Family breakdown: Developing an explanatory theory of reward system change

Philip LewisGloucestershire Business School, University of Gloucestershire,Cheltenham, UK

Mark N.K. SaundersThe Business School, Oxford Brookes University, Oxford, UK, and

Adrian ThornhillGloucestershire Business School, University of Gloucestershire,Cheltenham, UK

Personnel Review: Vol. 33 No. 2, 2004, pp. 174-186DOI 10.1108/00483480410518031

Keywords Benefits management, Reward pay, Competences, Performance measures

Abstract

Analyses the introduction and first three years of the operation of a new reward systemin a financial services organisation. The purpose of the studywas to develop an explanatory theory associated with reward system change effectiveness. Following a description of the organization and its operational context, analyses the new reward system, together with an examination of the specific objectives the organisation’s managers hoped it would achieve.Provides an explanation of the methods employed to collect andanalyse the data. The main part of the paper comprises an analysis of these data, which provides evidence that the system was not meeting its objectives. Subsequently uses the literature on reward theory and organisational behaviour to help explain the reasons for such apparent ineffectiveness. Concludes by suggesting a tentative theory of reward system change effectiveness.

Introduction

Reward management has traditionally had a rather unglamorous image. It hasbeen seen as part of “the turgid, unimaginative and inflexible

world of wageand salary administration” (Smith, 1993, p. 45). The reward literature is, withnotable exceptions (e.g. Kessler, 2000), characterised by prescriptive textswhich give little insight into the reality of reward system operation and, inparticular, reward system introduction. Indeed, there is a general scarcity ofcase study material that takes a critical perspective on the operation of rewardmanagement. This study aims to help in remedying this omission.In this paper, we analyse the introduction and first three years of theoperation of a new reward system in a financial services organisation (calledhere by the pseudonym “Norlife” for reasons of confidentiality). The purpose ofthe study was to discover the degree to which the introductioncould be definedas effective or ineffective, to explain the reasons for its effectiveness orineffectiveness and to develop a theory associated with rewardsystem changeeffectiveness.

We start by describing Norlife and the context in which it operates. This isimportant given that the objectives of the reward system are signifcantlyinfluenced by operational context. We then explain the new reward system andthe specific objectives the organisation’s managers hoped it would achieve.There is then an explanation of the methods employed to collect and analysethe data. In the main part of the paper, our analysis of the data providesevidence that the system was not meeting its objectives. This is followed by useof the literature on reward theory and organisational behaviour to explain thereasons for such apparent ineffectiveness. We then conclude bysuggesting atentative theory of reward system change effectiveness.

Norlife: its operational context; new reward system and the objectives of the new reward system

Norlife and its operational context

Norlife is a supplier of retail financial services products inthe UK. In recentyears this financial services market has been characterised byintensecompetition following the de-regulation of the market in the late 1980s. Thismeant that, in essence, all retail financial services organisations became part ofone market and in competition with one another for the supply of mortgages,unsecured personal loans, general banking facilities, insurance and unit trusts.Increased competition had two effects on organisations such asNorlife. First, ithad made them much more conscious of the necessity to sell their products tocustomers rather than wait for their members to demand the products that theywere offering. Second, it meant that organisations had to be increasingly awareof their operating costs. Norlife was not the only financial services organisationthat was addressing these dual concerns. Like others, it needed to reduce itscosts in order to offer more attractive savings and borrowing rates toincreasingly discerning customers. This necessity led to the development of astrategy in which cost reduction was a cornerstone. In particular, it was felt tobe of paramount importance that more value was obtained from theorganisation’s employees.

Obtaining more value from Norlife’s employees was the driving force behindthe new reward strategy that was introduced in 1998. Although the new rewardstrategy had been agreed in principle with the trade union

representing thebulk of Norlife employees, it was inevitable that there would be some tensionexperienced in its introduction. The history of the organisation was that“tough” measures had rarely been taken: in the words of one managerialinterviewee “we had become very cosy”.

The new reward system and its objective

For some years, Norlife operated a traditional pay system. Thefoundation ofthis was a conventional pay structure, in which a sequence of job gradesexisted and jobs of broadly equivalent value were slotted intogrades. A payrange was attached to each grade and pay progression was through that rangewhich contained, typically, ten pay points. Grades were determined by jobevaluation. The manager specialising in reward at Norlife agreed withArmstrong (1999, p. 209) that this structure provided an “orderly basis formanaging pay relativities”. However, the perceived cost of this orderliness wasa belief on the part of employees that the only means of career and payprogression was by promotion through the grade structure. Although therewas an element of performance-related pay (PRP), for many employees the linkbetween their performance and their individual reward was unclear.

The new system is based on the principle of job families. “Jobfamilies grouptogether a number of jobs which have some dimension of commonality de nedby the organisation . . . The grade structure for each family would normallycover all associated jobs from entry levels through to the most senior,providing a vertical structure” (Thorpe and Homan, 2000). All jobs at Norlife

are grouped into eight families that are on six hierarchical levels. Staff who dealwith customer queries in the company’s call centre, for example, were placed inthe job family “sales support” at level 6 (the lowest level) whereas directors arein the “strategy and policy” job family at level 1. Within thehierarchy,employees at one level are expected to report to a manager at a higher level.

For each generic role (e.g. accounting technician), a set of competences wasdefined reflecting what role holders should be able to demonstrate as a“starter”, “typical performer” or “high performer”. Under the new system, payis to be determined by market rate, acquisition of competencesby movingwithin the organisation and the achievement of individual performance targets.In addition, Norlife management stressed that pay will be determined by jobnot grade. An important de ning principle of the new system isthat thoseemployees who contribute more will progress faster through thepay scalesthan those who are average or below average performers. Stresswas laid on thefact that current pay and bene ts were unaffected by the new systemThe company newsletter that announced the new job families system notedseveral advantages of the change. These were:. employees would be better equipped to plan their own careers (within oroutside the organisation) and their own training and development needs;. broader job descriptions would give employees more opportunitytoincrease their skills and make their jobs more challenging;. employees would not see grade promotions as the only way of furtheringtheir salaries, but be encouraged to think of skill (competency) acquisitionas a means of career and salary progression; and

. more effective employees would be able to earn more competitive salaries.In the nal analysis Norlife was seeking to develop a more competent and¯exible workforce, better equipped to manage change and to meet the Norlifegoal of increased ef ciency and therefore, reduced cost.

Research method

The data are drawn from a longitudinal case study collected through visits tothe organisation over a three-year period. Multiple in-depth interviews wereconducted with senior managers responsible for implementing the system.Each of these interviews lasted between one-and-a-half and twohours, therebeing approximately a one-year gap between interviews with thesamemanager. This allowed us to establish the extent to which the managers’ viewshad altered since the introduction of the new system. In addition, at one-yearintervals throughout the research period, we held a series of group interviewswith employees from two departments within the organisation. These wereselected purposively to ensure maximum variation in participants’ views. Indetermining the composition of these groups, care was taken toensure thatparticipants occupied roles at different levels in the job family structure andhad differing periods of experience in Norlife. These data allowed us toestablish the degree to which employees’ views had changed since theintroduction of the new system. For the most part the composition of thesegroups remained stable throughout the research, although whereparticipantsleft they were replaced by people of similar level and role. Each group interviewinvolved six to ten Norlife employees and lasted approximately2 hours.

Discussion was promoted and noted by the three authors of thispaper.In-depth interviews were also conducted with those responsiblefordesigning the reward system at various points in the research process. Thiswas supplemented by additional telephone conversations, which provided theopportunity to check points of a technical nature and further understanding. Inaddition, access was also gained to organisational documentation associatedwith the operation of this reward system.The notes taken at each interview were checked and amended by allresearchers to ensure accuracy and comprehensiveness. They weresubsequently analysed using a process of categorisation to allow key themesand patterns to emerge as the data were collected (Dey, 1993).This allowedrelationships to emerge and propositions to be developed and tested as newdata were collected through the interviews.

Evidence for the failure of the new reward system to meet its objectives

There were many pieces of evidence from the data, particularlythose collectedin the later stages of the research, that led us to conclude that the new systemwas unlikely to achieve the speci c bene ts management had planned and theoverall aim set. These may be grouped under three headings: the lack of use ofthe competences; the reluctance of employees to move around the organisationin the manner envisaged and the contradiction of the principlethat anyemployee at one level should not report to a manager on the same level.

The lack of use of competencesThe principle of competence acquisition is crucial to job families pay systems

in general (Armstrong, 1999) and the Norlife system in particular. Competencesare essential for determining the position in the job family structure of roleholders. In addition, it de nes position in the pay scale by allowing ajudgement to be made as to whether the employee is at “starter”, “typicalperformer” or “high performer” level. In addition, extra pay could be earned bythe acquisition of competences. Competences are, of course, anessentialingredient of the desire of Norlife to develop the expertise and, therefore,¯exibility of its workforce. Consequently, if manager and employees wereplacing little emphasis on competence acquisition and assessment this wouldhave an important harmful effect on the pursuit of Norlife’s reward objectives.There was ample evidence in the data that competences had fallen intomisuse in the areas where we conducted interviews. Where they were used itwas, as one group interviewee put it, “little more that something to guide theconversation at performance appraisal interviews”. Most accountantsinterviewed noted that exams were still the way in which they could achievecareer progression. As one accountant put it: “my loyalty is to accounting not toNorlife. Expanding my competences is for Norlife, I need to pass my exams”. Ina similar vein, a group interviewee in another area added, “most people don’tbelieve that competences are linked to salary”.

Perhaps the best summary of the situation is provided in the words of onemanager:

The HR department says that the job family system is still in operation in [this department]but this is not so. We are not using the competence approach; we have gone back to using ourjudgement about people’s performance so there is a link between performance

appraisal andsalary. The job family system has done nothing about changing the culture wheregrade/status/comparability drives people to upgrade themselves, not competences. Peoplenow look at jobs advertised internally and say to themselves “what grade is this?” I think thisis inevitable in a status conscious organisation like ours. Nothing here haschanged much.

The reluctance of employees to move around the organisationPerhaps the second set of evidence is the most telling for Norlife’s rewardambitions. Several interviewees at different levels noted thatthere was littleevidence of employee interest in moving around either the department or theorganisation in order to broaden their experience. One interviewee advancedthe opinion that “employees know what they like and many are happy to stickto this. Moving around to develop yourself is a management ideal but noteveryone shares this ideal”. There was particular concern overthose employeeswho had progressed to “high performer” status or the equivalent in the “old”system. The general opinion seemed to be that the opportunity to developthrough learning new competences in different settings was insuf cientincentive. As one managerial interviewee put it, “people understand the oldsystem of promotion but ¯atter structures do away with many promotionopportunities”.

Contradiction of the principle that any employee at one level should not report toa manager on the same levelThe third set of evidence involved the principle that any employee at one levelshould not report to a manager on the same level. As one of the HR specialistssaid, “we must ensure that people should report to a manager in the next level”.This principle was felt to be important because it preserves the integrity ofreporting relationships. Given that the organisation became

¯atter than theprevious more hierarchical structure, it was also important toidentify clearreporting relationships that offered appropriate rewards for those charged withextra managerial responsibility. These principles underpinningtheintroduction of job families led to the importance of identifying a generic setof skills and responsibilities for each of the levels in the job families’framework.However, once the principle of not reporting to a manager on the same levelwas breached, as it was at Norlife, this not only adversely affected this aspectof job families, but also these other key principles. The resulting view wasexpressed that, “roles tend to metamorphose to individuals” for reasons whichare seen as more important than those of rewards system integrity.Reasons for the failure of Norlife’s new reward system to meetitsobjectivesQualitative research often does not follow the tidy “data follows theory”approach of deductive research (Saunders et al., 2003). At thesame time, it cannever take place in a theoretical vacuum. As suggested by Easterby-Smith et al.(2002), the collection of data and its analysis often take place simultaneouslywith little attempt to draw a distinction between these processes. So it was inrelation to this case.In the event, the theory of pay system effectiveness suggestedby Lawler(1995) dominated our thinking. In this Lawler (1995, p. 14) argues that thereward system should be driven by the organisation’s business strategybecause it “it speci es what the company wants to accomplish, how it wants tobehave, and the kind of performance and performance levels it must

demonstrate in order to be effective”. As with Norlife, business strategy drivingindividual and organisational behaviours is the touchstone forthe developmentof the reward strategy (Lewis, 1999). The idea of speci c personnelmanagement practices integrated with business strategy followsthe thinkingof the strategic HRM literature (see, for example, Beer et al., 1984; Mabey andSalaman (1995). Lawler (1995) goes on to argue that the individual andorganisational behaviours dictated by the business strategy will only bedelivered if three critical elements of the reward system are aligned. The rest ofthese is the organisation’s core values: what the organisationstands for, whichinforms the principles on which the reward system is founded. In the case ofNorlife this was its aim of being recognised as the preferred provider ofnancial services by potential customers, from which the imperative for ahigh-quality workforce ¯ows. The second element is process design featuresincluding communication policies, decision-making practices and themanagement style demonstrated in implementing the system. Third arestructural issues, which tend to dominate practitioner attention. These are theformal procedures and practices that re¯ect decisions about the basis forrewards, the extent to which there is pay for performance, market position,internal and external equity, the degree of centralisation andhierarchy and thereward mix (Lawler, 1984). According to Lawler, the alignment of values,process and structure is crucial for reward system effectiveness.Inconsistencies between what organisations say about their reward systemsand what they do will create misunderstanding and not create the behaviours

needed for business strategy achievement.We were hesitant about applying Lawler’s theory to the themes emergingfrom the Norlife data, principally because of the emergence from the data ofpolitical expedients as a possibly central and plausible explanation forineffectiveness. However, Lawler’s (1995) theory offered us a dominantframework for structuring the presentation of the data.We tookLawler’s threecritical elements: values, reward processes and reward structure and added thefourth – political expedients. It may be argued that politicalconsiderations arean important part of all elements of organisational activity (Zalenik, 1970) andtherefore should be integrated with the other three elements. However, politicalissues were so in¯uential in the data that we believed they needed their owncategory. Therefore, our presentation of the main body of the data, in which wesuggest an explanation of the reasons for the failure of Norlife’s new rewardsystem to meet its objectives, is structured around four headings: values,reward processes, reward structure and political expedients.

ValuesLawler (1995) notes the importance of reward systems matching the values ofthe organisation, and, by implication, those of the employees.There was ampleevidence that this was not so at Norlife. The Norlife employees we interviewedtended to be conservative in relation to reward change. They thought that theprinciple of job ¯exibility enshrined in the new pay system was “Okay for otherdepartments but not us”. Many felt that their jobs did not allow them todemonstrate a wide range of competences – as noted above, all that matteredwas passing professional examinations. In addition, they felt that the principle

of ¯exibility meant that they were being asked to do tasks that were “below”their capabilities. Managers asserted that many employees wereverygrade-conscious and therefore saw grade promotion as the only legitimatemeans of career progress.It was not just employees who perceived the new reward system as unfair.One manager complained that he had spent much of his time advising peopleon the competences they could acquire, the evidence that they would need tocite to achieve advancement and assessing that evidence. He had ceased usingcompetences as they were so time-consuming and complex and involved him in“doing what he was not paid to do”. He admitted that the aim was now to getevery employee who was, what he called, a “decent” performer to market ratewithin a set period without such a strong focus on the acquisition ofcompetences.Some of the explanations for the lack of use of competences are similar tothose that could be heard in any organisation. One intervieweeprotested thathe had been on courses to learn new skills but his manager hadnot let him putthem into practice. Another person complained that, “if you take on a morechallenging job to grow competences it means that it is more dif cult to get ahigh performance award because the easier the job the easier it is for people toshine at it”. Other interviewees employed the “it’s alright for them” argumentby stating that they worked in a specialist area and that it was less easy todevelop horizontally in such areas. One manager in a specialist area observedthat it was dif cult to compare levels and the acquisition of competences fordifferent jobs in his section. His view was that it was easierin other areas (e.g.

retail) to measure competences as they lend themselves to greaterstandardisation. In addition, he thought there was a problem of peopleacquiring unnecessary competences, e.g. presentation skills, simply in order toget more money. As a consequence of these perceived dif culties, severalinterviewees reported that the starter, typical performer and high performermethod of pay progression had effectively been abandoned.The overall impression of employees and managers involved in the researchwas that they could see the logic behind job families, with some expressingadmiration for the ingenuity of the strategy. However, many felt that whilesuch an approach was suitable for some parts of the organisation, it was lessappropriate and more problematic in the part in which they were employed.Communication and consultationMost commentators (e.g. Shuster and Zingheim, 1992) agree about the need forclarity and simplicity in pay systems. The presence of claritymeans thatchanges can be communicated more easily. Virtually all our interviewsinvolved a discussion about the complexity of the system. The de nition ofcompetences itself was an enormously time-consuming exercise and bothemployees and managers spoke of the time absorbed in citing evidence ofcompetence acquisition. Other concerns were the lack of transparency in theway in which managers reached performance award decisions. Onemanagercited the example of “innovation” as performance indicator. Asone asked,“What does this mean for lower-graded people and how can they demonstrateit?”A major area of contention was the lack of clarity over how the market ratewas de ned for many jobs. One of the HR specialists explained

that it was doneusing an external system of pay reference, employees being told thosecompanies against which benchmarking had taken place. Despite this, onemanager admitted it was “all a bit hazy . . . how it was arrived at”. Manyparticipants were unsure as to whether job title or actual roles were used.However, whatever approach had been used, managers believed that Norlifehad fallen behind other major local employers. As one manager noted: “we’retrying to recruit into roles and we can’t now. People are leaving for signi cantpay rises.” A group interviewee complained that “bosses can’t explain how themarket was rating arrived at. There wasn’t any explanation in the meeting Iwent to – later I found out it was done on exams. The people who did it werenot in contact with day to day work.”In addition, there were complaints by employees about the lackof employeeinvolvement, an important consideration for reward system change (Lewis,2001) in both the creation and the operation of the system. Most groupinterview participants said that they had not been consulted over the job familyin which they were placed. The general paucity of information about theexercise in placing employees into speci c job families (e.g. who was going towhich and why) meant that appeals were dif cult because there wasinsuf cient information on which to base an appeal. One participant noted that“I talked to my manager about my unhappiness about the job family I was putin and just got a memo back saying that it was correct.”

StructuresThere seemed to be contradiction between the new system and existing formalstructures. Several examples of this arose during the

interviews. During thethree years of data collection, there was an increasing tendency for people towork as project teams at Norlife. A senior manager stated thatthis wasessential to complete the type of projects that are necessary but noted that thisdiluted the principle of individual pay progression based on individualcompetence acquisition and individual performance.In addition, some participants in the group interviews complained about thejob family structure, which they felt was insuf ciently sensitive to deal withissues thrown up by people’s individual achievement. To some extent, affectedmanagers had coped with this by adding a greater layer of complexity to theway in which they differentiated between levels of performance. This resultedin amounts of pay being added or subtracted from the notional standardamount.

Another structural problem was highlighted by the belief of manyemployees that “by the time you have got to be a `high performer’ you shouldhave moved on”. The implication here was that if the employee was goodenough to be a “high performer” that employee should have beenpromoted somaking the “high performer” step of the three-rung ladder irrelevant. The HRspecialists argued that this was “old model” thinking althoughthey couldunderstand that within job families the role model might be considered a “culde sac” in some cases. Clearly, there was a problem here due to the ¯atterstructure with associated limited seniority levels.Political expedientsIt seemed that short-run expedients were taking precedence over the longer runperspective of the new reward system. This was evident, rst, in the size of the

pay awards in the rst years of operation of the job families system. Theperformance element of pay was designed to be non-consolidated– a one offpayment, but in one pay round this was not the case, with thiselement beingconsolidated. The organisation’s aim was to increase salaries in general andconsolidating performance payments into employees’ salaries was one way ofachieving this. Similarly, some managers we interviewed statedthat they hadbeen instructed that the organisation’s short-term pay goal was “to get themaximum amount of people to market rate as soon as possible”. Clearly,political considerations were taking precedence over the pay systemconsistency and integrity.These examples of organisational-level expediency are little different to theindividual manager-level decision to pay what was necessary toobtain desiredemployees and then, as one manager put it, “ x the job family they were inafterwards”. Some managers admitted in interviews that this iswhat they didand they knew of managerial colleagues who acted similarly. Discussion in oneof the group interviews suggested that little had changed in the way careerprogression was decided. As one participant commented:Nothing has changed to what happened in past. On the face of it competenciesmake it clearerbut in reality it is based on a person’s track record and the manager’s viewpoint. It’sdominated by what people can do. Ticking boxes doesn’t prove anything – it just adds to theconfusion. The reality is that the right person for job gets it. Trying to pretend it’s all clearerand scienti c and to justify [decisions] on the basis of the new system is not how it is. Before[job families] no-one would have questioned it.We also noted above how the principle of employees not reporting to a manageron the same level was breached in practice. This set a precedent and formalisedthe suspicion of many interviewees that “roles tend to

metamorphose toindividuals” for reasons which were seen as more important than those ofrewards system integrity.

Towards an explanatory theory of reward system change

Analysis of the data suggests that there was considerable congruence betweenthe context of the introduction of the new system and the new system itself. Inaddition, there seemed to be ample justi cation for senior management atNorlife thinking that the new system would deliver the bene tsof a moreskilful and ¯exible workforce that would lead to reduced operational costs.What seemed to be less secure were the processes involved in implementing thesystem. In systems thinking, if the inputs matched the outputsthis raised thequestion of what was in the “black box”, which was preventing the formerbeing translated into the latter? This led us to an attempt, through systemstheory, to explain why the new system seemed not to be meetingits objectives.The systems model of the introduction of new reward systems wehavedeveloped is shown in Figure 1. It is a hybrid and draws on the well-knownsystems approach (e.g. see Nadler, 1993 for an explanation of the systemsmodel in relation to organisational change) and the reward literature (e.g. seeLawler, 1995). In the model, the inputs to the system are the organisation’senvironment, history and strategy, and the new reward system itself. Thedesired outputs are more developed employees, ¯exibility, improved individualperformance that will, ultimately, enhance organisational performance. Theinputs are converted into the outputs through a set of transformation processes.In Figure 1 these processes largely re¯ect the way in which

the system wasintroduced and the reception it receives from those for whom it is designed –the organisation’s employees. The essence of the model is thatcongruencebetween the major components of the model will lead to the desired outputsbeing achieved.

Figure 1.Systems model for theintroduction of newreward systems

It has been shown in the discussion above that there was, on the “face” ofthis situation, a good deal of potential congruence between the inputs and thedesired outputs. The operational context of Norlife was in general congruentwith the need for enhanced employee performance. This is certainly the case inrelation to the external environment that dictated the need for changedemployee behaviours. The same may be said of the organisation’s strategy ofobtaining more value from its employees. However, there is less certainty aboutthe congruence between Norlife’s history of “cosiness” and theenhancedperformance. It is reasonable to assume that Norlife managers and employeesaccept the legitimacy of the inputs dictating the need for theoutputs and,therefore, the rationale for change. On the face of it, this suggests a favourablecontext for the enactment of the processes necessary to convert inputs tooutputs. However, the evidence above has demonstrated that the“seeing”rationality of this case was threatened by the way in which the processes wereimplemented: employee values were threatened, employees were not involvedin overly-complex changes; the structures were inconsistent with the aims of

the new reward system and, of not the least importance, the self-interest ofmanagers and employees alike was threatened in such a way thatthe “rules” ofthe new system were deliberated ignored in order that short-term political endsmay be met. In summary, it seemed that at Norlife the transformation processeswere conducted ineffectively and therefore were not congruent with either theinputs or the outputs with the result that the desired outputswere not achieved.The evidence from Norlife leads us to believe that in reward systems, as inmany other areas of HRM, it is the processes involved in change that arecrucial. The simple explanation of “it ain’t what you do but the way that you doit” is persuasive and powerful and serves as a reminder that the mostsophisticated initiatives fail if the necessary components of effectiveimplementation are not present. That said, we issue the normalcaveat thatthis is one case and therefore is a tentative theory. More research needs to bedone with different reward systems in different settings to test its robustness.

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