What Pay For Performance Should Measure" by Bruce Ellig at http://www.worldatwork.org/waw/adimLink?id=26401
-- WorldatWork Journal article "Pay For Performance Works: The United States Postal Service Presents a Powerful Business Case" at http://www.worldatwork.org/waw/adimLink?id=16925&nonav=yes

Paul

[Paul Weatherhead]

Ann, I particularly liked your link to the Wikipedia article on the Balanced Scorecard. My college professor/high school teacher/College Board consultant wife scoffs at my use of Wikipedia as good for nothing better than doing the NY Times crossword puzzles. However I have seen great entries on compensation issues such as the Balanced Scorecard, the Equal Pay Act, and the Employee Free Choice Act. Is Wikipedia perfect? No. But it strives to be fair and balanced; current; relevant; technically accurate; and FREE! Paul

[Paul Weatherhead]

Many compensation professionals will recognize the name of Graef Crystal as the long time Towers Perrin consultant who gained notoriety a few decades back by becoming disgruntled with his role of inflating executive salaries without organizations getting a return on their compensation investment.

WorldatWork (or was it their predecessor American Compensation Association) even gave Graef a Keystone Award for lifetime achievement in the profession.

But I noticed something in his many scalding blogs of executive compensation (http://www.graefcrystal.com/). He never assesses executive performance based on anything other than financial performance.

I wondered about that since I am a proponent of the balanced scorecard. But I admire Graef's courage for speaking out on compensation issues. So I emailed Graef to ask him about his thoughts on non-financial measures. I have yet to get an answer. If someone sees Graef, can you ask him to answer his emails. After all, he encourages people to email him on his web site.

[Ann Bares]

Paul H:

Great points. In no way am I suggesting that we should run companies, or design rewards, based solely on financial metrics. I have argued that side of this discussion in many posts. I just want us to think carefully anytime we swing the pendulum from one direction to the other, to make sure we aren't moving from too much emphasis on one thing to too much emphasis on another.

Too much emphasis on employee engagement (regardless of how we define it) could produce unfortunate consequences at well. For all I know, the folks at Bear Stearns and AIG were highly engaged in what they were doing - but that doesn't mean they were doing the right thing.

As you say, it is all about balance. I think that's my point here as well.

Paul W:

Thanks for all the great points and links. I, too, am a fan of the balanced scorecard (lowercase, more in concept than literally from the Norton and Kaplan book). I actually posted awhile back on balanced scorecard based incentive plans ... here-

http://compforce.typepad.com/compensation_force/2008/08/scorecard-based.html

I am also a fan of Wikipedia. As you long as you accept and recognize it for what it is, it is a great source!

I once got a testy comment from Mr. Crystal on this blog - he took great exception to my interpretation of and comments on findings from some TP research. Kept referencing me as "The Author". (Hello sir, this is just a blog, not the New Yorker. You can use my first name when you pick me apart. It's more personal that way...)

Thanks - both of you, for the great discussion here!

[Carla]

Ann,

I remember Mr. Crystal's comments to you. They were way off base and I lost a lot of respect for him as a result. He did not pick you apart in my opinion and he came out of the discussion looking petty.

Carla

[E James (Jim) Brennan]

Bud gets cranky. Remember, he's the one built most the excessive comp programs he later decided to "out" when he retired from TPF&C (Towers Perrin) as their national Executive Compensation Practice Leader. Suspect he's still expiating feeling of guilt, deconstructing just as he constructed; hence his reliance on financial measurables, which are also more easily accessed, more defensible and less controversial than other output measures within the usual litany-list of "quality, quantity, time and costs".

An underlying problem you nail, Ann, is HR/Comp's focus on the subjects as their constituency.... relating to the comfort of the employees rather than the health of the enterprise or the metrics prized by the top management committee.

"We" (in our trade) tend to see ourselves as intermediaries, protectors/servants of the workers, shop stewards of a company union sensitive to (rather than antagonistic against) management, serving the firm as we best feel serves the employees. No top exec sitting at The Big Table thinks like that.

Bottom line: "we" literally misrepresent our client in all sorts of ways, pleasing the innmates while disappointing the wardens (mixing metaphors as I love to do), frequently pursuing the wrong outcomes and perhaps becoming as populist and dysfunctional as Congress, for much the same reason. Do what's right or do what's popular? See the difference?

[Paul Weatherhead]

Since the Compensation Force is becoming so huge could someone do an old man a favor and provide a link to the Ann/Bud debate? Sounds too good to miss!

[Derek Irvine, Globoforce]

Ann, thanks again in helping make our roundtable webinar a resounding success -- very positive comments all around.

To your point here, it's an excellent question. Beatty's quote adds to the confusion -- satisfaction and engagement are two very different things. Employees can be quite satisfied being unproductive but comfortable in their positions As I've said repeatedly on my blog, engagement is about employees willing giving discretionary effort and, critically, focusing that additional effort on achieving the company's strategic objectives. As you say, these are the things that will keep the company profitable and in business.

I've blogged all week on measurement, engagement, recognition and the bottom line. Check out the posts for more.

[Debbie Norris]

I think the question about whether you're engaging those you really would prefer not to have around is valid. It seems reasonable that much of what passes as an engagement issue may be, in large measure, a hiring issue.

That being said, it seems like the real trick is drawing a clear line between an engagement program and the final numbers.

[Ann Bares]

Carla:

Thanks for the back-up and validation, I appreciate the thought.

Jim:

Thanks for your perspective and the metaphors. I hope I'm overexaggerating the underlying problem. The comparison to Congress is a little scary.

Paul:

I have collected a lot of posts here over the years, haven't I? I almost hate to do it, but here's the link. Not much of a debate, I folded pretty quickly in the face of "Bud"s" criticism. I was a little freaked out about it at the time. Friend Kris comes to the rescue ...

http://compforce.typepad.com/compensation_force/2008/11/should-variable-pay-be-cut-in-times-of-variable-performance.html

Derek:

It was a great pleasure to have the chance to partner with you and Jon Ingham in the roundtable webinar - hope to have the opportunity again in the future. I like your distinction between satisfaction and engagement. I wish I was confident that all organizations have and use that same level of useful clarity. But that's probably your objective!

Debbie:

Good thought - I'd agree that underlying hiring issues account for many of the engagement and performance problems we see organizations struggle with. And the key indeed is to tie engagement and final number together conclusively. Which I know a number of studies purport to do. Perhaps I need to take a deep dive into understanding how they see this working.

Thanks, everyone for the great discussion!

[Wally Bock]

I have to confess that the older I get the more I find that I agree with the concepts of "engagement" and "balanced scorecard" more than the implementations of either.

With engagements we face the Dance of the Dueling Consultancies and their proprietary definitions. In addition, we wind up trying to get our heads around something that can only be "measured" (note the quotes) via a survey.

Balanced scorecards seem to be subject to measurement creep. What starts out as balancing somewhere between two and four measures evolves quickly to a system with dashboards measuring twenty-five or more things.

[Ann Bares]

Wally:

We are in agreement. Funny how so many of these things work better in concept than in real life implementation.

Thanks!

[Wally Bock]

Congratulations! This post was selected as one of the five best independent business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2009/05/20/52009-midweek-look-at-the-independent-business-blogs.aspx

Wally Bock

[Steve]

Ann,

I operate a medium sized retail organization under a franchise banner that has about 200 employees. We have built our business on a great store experience and solutions. In the past year we acquired a small franchise group within our brand that had a very poor service culture. We converted all their stores to our point of sale platform and implemented a "scorecard" that has both finanical and qualitative metrics such as training compliance on our online university. Overall it is heavily financial. We implemented a bonus structure that is a gain sharing system whereby the store team receives 25% of the amount of store contribution above budget. This has has significant results in generating growth and employee engagement. I have committed as CEO to a quarterly business review process by region to teach the business aspects of what they do and with repitition hope to develop teams that have a great understanding of the business. We also have a dashboard that updates weekely at the store level so the stores undrestand how they are doing relative to their score card.

I think you thoughts on employee engagement are intriging and have caused me to go searching for metrics that can be obtained through survey's and other means. Thanks for your article.

[Ann Bares]

Steve:

Sounds like you are doing some great work! Glad that you found the post helpful!

[Tom McMullen, Hay Group]

Ann--I am glad to see you found Hay Group’s research interesting. First, I would like to answer the question you asked. The research focused on the performance metrics used in reward programs.

To your question about whether employee engagement should be a key measure of reward plan success – I think that balance – between financial and non-financial metrics – is not only a good thing, but is essential to any reward program’s success. However, at a time when the money available for salary increases and bonuses is squeezed, many employers are asking their employees to do more with less. If employees are going to put discretionary effort into their work to drive bottom-line results – they have to be engaged.