Of Rewards, OD and passing the buck

“Compensation decisions are based entirely on the market and business situations. Our objective is to achieve the right balance between ‘need to pay’ which is based on the market scenario and the ‘ability to pay’ which is based on the company scenario”, said the Rewards Manager. “Wouldn’t that make the Rewards function very transactional? Shouldn’t you look at the ‘want to pay’ aspect which is based on the overall people management philosophy of the organization, in addition to the ‘need to pay’ and ‘ability to pay’ aspects that you have mentioned?”, asked the Organization Development(OD) Manager. “We can’t create competitive advantage through compensation strategy as it can easily be copied. Hence, the compensation function has to be transactional and business oriented.While I agree that 'Total Rewards' is our approach, I am only the 'Rewards Manager'. Executing parts of the Total Rewards framework that are not related to compensation and benefits should be the job of the OD function as it is the mandate of the OD function to build a deeper engagement with the employees.”, replied the Rewards Manager. “OD function is also business aligned – it is not about charity and feel good initiatives. Creating deeper engagement with the organization requires a multi-pronged approach and that includes Rewards related dimensions also. Rewards is a very important tool to shape employee behavior. If our Rewards strategy is only about ‘paying the employees the lowest compensation that we can get away with’, we are not only not leveraging the full potential of Rewards, but also creating irreparable damage to the psychological contract between the employee and the employer. Managing the psychological contract is key to building deeper engagement with the employees”, said the OD Manager.

During the first few years of my career, I did a lot of HR consulting work related to Rewards – benchmarking, policies, benefits, compensation structuring, variable pay schemes, employee stock option plans, voluntary retirement schemes, job evaluation etc. Apart from developing functional expertise in the Rewards domain, I also developed an affinity/feel for compensation related numbers. When I look at a data sheet with a lot of compensation related information it (say the compensation data from various companies/units), the figures 'talk to me' (i.e. the patterns in the data and the actionable inferences based on the same automatically pop up in my mind). Later in my career, I gravitated towards OD, though I did get involved in Reward related matters when I have handled HR Business Partner roles. Anyway, Rewards has remained close to my heart though I have been making a living mostly out of OD for the last ten years. Of late, I have been making an attempt to stand at the intersection of Rewards and OD (Please see the six posts in the series on 'Salary negotiations and Psychological contract' for details). Also, I don’t miss any opportunity to interact with fellow Rewards and OD Managers. The conversation at the beginning of this post is derived from those interactions.

My opinion is that both the Rewards and OD Managers here are 'correct' - from the point of view of their respective sub-functions. They are just articulating the mandates given to them. However, while being 'technically correct' they are also missing the essential point here! Please note that one can be 'completely correct' and 'completely irrelevant' at the same time!

During the last 15 years, in the context of organizations that I am familiar with, I have seen ‘Compensation & Benefits’ evolving into ‘Rewards’ and then into ‘Total Rewards’. Similarly, I have seen OD evolving from ‘Process OD’, to ‘Process and Structural OD’ and then to ‘Organization Effectiveness’. That is where the 'trouble' begins. You see, when Reward Managers were just looking after compensation and benefits (providing 'money and goodies') and OD Managers were just doing OD interventions (the kind where you get people into a room and facilitate collaboration, better decision making or creation of a shared vision) these domains did not have much in common and they required very different skill sets. Now if we look at the ‘Total Reward Frameworks’ of many of the organizations, they will have dimensions like culture, learning opportunities, career development, empowerment, work environment etc. Similarly, Organization Effectiveness (OE) is essentially about enabling the organization to achieve its goals by ensuring alignment between the various dimensions/components of the organization and by facilitating positive change. This makes OE/OD more business aligned. This also calls for structural interventions (interventions at the structure, norms, policy & work process levels) in addition to interventions at the human process level. This creates an overlap between the Reward and OD domains, especially when it comes to policies and reinforcement mechanisms to encourage and institutionalize particular actions/behaviors/changes.

When there is an overlap, there are three basic possibilities. The first is that the parties find a way to work together effectively and help each other in the areas of overlap. Obviously, this leads to the best possible outcome. The second possibility is that there is a war over territory and the winning party captures some or all of the overlapping area. While this is often a wasteful process, things usually get done (i.e. they don’t fall through the cracks). The third possibility is that none of the parties take ownership for the overlapping area (and things fall through the cracks). Unfortunately, when it comes to the overlap between Rewards and OD, the third possibility is the one that often actualizes! May be, Rewards and OD Managers are basically ‘nice’ people who don’t want to step on the toes of others! So this creates a situation where the overlapping areas exist in the ‘Frameworks’ and Power Point Presentations of both the parties but nothing much gets done!!! This is what leads to the ‘passing the buck’ phenomenon that this post talks about.

So, what should be done? The important thing here (apart from seeing to it that things don’t fall through the cracks) is to ensure that there is alignment between what Rewards is driving and what OD is driving.

For example, if OD is working on creating an emotional connect between the employer and the employee (that goes beyond rational commitment) and the Rewards approach is that ‘compensation is purely a matter of supply and demand’, then it will send conflicting signals to the employees and also create a violation of the ‘psychological contract’.

Let us look at this in a bit more detail. The situation here can be traced back to fundamentals of the compensation philosophy of the organization – does the organization pay the employees based on what they deserve (within the constraints of what the organization can afford) or does the organization pay the employees as little as it can get away with? This comes into play in a situation where there is an industry downturn (making it difficult for the employees to change jobs) but the particular organization is doing well (growing reasonably fast with healthy profits). In such a scenario, the organization can afford to give the employees good salary hikes. But it can choose not to do so (or choose to give a very low salary hike) because even without the salary hike it can retain the employees. This certainly provides short term gains. It can also be explained away in terms of salaries being market benchmarked. However, this will violate the psychological contract and will lead to a situation in which the employees (especially very valuable employees) leave the organization as soon as the job market improves (Going by the same logic that the organization had used, the employees should leave the organization when the market will pay more!!). A similar situation occurs in the case of hiring also. When the company hires a person (internal or external hire) into a job what salary will be offered? Will the company offer the lowest salary that the candidate will accept or will it offer the salary corresponding to the worth of the job in the company? These are the situations where the 'want to pay' aspect comes in. If the company drives a hard bargain because the employee was not in position to negotiate at that time, no amount of talk later about ‘employees being the biggest asset’ and ‘building a great organization together’ will undo the damage that happened earlier because of the  loss of trust. Some of the IT organizations in India have learned this lesson the hard way!

At the core, people management (of which Rewards and OD are parts) is about understanding, predicting and influencing human behavior. Now, 'human motivation' is a complex phenomenon (See 'The power of carrot and stick' for a detailed discussion). Complex phenomena are usually 'over determined' - that is they have multiple (interrelated) causal/input factors. Some of these factors are in the OD domain and some of the factors are in the Rewards domain. Hence an integrated approach combining Rewards and OD is required. For example, the recent research findings in behavioral economics have created serious doubts on whether many of the performance linked pay schemes have any positive impact on performance. Hence, a combined effort from Rewards and OD is required to ensure a positive return on investment (in monetary and non-monetary terms) from such schemes. Otherwise, such schemes will just be 'tools to match the payout with the ability to pay' - without any useful impact on performance levels. In a way, our problem (Rewards and OD working in silos) has similarities with ‘Multiple Personality Disorder’ (see ‘HR Professionals and Multiple Personality Disorder’ for details). The most important thing in such a scenario is to get the two parts of the personality (Rewards and OD in this case) to talk to each other. This is not something that can be accomplished in one big meeting. This involves a different way of looking at things and joint exploration and solution design.

One approach to make this happen is to get the Rewards and OD teams to work together in crystallizing, articulating and delivering (in terms of specific HR processes and initiatives) the ‘Employee Value Proposition’ (EVP) of the organization. EVPs (that specifies the total employee deal offered by the organization) usually have both Rewards and OD related components and the EVP should inform both the OD and Rewards strategy of the organization. Also, jointly thinking through the implementation details of the various initiatives to deliver the EVP will help professionals in the Rewards and OD sub-functions to develop a better appreciation of challenges the other sub-function is facing. For example, it is very easy for OD managers to talk about 'correcting the salaries' or about 'standardizing benefits'. Similarly, it is very easy for Rewards managers to talk about 'changing the culture' or about 'creating intrinsic motivation by providing employees opportunities for self-actualization'. However, to make these happen in a reasonably short time period within the constraints of the organization is incredibly difficult.

May be, it would also be a good idea to integrate Rewards and OD domains more tightly in terms of the structure of the HR function.

There is also a larger issue here. As I had mentioned in ‘Paradox of business orientation of HR’, while there is no doubt that the HR function (and hence the Rewards and OD sub-functions) exists to support the business, the exact nature of the ‘business orientation’ that is required to support the business most effectively is a complex one. This becomes especially important, if HRM has to mean something more than ‘making people do more work without paying them too much and without risking disruptions to the business operations’. Please note that this problem is not confined to the Rewards domain. For example, if the OD/OE function goes about actively deskilling the jobs so as to manage the process risk and to reduce skill requirement (and hence the time and investment required in hiring/training and of course the salaries that need to be paid), it would take away from the richness and hence the motivation and learning potential of the jobs. In the specialist functions like Rewards and OD we should also be careful to ensure that in our obsession with tools and techniques (see 'Daydreams of an OD mechanic') we don’t miss the broader picture – that is alignment with the core values and the basic people management philosophy (see ‘Towards a philosophy of HR') of the organization.

Any comments/thoughts?

Of salary negotiations and psychological contract: Part 6 (the big picture)

In this series of posts we have examined the impact of salary negotiations on the formation and evolution of the psychological contract. In the first post in the series (see Part 1: dramatis personae) , we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some basic principles in the domain. In the second, third and fourth posts we examined the salary negotiations between the employee and the employer before joining (see Part 2), after joining (see Part 3) and after submitting the resignation (see Part 4) and examined how interactions influence and are influenced by the psychological contract. In the fifth post we looked at a special phenomenon in this domain – ‘batch mentality’ (see Part 5).

In this post, we will look at some broader aspects related to psychological contract and its workplace implications – over and above those related to salary negotiations.

Let us start with the concept of psychological contract. In the previous posts in this series, we looked at the psychological contract in the context of the 'employer – employee' relationship. However, psychological contract operates in any sort of relationship – not just that between the employer and the employee. This is because psychological contract is essentially about the mutual expectations people have about one another in a relationship, how those expectations shape the behavior of the people in the relationship and how those expectations evolve. It has even been argued that psychological contract between God and man is the basis of many of the major world religions (at least those religions that believe in a ‘personal God’).

If we look at the ‘content’ of the psychological contract in the context of business organizations, there are many other dimensions in addition those related to ‘Rewards’ (that we had covered in the previous posts). These include expectations related to the ‘relative seniority’ (where does my job in the new organization fit in the organization hierarchy of the new organization as compared to that in my previous organization), congruence between individual values and organization values, pace of career growth, degree of empowerment, amount of training/development opportunities provided, amount of support available, physical infrastructure, behavior of superiors/peers/subordinates, organization climate, how the organization will treat its employees when the organization and/or the industry is going through a downturn etc. In all these dimensions, the discrepancy between what a person encounters on the job and what he/she expected to encounter can lead to a violation of the psychological contract.

Now, let us take a look at the consequences of perceived violations in the psychological contract. Employees often respond to perceived violations in the psychological contract with withdrawal, reduced engagement levels, negativism, dissatisfaction, lowered job performance, turnover intention and actual turnover. As we have mentioned earlier, when it comes to the psychological contract, the employer is ‘represented’ by its agents/representatives like the managers of the employee. It has been observed that employees with ‘positive supervision experiences’ are less likely to perceive breaches of psychological contract. Also, even if they perceive a possible violation of the psychological contract, they are likely to deal with it in a constructive manner – like discussing the same with the supervisor and trying to find ways to mend the damages to the psychological contract.

We have mentioned that psychological contract (unlike the employment contract) is usually unwritten. However, Employee Value Proposition (EVP) statements often contain aspects (related to what the employer offers to the employees) that are not mentioned in the employment contract. This would mean that the Employee Value Proposition can be leveraged to actively shape and manage the psychological contract. EVP is usually worded in broad terms and is often expressed as a ‘statement of intent’ (and not a legal commitment). Hence it offers more flexibility to the employer and it can be used to actively shape the psychological contract and drive employee behavior. However, one needs to understand the difference between ‘management’ and ’manipulation’. If the employer communicates the EVP and fails to deliver the same (in terms of the employee experience/employee perception), this is likely to result in the violation of the psychological contract!

This implies that if an organization crafts an EVP based on what it can deliver consistently to its employees (ideally, what it can deliver better than that the other organizations can) and emphasizes the same in the various phases of the employee life cycle, it can have a very positive impact on employee engagement. Yes, there is material that can get into the psychological contract that can’t get into the EVP. Remember - EVP is common for all the employees – but psychological contract is individual specific – though there can be a lot of commonality of the content in the psychological contracts in the minds of the employees. At the recruitment stage, it makes eminent sense to communicate the EVP to the prospective employees. This will help in attracting those candidates who are likely to be a better fit to the organization (as they are motivated by factors that the organization is good in delivering to its employees) and also in ‘repelling’ those candidates who are unlikely to fit in. Yes, as the psychological contract is individual specific (and as it is likely to have material that is not covered in the EVP), the organization should take special effort in ensuring that all the interactions with the prospective candidates are carefully handled so that the candidates gets the ‘right hints’ on what it would be like to work in that particular organization in that particular job.

As the organization evolves/changes what it expects from the employees also changes. Again, as an employee goes through the various stages in his/her life, his/her expectations from the employer also changes. This ‘natural evaluation’ has to be kept in mind (and managed), in addition to the changes in the psychological contract that happens based on the interactions between the employer and the employee. With the accelerating pace of change in the organizations, the importance of psychological contracts (to shape employee behavior) and the importance of managing psychological contracts (to facilitate employee engagement) have increased significantly.

It is interesting to note that there are basically two types of violation of psychological contract. The first occurs when the employer or the employee knowingly fails to meet an obligation/expectation. The second occurs when there is a lack of shared understanding as to whether the obligation/expectation exists. From an organization development point of view, mapping the psychological contract (that exists in the minds of the employer and the employee in terms of mutual expectations), making it explicit and facilitating a discussion (exploration) on same can be a highly useful intervention – especially when dealing with aspects related to employee engagement and retention in a fast changing organization. Yes, this can also include ‘renegotiation’ of the psychological contract!!

Please let me know if you have any comments/suggestions!