Aligning remuneration and culture in business is no mean feat. Christopher Niesche considers how companies should incentivise staff to build the right culture.

    When Julie Garland McLellan FAICD was a young civil engineer, she was surprised to receive performance feedback that she wasn’t a team player. Her manager explained that although she was very results-oriented, her reaction when things went wrong with other team members was to point out how that would affect the team results rather than stepping in to help.

    Her manager set her a performance bonus target – she had to receive 20 emails, thank-you notes, letters or other tangible pieces of evidence from people for helping them with their jobs.

    “It was a horrible few months until the first ones came through because I was behaving in a way that wasn’t my natural way to behave,” she recalls. “At one stage I got a bunch of flowers from somebody and I can remember borrowing the company’s polaroid camera to take a photo of them so that I had tangible evidence that somebody gave me a bunch of flowers.”

    Garland McLellan, who is now a company director and board consultant, says having a measurable target made all the difference, and what was initially a learned behaviour eventually became intrinsic and instinctive. “I discovered that I actually quite enjoyed becoming a team player,” she says. It’s an example of how remuneration can be used to alter an individual’s behaviour and an organisation’s culture.

    Getting it Right

    The global financial crisis (GFC) and the role played by incentive payments to US investment banks highlighted how important remuneration can be in creating the right – and wrong – sort of company culture. Scrutiny of companies and their corporate cultures has increased in the wake of the GFC, and a recent series of corporate scandals in Australia, including the underpayment of 7-Eleven workers, the manipulation of financial data at Target and the Commonwealth Bank financial planning issue, demonstrate that more needs to be done to improve some organisations’ culture.

    While culture is becoming more important, for the most part, in many cases it isn’t being linked with pay and bonuses. John Egan, of remuneration consultancy Egan Associates, says there is little focus on culture in remuneration reports.

    He says often organisations will reflect on creating a performance-driven or customer-centric culture, but no specifics are given on how the current remuneration framework fosters a specific culture imperative that is codified in publicly available documentation.

    “Culture may be mentioned as a KPI in an annual incentive plan, but the term is generally not defined or expanded on,” he says.

    Egan says that organisations wishing to influence culture through remuneration must carefully consider the remuneration framework in the context of the effect it will have on employees’ individual and collective mindsets and how this aligns to the organisation’s desired culture and strategy.

    A board’s remuneration committee should consider what culture means to the organisation, what the organisation’s current culture is, and whether it will enable delivery of the company’s current strategy.

    Other considerations include whether incentives and performance conditions encourage employees to chase individual or collaborative goals and how the incentives affect treatment of customers and colleagues.

    After the remuneration framework is implemented, it needs to be observed and adjusted where required, with observation focusing on whether incentives function in the intended fashion or whether there are unintended consequences. Which types of employee receive the highest benefits under the incentive plan? Do these employees embrace the desired culture?

    Katy Lahey FAICD, from HR consultancy Korn Ferry, defines culture as the things you do when no one’s looking, the way people behave and what’s acceptable in the organisation. “The definitions are pretty loose, but people instinctively know what’s acceptable and what’s not,” she says.

    Broadly, it’s about behaviour, ethics, values, how you treat others, how you treat suppliers, how you treat customers, how you manage up and manage down.

    Traditionally rewards have been for very tangible outcomes – meeting sales targets or increasing production, for instance. But the increasing focus on organisational culture has created the need for rewards structures that are more subtle and reward qualitative behaviours. “I think it’s very important now in a modern organisation that the rewards structure does parallel the culture of the organisation and what the culture is trying to achieve.

    “It might be that you are rewarding people for teamwork. For companies that have got diversity targets, it might be about how they’re going with introducing the targets into the company. It might be how you perform as a brand ambassador for your organisation.

    “These are much more subtle things that make it more difficult to measure and manage but they are just as important for the wellbeing and sustainability of the company,” says Lahey.

    Measurement Metrics

    Measuring sales or progress against a production target is straightforward, but this doesn’t mean that cultural aspects of performance cannot also be measured. It could be through 360-degree feedback from the employee’s direct reports, colleagues and superiors, which could provide a tangible indication of how well they work with others, for instance.

    Customer surveys can provide data not only on customer satisfaction, but also on how good an employee is at representing the company and at customer service.

    “The fact that we are now talking about culture shows that corporations have moved on from just having a one-dimensional remuneration structure. In the past they would have only rewarded for those quantitative targets. Now they are starting to introduce qualitative targets and that of course is much, much harder to measure and manage. But corporations generally are realising that a rewards structure has got to be much more comprehensive than it’s been in the past,” says Lahey.

    This has been brought about by the shift in the way that the companies themselves are measured. Where previously it was the bottom line and nothing else, stakeholders are looking beyond the financial performance to their environmental performance, their ethics and values.

    “You want to know that the company you’re dealing with has ethics and values that align with yours,” she adds.

    There are of course different aspects to a remuneration structure – there are those aspects such as headline salary and bonuses that help attract prospective employees and there are also other elements, which help keep them in the job.

    It’s these second elements which usually can be used to drive culture, says Lahey, and often they are non-financial rewards, including things such as flexible working time, sabbaticals, work/life balance and development activities. They don’t necessarily have to be linked directly to performance, but can still be effective in driving cultural change.

    “These are part of the package that you would develop to enhance some of those cultural issues,” she says. “You’re looking for people who are interested in work beyond just the financial benefit; they want to do a good job; they want to work with good people. People have to know that there are other things in the rewards package that are not just financial.”

    This is something directors should be probing. “If I’m on the board I want to know that the reward structures look like beyond just one dimension, they also look through a cultural lens.”

    Directors should have a good understanding of the remuneration structure and whether it will help build an inclusive and constructive culture, or just concentrates on bottom line targets. Culture in an organisation is set by the CEO, so in conversations with the CEO the board needs to assess whether it is treated as a priority.

    “If you’re saying culture is very important but you’re still rewarding people who don’t take the cultural aspect of their role seriously then you’re missing an opportunity to make that change,” Lahey says.

    “Cultural change is not a quick fix. You’re not going to turn around these issues quickly. It’s about the long-term sustainability of the organisation.”

    Value-Based Incentives

    PACCAR Australia is a subsidiary of the century-old NASDAQ-listed US truck company that owns Kenworth and Daf trucks, and HR director Robert Brierley GAICD says it is a strongly values-based organisation.

    He says the remuneration structure reflects that. “It’s not going to be anything that’s inconsistent with that value set because, at the end of the day, we do not want to encourage behaviours that would be contrary to those values,” he says.

    The bonus system is based on organisational goals, functional goals, and personal goals and people are assessed not just on task, but also their people-oriented behaviours. “If a person scores highly on task but low on people, that’s not acceptable performance,” he says.

    PACCAR focuses on a mix of behaviours, some of which relate to task and outcome and some of which relate to people. These are safety; teamwork; initiating innovation and quality; solving problems; acting with integrity; influencing others; managing talent; using sound judgment and business acumen; demonstrating adaptability; and driving for results.

    Many of these are reflected in the company’s values: quality, integrity, people, customer service, innovation, teamwork and social responsibility.

    “In terms of establishing culture, you want to be consistent all the way through with the way you go about setting up your systems and processes and your people – that they align with your values set,” says Brierley.

    Erron Palmer, HR director at George Weston Foods, which owns brands including Tip Top and Don, describes remuneration as more of a “hygiene factor” in driving culture.

    While it might not be a driver of engagement and culture, the remuneration and rewards structure can drive culture the wrong way if it is poorly designed. “If you get your incentives wrong it can really impact on culture,” says Palmer.

    Firstly, the rewards structure needs to be equitable and consistent. If one staff member is paid more than another yet there is no justifiable reason, this will just annoy co-workers and ultimately lead to disengagement. “It’s that whole thing about making sure you’re not eroding that culture by doing inequitable things like paying someone $5,000 more because they asked for it,” he says.

    In designing a rewards system, it’s important to look at where the system can be gained because this will drive the wrong behaviours.

    For instance, in designing an incentive for one of the sales teams at the company, Palmer realised that if individual sales were rewarded, then there was little incentive for staff in direct sales to work with the indirect salespeople, which could drive poor overall results. So the company introduced an incentive scheme where all salespeople were rewarded for better sales across their state. “They’re going to have to work together to get the best that they can out of the state as opposed to just individual lines of business,” Palmer says.

    And if people are being rewarded for the results of the team, then the team as a whole should be rewarded. Rather than sending one person to a conference in Las Vegas, for instance, a whole team could go to a resort in Queensland for the same cost.

    Palmer says that an engaged workforce will be aligned with the culture and values of the organisation, but if the workforce is disengaged then there will be a disconnect. Engagement isn’t driven by rewards so much as the sort of work a person does and the opportunities they are given as well as the quality of their co-workers and their leaders. “Rewards is only one piece,” says Palmer.

    George Weston Foods has introduced a program called “A Simple Thank You”, which involves publically thanking and recognising staff who have stepped above and beyond their usual roles. Palmer says he initially questioned the need to have a formal program to get people to say thank you, but says it has been effective because it helps drive engagement.

    Garland McLellan says that culture relies on shared beliefs and those beliefs can be led by behavioural change. In the same way that someone who is feeling depressed can make an effort to smile and so start to feel better, creating a remuneration structure that drives certain behaviours will ultimately affect the underlying culture – as it did for her when she was a young engineer.

    “You get that feedback loop that people start saying, ‘That’s the way we have to behave around here’. They just start naturally and instinctively behaving like that until it feels like their culture,” she says.

    Ironically, says Garland McLellan, it is easier to use remuneration to change the culture of an organisation that is more skewed towards “the psychopathic tendencies of cold, hard, smart targets; what get measured gets done”.

    These people will respond better to a remuneration target and so strive to meet the desired behaviours. “Those cultures are actually quite easy to change if you take away the bonus from risk-taking or growth and put it onto other things. But they’ve got to be smart, hard measureable targets,” she says.

    “You can shift it more quickly than you can with what appears, on the face of it, in our current view a softer and more empathetic culture where people are more likely to be self-referenced.”

    She says non-executive directors (NEDs) have a lot to contribute to changing an organisation’s culture, because while the staff inside the organisation are living the culture, NEDs are outsiders, looking in. They also choose the CEO, who can set the culture from the top down, and they should be looking at the remuneration structures of the CEO and senior managers.

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