Motivating and retaining employees requires more than competitive salaries. Research by Business Intelligence for Director suggests that more employers are turning to innovative approaches to reward staff

What costs nothing to develop and deliver but works better than tangible rewards? Some companies believe they've solved the riddle: recognition. In research by Director and Business Intelligence, an overwhelming majority of employers (mainly small and medium-sized enterprises) say recognition is as important as pay and benefits in the reward mix.

One boss who believes recognition improves performance is Mark Pettican, HR director of Telindus, an ICT solutions and service company that employs 200. "It's absolutely imperative," he says. "I'm almost tempted to say that it's more important than financial reward for us. It makes such a difference."

Chris Nel, managing director of the Tom Peters Company, which promotes the management guru's ideas and practises them in its own 30-strong UK consultancy, agrees with him. "Pay is your ticket to the game. But recognition is what people work for."

Pettican and Nel are not alone, as shown in The Smarter Rewards Report by Director and Business Intelligence (a research company tracking management trends). More than three-quarters of employers strongly agree with the statement "Recognition is as important as pay and tangible rewards" and only two per cent disagree. The snag is that only half the sample of 771 say managers regularly give their staff a pat on the back for a job well done. And just 30 per cent make exceptional performance an excuse for formal celebration.

But their number looks set to grow. A further eight per cent of respondents plan to introduce a formal recognition scheme in the next year. This trend is part of a broader re-evaluation of reward, driven by external market conditions and a desire to make the most of what chairmen never tire of reminding shareholders are the company's most valuable asset: people.
The Smarter Rewards findings reveal that the way companies plan and implement the role of reward is rapidly changing.

Richard Price, managing director of Say Communications, a PR company employing 16 staff, reports that more of his board's time is being spent on people issues and the role of reward.

"Intangible rewards are becoming more important for us, particularly those concerned with work-life balance," says Price. With a predominantly female staff, including senior managers with young families, flexible working hours have become an essential perk.

Say Communications operates in a highly competitive segment of the PR business, so it knows what failure to hold on to staff can mean.
"It's a people business, and the talent pool is limited," says Price. "For senior people, your reward strategy is key. If they walk out, you've got real problems. There are examples in our sector where whole teams have left with a senior manager and set up on their own. So a lot of effort has to go into getting reward right."

Typically, companies set multiple objectives for reward. Most respondents (78 per cent) see it as key to promoting retention and staff loyalty, just ahead of their next objective, individual performance (71 per cent). This is followed closely by the achievement of specific business goals (69 per cent). Today, companies have had to become more resourceful in the ways they achieve these and other reward-related objectives.

Virtually all respondents agree that the first task is to ensure reward is linked to strategy, although only half do this explicitly. Even then, the job is tricky because business objectives are constantly being revised.
"The key thing for us is to ensure that remuneration is aligned as clearly as possible to strategy and the aims and aspirations of the organisation," says Telindus's Pettican. "But what is right for us this year might not be right next year."

Constantly shifting priorities are not the only problem. Rising employee expectations top the list of policy-influencing factors for 90 per cent of companies. Gary Browning, chief executive of 250-strong human capital consultancy Penna, says that it is the youngest "Generation Y" staff who pose the biggest challenges for reward policies.

"New graduates want financial rewards and they want them fast," says Browning. "Generation Y also wants to work for companies that add value to the wider community."

They believe in corporate social responsibility and they also want to play their part. One of the recent "perks" introduced by the consultancy is the opportunity to work with disadvantaged children through a charity, the UK Career Academy Foundation. Since a core part of Penna's offering involves mentoring and coaching, Browning says that this helps to develop relevant skills and makes good business sense.

Opinion is divided as to which combination of rewards is most effective. For example, respondents are ambivalent about the effectiveness of performance-related pay. Only a third are unreservedly enthusiastic. But, as Pettican reports, in a broader reward context, the approach can work well.

"We aligned the commission structure to increase the margin we get from customers," says Pettican, "and it worked. We aligned commission against length of contract, and the average length of contract went up. You can track back performance to these incentives."

While Say Communications pays bonuses for meeting targets, new-business acquisition and other achievements, Price believes their value is limited. "Bonuses are a seven-day wonder," he says. "They're soon forgotten."

Nel, of Tom Peters, argues that you get more lasting impact with what he calls "meaningful recognition". "Recognition needs to be personalised in ways that mean something to the individual," he says.

Paying attention to staff views is also a way to improve retention, according to Price at Say Communications. "We are much more consultative because it is another reason why people would stay with us." It also ensures that the company knows what works. "If people don't value something," he continues, "there's no point in doing it."

What many companies have discovered from listening to staff is that there is a growing demand for different sorts of benefits—ranging from unpaid leave and flexible working to medical care—that meet different personal circumstances. Currently, only 17 per cent of companies allow their staff to choose from a menu of benefits. A further eight per cent plan to go down this route in the next year. 

However they plan and implement reward, most companies expect the cost of delivering pay and benefits to rise. Two-thirds are anticipating higher costs, while only about a quarter expect to mark time. Whatever the budget for the coming year, the big question is whether companies can make reward work more productively for them.

Those that succeed in this area are likely to be the employers that integrate recognition with a well-planned and implemented reward strategy. They may also sense a bigger prize. "For me," says Pettican, "it's about driving passion, knowledge and agility." Money alone will never do the trick. 

Key principles of smarter rewards

The research identifies the key practices that help to maximise the value of reward to the organisation:

• Promote the value of reward. Communicating all aspects of an individual's reward package is essential to increasing appreciation of the value it represents.
• Be innovative in providing benefits. It is not always the most costly perks that employees appreciate most.
• Give employees control. Web-based flexible benefit "menus" and self-service keep costs down and enable staff to manage their package.
• Enable line managers. Let them use IT systems to analyse and devise pay policies that improve local performance.
• Introduce health and well-being programmes. As well as engendering the feel-good factor, provision of gyms, health checks, on-site medical and dental services, health advice and health-education sessions can cut absenteeism and raise performance, contributing significantly to the bottom line.
• Improve loyalty through engagement strategies. These should be relevant to your business goals. Examples are entitling staff to work on their own projects or to qualify for superior perks.
• Run financial education programmes. Help employees make more informed choices, while communicating the rewards' value.
• Introduce recognition schemes These underpin a performance culture.
• Consult employees Find out which rewards they value most.

David Harvey is managing director of Business Intelligence. The Smarter Rewards Report: How UK directors use pay and benefits to drive performance provides details on SME reward planning and implementation. Readers who took part in the research can order copies at the reduced price of £295 (£355 for other readers) from www.business-intelligence.co.uk