4 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 1, 2005

No news is good news? Evaluating new pay systems

Susan Corby, Geoff White and Celia StanworthUniversity of GreenwichHuman Resource Management Journal, Vol 15, no 1, 2005, pages 4-24

The evaluation of the impact of changes in reward systems is a common recommendationin the personnel practitioner literature, but little has been written about how and to whatextent practitioners themselves evaluate. This article therefore focuses on the activities ofHR managers who have introduced new pay systems, not on academic studies of rewardsystem change. Face-to-face interviews were conducted in 15 large, unionisedorganisations in England between 2000 and 2002. The study found that little formalevaluation of changes in pay and grading systems had been carried out and thatmanagers expressed considerable scepticism about the evaluation process. They reliedheavily on informal or anecdotal feedback, and appeared to have little psychologicalincentive to evaluate. The article suggests explanations for this lack of formal evaluation,drawing on the management decision-making literature, and recommends how changes inreward systems should be evaluated.Contact: Susan Corby, The Business School, University of Greenwich, Old RoyalNaval College, Park Row, London SE10 9LS. Email: S.R.Corby@gre.ac.uk

The evaluation of pay systems would intuitively appear to be a vital part of theprescriptive HRM cycle, not least because of the significant cost involved. Theliterature typically recommends a cycle of innovate, implement and review (see

the model of Beer et al, 1984) and argues that pay systems not only have an impact on‘hard’ measures such as costs, productivity and the ‘bottom line’, but can also influence‘soft’ outcomes such as employee commitment (see Gomez-Mejia and Balkin, 1992).

Against this background, there have been various academic studies into the impact ofvarious payment methods on employee behaviour and company productivity, notablythe effect of performance-related pay, but there is little academic research on whetherand how HR managers themselves evaluate the effects of changes in pay systems intheir own organisations. Accordingly, the purpose of this article is to consider what HRmanagers do in practice to assess effectiveness when significant changes in pay andgrading systems have been implemented. We also begin to ask why formal evaluationhas, or has not (given our findings), taken place, as there is strong support for suchaction in the HRM prescriptive literature.

This article is in three main parts. First, we set the theoretical context for our work byexamining the competing perspectives on management decision-making and academicstudies on reward system changes, before noting the absence of research on what HRpractitioners actually evaluate in practice. The second part focuses on the findings fromour 15 case study organisations. Discussion and conclusions form the third part: havingfound that little, or only patchy, evaluation was carried out, we discuss someexplanations and practical implications.

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COMPETING PERSPECTIVES ON EVALUATION

There are two main perspectives to evaluating HR practices and their outcomes: thetraditional rational/systems approach which we first discuss, and the literature thatquestions the rationality of management decision-making.

The rationalist approach

The classical systems view of management decision-making is that it is a rationalprocess, a series of logical steps to ensure efficiency and effectiveness. After decisionshave been implemented, there is follow-up and monitoring and, if necessary,modification to ensure that the implemented decision has an outcome coincident withthe managerial objective(s) that underlined the process (Harrison and Pelletier, 2000).This rationalist or systems approach presupposes that managers are neutralprofessionals exercising their expertise with impartiality and without self-interest, andalso assumes a monolithic management group that designs, implements and monitors(see Fincham and Rhodes, 1999; Watson, 2002).

The literature on pay system evaluation usually adopts the rationalist approach.Gerhart and Milkovich (1992: 482) say: “From the organisation’s perspective, perhapsno other set of decisions [than those surrounding pay] are as visible or asconsequential for the success or failure of an organisation”, but see also Lawler (1990)and Schuster and Zingheim (1992). From this view stems an exhortation to evaluatepay systems. For instance, Armstrong (2002), in the recommended text for students forthe Chartered Institute of Personnel and Development (CIPD) course in EmployeeReward, gives advice on monitoring and evaluation. He says that there should be:

an analysis of each component of the reward system to assess itseffectiveness, the extent to which it is adding value, and its relevance tothe present and future needs of the organisation. Armstrong, 2002: 479

Similar diagnostic reviews and feedback loops are advocated by Armstrong andMurlis (1994), Schuler et al (2001) and Mabey et al (1998).

The rationalists also argue that a pay system’s effectiveness can vary according tothe type of desired outcome. Analytically, three broad levels of outcome can bedistinguished (see Figure 1). At the first and most basic level are costs. At the secondlevel are HR outcomes – ie the impact on employee attitudes and behaviour, includingrecruitment and retention – and at the third level are business performance outcomes.This third level is colloquially known as the ‘bottom line’ and encompasses both costs(level 1) and employee attitudes and behaviour (level 2).

Costs

There is prescriptive literature on the way that managers should go about evaluatingcosts. For instance, Phillips (1996) says that these should include the administrativecosts for implementing, co-ordinating and monitoring pay, as well as the overallpaybill costs. Tyson and Fell (1992) argue that paybill costs should not be evaluated inisolation, and that the costs of recruitment/induction should be calculated so that anyincrease/decrease in labour turnover can be offset. Using this approach, one companycalculated how a new and enhanced salary policy for clerical staff would be self-financing. Thorpe et al (2000) advocate a series of statistical analyses to assess costoverruns, such as payroll costs relative to added value, performance-related pay as aproportion of total paybill and overtime costs.

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HR outcomes

Much of the rationalist literature also focuses on the HR impact – the effect onemployee attitudes and behaviour (see Figure 1). For instance, Thorpe (2000: 115) says:“Pay cannot only attract, reward and retain the right kind of people, and signal to themwhat the organisational priorities are but act as a catalyst for wider organisationalchange.” Moreover, there are suggestions of how the HR impact of a new pay systemcan be evaluated. Armstrong and Long (1994) suggest that there can be quantitativemeasures of employee behaviour including:● retention and turnover rates● absenteeism rate● ratio of employee suggestions received to number of employees● frequency/severity rate of accidents● ratio of grievances to number of employees● time lost through disputes● number of references to employment tribunals.

They also say that these quantitative measures need to be supplemented byqualitative measures of employee attitudes relying on employee self-report. There hasbeen research by academics using employee self-report on the effects of certain aspectsof pay systems such as individual performance pay on employee attitudes andmotivation in the UK (Dowling and Richardson, 1997; Heery, 1998; Marsden andFrench, 1998) and Save-As-You-Earn share schemes (Hyman et al, 1989). In short, thesestudies found at best a neutral effect on staff attitudes and at worst a negative effect inthe form of demotivation.

In the USA, much of the evidence of the influence of a specific pay programme onemployee attitudes and behaviour comes from commercial research organisations.Comparison of such studies seems to indicate that each individual pay plan comes outbetween partially successful and highly successful, and virtually no organisationsappear to have adopted plans that do not work. As Gerhart and Milkovich (1992: 522)comment, this “is more than a little suspicious”.

Business performance

There is also academic work looking at the impact of a pay system, notably incentive or‘contingent’ pay systems, on business performance (level 3). This can be subdividedinto the impact on productivity and quality and the impact on financial performance

Level 1: costs

FIGURE 1 Levels of evaluation

Level 2: HR impact

Level 3: business performance

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(Guest, 1997). For instance, in the USA Blinder (1990) found a strong correlationbetween the use of financial participation schemes and improved corporateperformance. In Britain Metcalf (1995), re-analysing data from the 1990 WorkplaceIndustrial Relations Survey, found that private sector workplaces with any form ofprofit-sharing scheme or employee share ownership scheme had a better productivityperformance than those without such schemes. He also found that merit pay schemeswere associated with a high leaving rate but a good productivity performance. Belfieldand Marsden (2003), using data drawn from the cross-section and panel (1990-1998)elements of the Workplace Employment Relations Survey 1998, found thatperformance-related pay had a real and positive effect on organisational performance.

Indeed, there have been numerous studies of the effect of performance-related pay.See Gerhart and Rynes (2003: 115-160) for a review of the US research and CIPD (2001)for a review of the UK evidence, but few of these studies compare an organisationbefore and after the implementation of a new pay plan.

TECHNICAL PROBLEMS

Academics are conscious of the technical problems of evaluation. For instance, Belfieldand Marsden (2003) admit that the data they use does not allow them to assessdefinitively the direction of causation. This echoes the view of Legge (2001) that anassociation between an HR practice and a business outcome does not necessarily equateto a causative correlation. Alternatively, there may be ‘reverse causality’ in the linkage.Another technical problem relates to the fact that it may be difficult to distinguishbetween the impact of a change in a pay system and the impact of a change in paylevels. Furthermore, ‘bottom-line’ measures are often available only at corporate level,whereas a pay plan often relates only to a business unit (Rynes and Gerhart, 2000).Measuring customer satisfaction as an indication of success has also been found to beproblematic as a guide to the effectiveness of pay plans (Cardy and Dobbins, 1994).

Richardson and Thompson (1999) point out that in the public services there is aparticular difficulty in evaluating outcomes: non-commercial organisations, such as NHStrusts, often find it difficult to specify ‘hard’, so-called bottom-line, evaluation criteria.Kearns (1995), however, suggests that public sector organisations can specify targetssuch as the achievement of a charter mark or a predetermined customer service target.

Kearns (1995) puts forward a typology of the measures that can be used forevaluation. At one end of the continuum is what amounts to no measurement at all, anact of faith – ‘we think it worked’. Towards the middle, there are subjective/qualitativemeasures, moving on to objective measures of cost, quality and quantity. At the otherend of the continuum are objective ‘bottom-line’ measures of profitability. We willreturn to this typology in our conclusions.

Kearns (1995) favours quantitative measures, rather than qualitative ones, whereasRynes and Gerhart (2000) argue that both types of measures, although flawed, shouldbe used. A common approach to studying the outcomes of pay plans is to usemanagerial or HR ratings of the pay plan and organisational effectiveness (seeMcAdams and Hawk, 1994), but such perceptual measures have their limitations.Alternatively, ‘hard’ measures can be used, but many factors (not just the pay system)affect business performance – so-called background noise (Richardson and Thompson,1999). In particular, Rynes and Gerhart (2000) maintain that operational (productivity)and financial (profit) measures may be contaminated by internal and external factors:eg technology and the business cycle. As Gerhart and Rynes (2003: 260-261) point out:

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Because observed relationships between pay and performance outcomesvary across studies, without measuring intervening variables, it is difficultto identify characteristics of either the pay design or context thatcontribute to such variance. Similarly, not being able to documentintervening processes makes it difficult to have much faith in any singlecausal interpretation of observed relationships which, in turn, makes itdifficult to develop confident policy recommendations.

Process variables may be important, too, in determining outcomes (Snell andYoundt, 1995). Indeed, Legge (2001: 26) reminds us that Bowey and Thorpe (1986)found that it was not the type of pay system that affected the outcome but the use ofconsultation in the design phase.

In summary:

Taken as a whole, the literature...leaves little doubt about the fact that howemployees are paid has important consequences for individual, group andorganisational performance. On the other hand, an examination of theevidence on any particular pay plan often does not lead to firmconclusions about its consequences.

Gerhart and Milkovich, 1992: 533

THE LIMITATIONS TO RATIONALITY

The technical problems of evaluating pay systems and Kearns’s inclusion of the ‘wethink it worked’ type of evaluation alert us to the limitations of the rational managerialdecision-making perspective. As Watson (1995: 270) argues:

It is increasingly being recognised by organization theorists that socialscientists are prone to see far more rationality in organizational activities…in the sense of fully calculated goal-oriented and purposive thinkingthan is justified.

Furthermore, Mabey et al (1998: 149) admit that the systems approach is “a model ofmanagement which is more rational than is achievable in practice”. Simon (1957) suggeststhat human rationality is bounded, and that reasoning and decision-making are restrictedin scope because humans have both perceptual and information-processing limits.Although people intend to act rationally, in practice they can only do so to a certain extent.

Evaluation of pay systems may be affected by these limits (Weick, 1979). There isoften little consideration of all viewpoints, a criterion of sufficiency is applied andmanagers’ actions and choices are made to satisfy constraints, not to maximiseobjectives, according to Cyert and March (1963). They say: “Where an existing policysatisfies goals, there is little search for alternatives” (1963: 134) and non-routineevaluation may be particularly problematic. Simon (1957) is of the view that strategicdecisions may be approached less rationally because they are inherently complex andmay have unintended consequences.

The importance of organisation politics in managerial actions has also beenhighlighted as a limit to rationality, together with tensions within managerial groups.Buchanan and Badham (1999: 2) say:

It is uncommon to hear decisions defended in terms of political motivesand behaviours... But initiatives are pursued, decisions are taken andchanges are introduced to preserve and extend the power bases andinfluences of individuals and groups.

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They argue that most significant decisions are the outcome of a social and politicalprocess only partly shaped by the evidence which, they add, may be lacking – at leastin part. Similarly, Butcher and Clarke (2003) argue that research into managerial workshould take account of the role of politics and self-interest in shaping managementactivity. Mintzberg (1973) and Kotter (1982) argue that managerial work is essentiallysocial rather than analytical, not work that breeds reflective planners. Managers tend togravitate towards the current, the specific and the well-defined, and react to issues thatappear to be the most urgent or politically important.

These observations do not deny the possibility of rational behaviour in terms ofevaluation of a pay system, but alert us to the possibility that evaluation may not bedone at all, or if attempted may be influenced by a plethora of other factors that willaffect the outcome.

THE APPROACH OF PRACTITIONERS

While there is much literature prescribing how pay systems should be evaluated, andsome literature examining the difficulties of evaluation, there is only a little researchstudying what managers do in practice. Indeed, two significant recent evaluations ofpay arrangements in the UK were not carried out directly by organisation-based HRpractitioners themselves, but by a government department (Makinson, 2000) and by apublic body (Review Body for Nursing and Other Health Professions, 2004).

There are two aspects to pay system evaluation by practitioners: the extent ofevaluation and, where there is evaluation, how it is carried out. As to the former,Mabey and Salaman (1995) discuss the work of Milkovich and Wigdor (1991) for theAmerican Bureau of National Affairs which found that only 6 per cent of organisationsconducted any formal assessment of their performance-related pay systems. Dunnetteand Bass (1963, cf Mahoney 1979: 29) suggest that personnel practitioners rely on“faddish and assumptive practices in administering pay which lack empirical support,rather than in rigorous evaluation of the effects of particular pay programmes”.

Ahlstrand (1990), who looked at 25 years of productivity bargaining at Esso Fawley,also found little evaluation. There was little evidence that productivity bargainingsucceeded in meeting its objectives, and he could not find a valid basis formanagement’s calculations of savings. Yet, repeatedly, Fawley management concludednew agreements with the unions. He argues that productivity bargaining at Fawleyhad a symbolic function and was used to manage impressions: to give the impressionto Fawley employees, the UK company board and the general public that somethingwas being done. It was also used as a vehicle for the enhancement of careers bothwithin line management and within the personnel function. By moving onimmediately after the design and negotiation of the agreement (usually due to apromotion), the manager was more often than not spared the problem of monitoring.

Perhaps this is no surprise. Pay systems are not unique among other HRinstruments. Marchington et al (1993) essentially found that managers did not monitoremployee involvement schemes. Doyle (2001: 416) argued that managers expendedlittle effort on a “proper evaluation” of the extent to which management developmentactivity contributed to organisational objectives. Skinner (2004) found that managersevaluated change management informally, not systematically or explicitly. In fact, theonly area where evaluation is prevalent, regular and longstanding is in respect ofequal opportunities where there are statutory codes of practice issued by theCommission for Racial Equality (1983) and the Equal Opportunities Commission(1985) recommending monitoring.

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We found virtually no examples of the process of evaluation adopted by managers,apart from Tyson and Fell (1992) – see above – even though we searched electronicdatabases and the CIPD library. Marchington and Wilkinson (1996: 305-06), however, say:

...few managements attempt to evaluate their pay systems in any realdepth. They appear not to have clear criteria against which the schemescan be evaluated, but rather tend to rely on a ‘gut’ feel.

They do not, though, provide any empirical evidence for this assertion, a gap thisarticle aims to start to fill.

THE FIELDWORK

Research question and methodology

Our research question was: how do managers, who have introduced a new pay systeminto their organisation, carry out evaluation? By this we mean formal evaluation – iewhere managers purposively set out to ascertain how their pay system is working in asystematic and explicit way, bearing in mind their objectives. We wanted to find outwhat managers evaluated – ie how comprehensive or alternatively piecemeal theirevaluation was in the three areas of costs, HR outcomes and business performance. Wealso wanted to know how managers evaluated. For instance, when measuring HRoutcomes did they look at hard data such as labour turnover and/or soft data such asthe results of staff attitude surveys?

Initially this research question was applied as part of a wider study into pay andgrading for non-medical staff in the National Health Service (NHS). At the time of thefieldwork (2000/01), the Department of Health (DoH) was negotiating a new pay systemfor all non-medical staff in the NHS, known as Agenda for Change. It was interested toknow how NHS trusts, which had introduced their own pay systems in the 1990s, hadcarried out their evaluation so that it could, where appropriate, copy strategies andtechniques. A report (Corby et al, 2001) suggested that, in fact, little evaluation had beencarried out by NHS trusts. As negotiations between the DoH and the recognised unionsproved to be protracted, the DoH took the opportunity to commission further researchinto pay system evaluation. It wanted to know how organisations outside the NHScarried out their evaluation of new pay systems, and further fieldwork took place in2002. In addition, the DoH was interested in whether organisations in the private sectorcarried out more pay system evaluation than those in the public services, where ‘bottomline’ measures such as profit/loss and share price are absent.

Our sample included only relatively large organisations which had the resourcesand HR expertise to carry out evaluation. Our smallest organisation was Community,an NHS trust with 1,800 employees, and our largest Royal Mail, with 160,000employees. All the organisations in the sample were unionised because the DoH,which was commissioning the research, wanted organisations comparable with theNHS and therefore it wanted unionised organisations to be studied.

Our research was conducted in eight NHS trusts, four public-sector organisationsoutside the NHS – HM Customs and Excise (C&E), a county council (‘Council’),Government Communications Headquarters (GCHQ) and Royal Mail – and threeprivate-sector organisations: a life assurance company (‘Assureco’), a defenceequipment manufacturing company (‘Engineerco’) and a communications company(‘Communico’). With the help of Incomes Data Services (IDS), we identifiedorganisations that had experienced large-scale change in pay and grading systems

No news is good news? Evaluating new pay systems

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fairly recently (between 1994-2000), as we were of the view that reliable data could beobtained only where memories had not faded, documents mislaid and/or keyinformants had not moved on. On the other hand, the pay systems had been in placelong enough for evaluation and auditing to have been at the very least started. Therewas a geographical spread within England and variation in size as measured by thenumber and proportion of employees covered by the new pay system. In short, thesample, although largely fortuitous, had theoretical validity, and Table 1 summarisesthe main features of the sample.

We adopted a case study approach in these 15 organisations, interviewing HRmanagers and union representatives as well as finance directors and line managers inNHS trusts. Our findings reported below are based on 61 tape-recorded interviews,mostly conducted face to face, but there were two telephone interviews and one videoconference. In addition, we studied documents and in-house statistics. We weremindful that managers do not carry out evaluation in a vacuum. Accordingly, as wellas asking questions about the evaluation process, we asked about the aims andobjectives when introducing a new pay system. We analysed transcripts using agrounded theory approach.

We considered this methodology appropriate to the research question for tworeasons. First, evaluation occurs in the context of a pay system whose characteristicsvary from organisation to organisation, and whose complexities and dynamics cannoteasily be ascertained by a postal survey. As can be seen from Table 1, the new paysystems varied considerably: for instance, some were based on job evaluation and somewere not; some based pay progression on service and others based it on performance.Secondly, we wanted to study only unionised organisations that had recentlyintroduced new pay systems for the reasons given above. Our discussions with IDSindicated that only a few organisations fell into this category and a large-scale surveywould not yield appropriate data.

FINDINGS

Pay system objectives

All our case study organisations had clear objectives which they stated to their boardsbefore introducing a new pay system, and most were capable of measurement in someway. Each organisation had more than one objective, the most common of which werethose related to the HR impact – in particular, attracting and retaining staff,encouraging flexibility and making the pay system simpler and easier for employees tounderstand. One organisation (Council) wanted to resolve equal value/genderdifferential problems, and two organisations (Multiservice 1 and Engineerco) wanted toreward employees financially for staying in their grade rather than only being able toobtain higher pay through promotion. Allied with this, several organisations wanted toreward individuals for good performance, “moving away from a culture where peoplegot increases irrespective of performance”, as one HR manager said.

There were very few objectives related to business performance. Only Royal Mailhad as an objective improving operational performance, although one of the NHStrusts (Urban) wanted to improve the quality of patient care. The otherorganisations (as our interviews with HR managers revealed) often hoped foroperational improvements, but did not specify such improvements as an objective.Similarly, cost considerations did not feature as an explicit objective, except forAssureco, Engineerco and Urban. Table 2 gives details of managerial objectives.

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Tab

le 1

con

tinue

d

04-24 corby 21/1/05 10:39 am Page 13

No news is good news? Evaluating new pay systems

14 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 1, 2005

Organisation Main objectives (as stated by organisation)

Acute Teaching 1 Be affordable(NHS trust) Facilitate teamworking

Encourage flexibilityBe easy to understand and apply

Acute Teaching 2 Facilitate teamworking(NHS trust) Encourage flexibilityAcute Teaching 3 Encourage flexibility(NHS trust) Support performance managementAssureco Reward good performance(Life Assurance) Attract and retain staff at an affordable cost

Provide a pay system that staff find fairCommunico Enable flexibility(Communications) Harmonise and simplify pay structure

Support culture changeCommunity Harmonise and simplify pay structure (NHS trust) Support performance managementCouncil Provide equal pay for work of equal value(County Council) Remove anomaliesEngineerco Harmonise and simplify pay structure(Manufacturer) Self-financing through efficiency gains

Retain staffDiscourage notion that pay can only be improvedby promotion

GCHQ (Government Attract and retain staffCommunications Headquarters) Reward individual performance

Provide a pay system that staff find fairC&E (HM Customs and Excise) Ascertain whether team bonuses incentivise staff

Ascertain whether there are any contra-effects fromteam bonuses

Large Acute Harmonise and simplify pay structure(NHS trust) Encourage flexibilityMultiservice 1 Reward good performance(NHS trust) Discourage notion that pay can only be improved

by promotionSupport culture change

Multiservice 2 Attract and retain staff(NHS trust) Enable functional and temporal flexibilityRoyal Mail Improve operational performance

Encourage flexibility and new working patternsMove away from excessive levels of overtime

Urban Enable flexibility(NHS trust) Reward good performance

Be affordableImprove the quality of patient care

TABLE 2 Reasons for introducing a new pay system

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15HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 1, 2005

Evaluating costs

Although cost considerations were rarely an explicit objective, all the organisationscalculated and monitored assimilation costs. Royal Mail conducted the mostcomprehensive monitoring in this area, but the new pay system was introduced at atime of organisational restructuring so the accountants were not able to pinpoint thecosts arising solely from the pay package because other things had been ‘going on’, asan interviewee put it.

Although assimilation costs were monitored, no account was taken of offsettingsavings such as lower recruitment costs. Yet affordability was one of the objectives ofAcute Teaching 1 and Assureco, while Engineerco aimed to introduce a new paysystem that would be self-financing through efficiency gains (see Table 2). AtCommunico the HR manager said that organisation-wide monitoring of net costs wasnot appropriate as “jobs vary quite a lot and the businesses [within the company] lackthe uniformity of a manufacturing environment”. Accordingly, the costs and savingsvaried from business to business. Even though the pay system was company-wide,however, businesses were not required to report back to the centre, which thus couldnot identify the real costs/benefits of the new pay system.

EVALUATING HR OUTCOMES

A new pay system can have an impact on a number of HR factors which we group inthree areas: first, labour turnover/recruitment/retention; secondly, staff attitudes; and,thirdly, working practices.

1. Labour turnover, recruitment and retention

Four of our organisations explicitly aimed to improve recruitment and retention.Moreover, virtually all our interviewees considered that pay systems were animportant factor in the recruitment and retention of employees of the required quality.Looking first at labour turnover, we were told that all our organisations collectedstatistics, although the documents we were given were often incomplete. Althoughlabour turnover statistics were collected, however, managers seldom analysed them forthe purpose of evaluating the pay system. The exception was GCHQ, although it didnot distinguish the pay system from pay levels.

NHS trusts were particularly well placed to measure labour turnover. Because oflegal restrictions, new pay systems in the NHS could only be applied to eligible staff ifindividually they so chose, as long as they stayed in the same job and were notpromoted. Yet none of these trusts compared the labour turnover of those on the newpay system with those remaining on the old pay system. In particular, although the HRdirector at Acute Teaching 1 had promised the board that the new pay system wouldbe monitored, we understand that there was no pressure from the board subsequently,and the HR manager said:

we monitor the workforce, the hospital’s workforce, monthly on amonthly report that goes to the trust board… but I have not actually goneback to when we started to introduce new terms and conditions and seewhether there is an improvement generally.

Another way of evaluating the effect of a pay system on labour turnover is by exitinterviews. We found, however, that exit interview data were not always held centrally.In some organisations department heads collected and held exit interview data, and inother organisations exit interviews were only held in areas where a problem had been

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16 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 1, 2005

identified. Even where data was held centrally, however, it was generally not analysedfor pay evaluation purposes. The main exception was GCHQ which, because of thesensitive nature of its work, had a rigorous exit interview process (an interview by apersonnel officer using a pro-forma) and analysed data annually to ascertain whetherpay and/or pay progression was a reason for leaving or not. An interviewee said that,for security reasons, “we need to make sure that there aren’t going to be lots ofdisaffected people kicking their heels around outside”. At Community there was a one-off exercise: the HR manager, noting in 1999 the reduction in the number of staff citingpay as a major factor in their decision to leave, commented in a report to the board thatthat “could be a reflection of staff satisfaction” with the new pay system.

As to recruitment, only one of our organisations (Acute Teaching 3) carried out alimited and one-off study. When it piloted a new pay system, it issued a questionnaireon recruitment, receiving 40 responses. According to the HR director, however, thetrust was “not evaluating in the sense of setting it against costed alternatives”. SeeTable 3 for a summary.

2. Staff attitudes

We now turn to staff attitudes: first their understandings of how the new pay systemworked and, secondly, their views on whether it improved their commitment and/ormotivation. One NHS trust (Multiservice 1), which had introduced individualperformance pay as part of its new reward system, carried out a one-off, small-scalestudy to see if staff understood the process of awarding performance pay, but did notlook at outcomes in terms of employee commitment.

As to motivation, all the organisations inside the NHS and five of the other sevenorganisations carried out staff attitude surveys. None of these organisations, however,specifically used that information to evaluate their pay system. Moreover, NHS trustsdid not compare the responses of employees on their new pay system and thoseremaining on the ‘old’ (national) pay system.

One NHS trust (Urban) and one organisation outside the NHS, Customs & Exercise(C&E), however, carried out bespoke surveys of staff motivation and the new paysystem. Urban’s one-off survey was carried out two years after the introduction of thenew system and was supplemented by interviews and focus groups. (It concluded thatthe new system had had a positive impact on staff motivation.) C&E was morerigorous. An external consultant was commissioned to survey staff attitudes just beforeC&E’s trial of team bonuses started in July 2000 to provide a benchmark and, at the endof the trial, after the staff received their bonuses, in June 2001. These surveys wereconducted not only in the six trial sites but also in three control sites and weresupplemented by 18 focus groups. The results, however, were inconclusive, mainlybecause all staff in the trial sites received the bonuses in full.

It should be mentioned that in three NHS trusts, outside academics carried outstudies on staff attitudes to the new pay system but in all cases the academicsapproached the trust for access. The trusts did not commission the studies.

No organisation that we studied used quantitative measures to evaluate the impactof the new pay system on employee behaviour, such as absenteeism rates, number ofgrievances, frequency/severity of accidents or number of employment tribunal claims,although they all collected statistics on at least some of these matters. C&E started toseek data from trial site managers on complaint rates, staff turnover, sick leave andwhether there was pressure on team members, but the data only related to a short time-scale (less than nine months) and so was not analysed (see Table 3).

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Susan Corby, Geoff White and Celia Stanworth

17HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 1, 2005

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04-24 corby 21/1/05 10:39 am Page 17

An aim of Multiservice 1 and Engineerco, when introducing their new pay systems,was to enable professional employees to enjoy pay progression while remaining intheir grade, rather than to have to seek promotion (perhaps taking on managerialresponsibilities) to secure an increase in pay. Only Engineerco, however, trackedemployees in the three ‘zones’ of each grade.

3.Working practices

Finally in this section we turn to working practices. One of the explicit aims of the paysystems adopted by eight of the 15 organisations in our sample was to facilitateflexibility of both a functional and/or temporal kind, but only two organisations (bothin the NHS) carried out any evaluation to see if the aim was realised. Multiservice 2reviewed the extent of functional flexibility one year after the introduction of a newpay system for qualified theatre staff. The review, however, did not evaluate another ofthe trust’s aims, temporal flexibility, to provide a more affordable and efficient systemof rostering and 24-hour cover. In addition, Urban asked staff in its one-off survey(mentioned above) if they thought the new pay system had encouraged flexibleworking. (By a small majority staff were of the view that it had not.)

The empirical evidence on how the sample organisations evaluated the HR impactof their new pay system is summarised in Table 3.

Business performance

Turning to level 3, business performance, our fieldwork indicated that only twoorganisations sought to evaluate the impact of their new pay system on performanceand both were in the public sector. C&E, when evaluating its trial of team bonuses,measured financial performance by first establishing a baseline for the six trial sites andthree ‘blind’ control sites and then carrying out a further review after a year. Inaddition, one of the trial sites carried out a customer satisfaction survey. Partly becauseof the limited time-scale (one year) and partly because there was “a lot of noise in thesystem”, to quote the HR manager (ie restructuring and new appraisal and promotionsystems), the results were not conclusive.

Urban, in its survey, asked staff about the impact of the new pay system on patientcare. (A small majority thought that the impact was positive.) Unlike C&E, however,there was no control group.

Rationales for not evaluating

Our research primarily focused on how managers evaluated their pay systems, not whythey did or did not do so, but what came over strongly was scepticism by both HRdirectors and finance directors about the process of evaluation. For instance, the HRdirector of Large Acute said that a pay system was “exceedingly difficult toevaluate…It’s likely to emerge at a time with lots of other change and quite how youpick the pay bit out of that, I don’t know”. The finance director of Acute Teaching 2 said:

We haven’t done a full post evaluation… I can show you that we aregetting more patients through with the same amount of staff and I couldargue that is because we have introduced the new pay system. But youwould be able to give me lots of arguments of other things that impingeon that as well. It is very difficult to measure.

The finance director of Multiservice 1 said: “I’m not sure to what extent a pay systemwill contribute to patient outcome measures”. The HR director of Community said: “Ithink pay does have an influence on vacancies, but I couldn’t say it was cause and effect”.

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Neither was this scepticism about evaluation confined to the NHS. For instance, theHR manager interviewed at Engineerco considered that it was not possible to inferanything about the effectiveness of the company’s pay system from bottom-lineindicators. Profitability was too dependent on external factors for financial indicatorsto be a useful measure of a pay system. Similarly, the HR manager at Communico wasof the view that the new pay system would give the company “the opportunity tointroduce financial incentives to change behaviour and hence productivity”. The link,however, was not easily measurable, and changing behaviour was a slow process.

Other reasons for the lack of evaluation were given. At GCHQ the HR director said:“We haven’t identified a specific set of evaluation criteria… not least because wehaven’t had the management information to do that”. Also, a number of respondentsquestioned the need for formal evaluation because there had been no negativereactions. The HR director at Community said: “There is anecdotal stuff about it”. TheHR director at Multiservice 1 said: “The anecdotal bit… the feedback we’ve had fromthe staff themselves, the feedback from ward managers is very positive”. The financedirector at Large Acute said: “If staff weren’t happy we would have seen a lot morecomplaints than what we’ve seen. If they weren’t happy, I mean you would know.”The HR director at Multiservice 2 said:

I know that staff think the pay system is fair because I haven’t had anycomplaints, so that’s a negative measure, and because those people that Ihave spoken to… have all been enthusiastic.

DISCUSSION AND CONCLUSIONS

Limitations

There are limitations to our findings. First, the research project was designed to meetthe requirements of its funder – to collect data on how organisations evaluate changesin pay systems. We did not set out to discover why employers did not evaluate,although this rapidly became a by-product of our work. Secondly, we only carried outfieldwork in large, unionised organisations, although one might expect moreevaluation to be undertaken where change is complex and where employees haverepresentative institutions that jointly determine terms and conditions withmanagement. Thirdly, as noted above, because we looked only at those organisationsthat had introduced new pay systems recently, we carried out case studies in just 15organisations and our findings are, therefore, limited. They are also heavily weightedtowards the NHS (see note 1). Thus, there is a need for further research.

Analysis

Given these caveats, our fieldwork showed that managers, when they introduced newpay systems, on the whole conducted only limited and piecemeal evaluation, despitethe urgings of the prescriptive literature. Indeed, Council and Acute Teaching 1 carriedout no evaluation at all in a systematic and explicit way, apart from monitoringassimilation costs.

Focusing on those organisations that carried out some evaluation, we examinedwhat managers evaluated, categorising our findings on three levels: the costs, the HRimpact and the business performance impact. Although statistics were collected onpaybill costs, they were not analysed on a net cost basis – ie taking account of offsettingsavings. Only two organisations evaluated the effects of the pay system on business

04-24 corby 21/1/05 10:39 am Page 19

performance, and we found that the evaluation managers conducted related primarilyto the HR impact.

Turning from what was evaluated to how evaluation was carried out, noorganisation used such quantitative measures as accident rates, number of references toemployment tribunals or ratio of grievances to number of employees to evaluate theimpact of a pay system on employee behaviour, as recommended by Armstrong andLong (1994). Only one used labour turnover data to evaluate its pay system, though allthe organisations collected some ‘hard’ data, most commonly on absenteeism andturnover. Indeed, evaluation was essentially based on employee self-report, and innearly every case it was limited to a one-off exercise. Moreover, while any evaluation ofthe impact of a pay system might be misleading where simultaneously there is otherorganisational change, there were control groups available in both the NHS trusts andC&E. Only the latter, however, used control groups for pay evaluation purposes.

The literature suggests that it is easier to evaluate business performance in theprivate sector, where there are clear indicators of profitability and one can also look atshare value, than in the public sector (Richardson and Thompson, 1999). In contrast, wefound that evaluation of business performance was only undertaken by two public-sector organisations and not by any private-sector organisation in our sample. Perhapsthis is a reflection of the auditing culture of government and the need for accountabilityof publicly provided money.

We also found, contrary to our expectations, that there was not greater evaluationwhere the proportion of employees covered by the new pay system was large – ie thescale of the exercise was not related to the propensity to evaluate. Indeed, we couldfind no pattern. The most extensive evaluation was carried out at C&E where 3 per cent(700) of employees were covered by the new pay arrangements. In contrast, there waslittle evaluation at Multiservice 2 where, similarly, 3 per cent (80) employees werecovered; and at Council or Communico, where the figures were 89 per cent and 68 percent respectively.

Explanations

Further research is needed into why so little evaluation was carried out, but ourresearch indicated some explanations. Managers were sceptical about the process ofpay system evaluation. They were of the view that the link between a pay system and agiven outcome – eg staff attitudes or service/product delivery – is well nigh impossibleto prove. Indeed, some of the literature (eg Gerhart and Rynes, 2003; Richardson andThompson, 1999; Rynes and Gerhart, 2000) emphasises the difficulties of suchevaluation. Rather than spending time and incurring the cost of carrying out detailedmonitoring, which would not provide conclusive results, our research indicates thatmanagers often relied on anecdotal evidence. To return to the typology of Kearns(1995), in the main the type of measure adopted for pay system evaluation was ‘wethink it worked’.

Yet were managers’ espoused reasons, essentially focusing on technical difficulties, acomplete explanation for their failure to evaluate? We reiterate that further research isneeded, but we argue that managers have little psychological incentive to evaluate.Our fieldwork highlighted the fact that new pay arrangements generally take aconsiderable time to develop, negotiate and implement. For instance, at one of ourNHS trusts (Acute Teaching 3) the design of a new pay system for nurses, midwivesand their support workers started in 1994, to be followed by the first pilot in 1996, afterwhich there was gradual roll-out, completed in 2000. At Communico it took more thanfour years from initial discussion to company-wide implementation. Moreover, such

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21HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 1, 2005

new pay structures are put in place for an indefinite period. They are not regarded asexperimental and there can be considerable assimilation costs. Managers, having spentconsiderable time, energy and resources in developing and implementing a new paysystem, are likely to have a psychological investment in its success and thus have littleinclination to carry out any rigorous evaluation. This reflects the social view ofmanagement in terms of the pursuit of self-interest (Mintzberg, 1973; Kotter, 1982).

Furthermore, managers are subject to political pressures, (Buchanan and Badham,1999) which include pressures not to make unnecessary ‘waves’. If, anecdotally, it isreported that the new pay arrangements are working satisfactorily, or problems arenot reported by middle managers or union representatives, managers maylegitimately consider that there is little need to undertake in-depth evaluation. Linkedwith this and bearing in mind the politics of organisations, managers may have a fearof failure if a systematic evaluation demonstrates that the new pay system has failedto achieve its objectives (Buchanan and Badham, 1999; Butcher and Clarke, 2003).Such a consideration, however, is far less likely to arise where the pay system is a trialor a pilot.

Indeed, the only organisation where the evaluation was extensive was where therehad been little psychological investment in the development of a new pay system andwhere it had been adopted for a limited period, not indefinitely. In short, C&E carriedout a time-limited trial affecting a very small proportion (3 per cent) of its employeesfrom an agnostic viewpoint. As the framework had been predetermined, C&E’spreparation for the trial took less than six months. It wanted to know whether the teambonuses recommended by Makinson (2000) worked, before it “bought into” them, as aninterviewee put it. HM Treasury, too, which sponsored the trial, wanted a rigorousevaluation. In other words, C&E conducted an experiment; it did not introduce fullyfledged new pay arrangements which had been preceded by lengthy negotiations.

The literature also suggests further grounds for inferring that managers’ espousedreasons for lack of evaluation were incomplete. In addition to their overt and rationalobjectives, new pay systems may be used by managers to impress their superiors, asAhlstrand (1990) found. Although we had no direct evidence that HR directorsintroduced new pay systems to enhance their careers, a follow-up at the end of 2003(for another purpose) found that some had moved up.

Interestingly, in the NHS’s final agreement on Agenda for Change signed by theparties on 25 November 2004, monitoring and evaluation are to take place bothnationally and locally against 10 ‘success criteria’ and five ‘avoidance of risk’ criteria.However, whether and/or to what extent such monitoring and evaluation take placein practice remains to be seen.

Practical implications

So what are the practical implications of this research? Given that evaluation iscomplex, practitioners should have a realistic view of what is achievable and prioritisetheir objectives. Having done this, they should focus on evaluation in only a fewdiscrete areas, rather than compiling what is essentially a wish-list, and compare bothbefore and after reward changes have been implemented. Furthermore, whenmonitoring costs, practitioners should evaluate both the costs of the new pay systemand the transaction costs incurred. Manager and employee perceptions of theoutcomes are also important. If employee attitude surveys are already in place, specificquestions about pay could be added to obtain formal feedback. Whatever measures areused, however, managers should actively consider how best to report their findings aspart of an externally available human capital report (Scarbrough and Elias, 2002).

04-24 corby 21/1/05 10:39 am Page 21

In addition, the reward management literature should recognise the realities:managers normally carry out minimal pay system evaluation, partly because of thedifficulties of establishing causal links between pay system implementation andoutcomes. The literature should also recognise that, because a new pay system oftentakes a considerable time to develop and implement, there are strong politicalpressures not to disturb an indefinite arrangement where there is no negative anecdotalinformation and that managers follow the axiom ‘no news is good news’.

Note

1. The authors would like to thank the DoH for funding this research. The viewsexpressed, however, are those of the authors and may not necessarily reflect the viewsof the Department. Furthermore, the authors would like to thank Professor Jan Drukerand the anonymous referees for their useful comments.2. Paul Dennison, University of Greenwich, and Fiona Douglas, formerly of theUniversity of Greenwich, contributed to the research on which this article is based.

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