Government Business

These are challenging times for reward practitioners working in the service sector. They must reconcile two broadly competing pressures. Challenges, such as talent management, changing demographics, inflation, climate change and regulatory and compliance costs are increasing reward spend while others, such as competition and economic growth are creating pressures to reduce it.
    
To find out how organisations manage these pressures, the Chartered Institute of Personnel and Development (CIPD) carries out research into reward management in the UK each year1. It finds that employers are increasingly shifting some of the cost, risk and reward of the employment relationship away from the employer towards the employee. But how are reward management practices in the private service sector different from those in the public service sector?

Individual pay
On pay we find many employers claiming to align reward with performance. In the private service sector, two out of three firms no longer award an annual across-the-board pay increase where individuals know in advance the size of their pay rise. By contrast, around nine in ten public service sector still make such an award.
    
Instead, around nine in ten private service sector firms link an employee’s individual pay award to a combination of factors. The most common of these is individual performance (88 per cent), followed by market rates (74 per cent), an organisation’s ability to pay (57 per cent) and competency (55 per cent). However, 52 per cent of public sector employers report using a combination approach to move someone through a pay band. While the most common factor employers examine is performance (79 per cent), they also consider competency (54 per cent), length of service (46 per cent) and market rates (41 per cent). Less than one per cent of private service sector companies rely solely on length of service.

Bonus arrangements
While there appears to be a convergence towards linking base pay awards to an assessment of individual contribution (i.e. performance plus skills and/or competency) coupled with market rates, there has been no similar convergence around variable pay. Around nine out of ten employers in the private sector operate one or more bonus arrangements for their employees, just three in ten public sector employers do likewise. This low proportion may reflect cultural issues and budget constraints. There are slightly fewer public sector employers with a bonus scheme since our previous survey, which may be a consequence of equal pay concerns in local government.
    
Oddly enough, most private and public service sector employers do not have a formal recognition or non-cash incentive schemes in place. This is surprising given that such schemes are relatively low cost to run but can have a positive impact on employee engagement by recognising staff for their individual and collective contributions.
    
Pensions have represented the biggest shift in private sector benefits. More than two in five private service sector firms have a final salary pension scheme but the vast majority have now closed them to new employees and a sizeable proportion have closed them to future accrual. Conversely the vast majority of public sector employers still have offer a final salary pension that is open to all employees.
    
To encourage pension take up, just under two-fifths of private service sector firms have adopted salary sacrifice. Salary sacrifice means an employee gives up part of their gross salary and in return their employer agrees to provide an additional benefit. This helps reduce costs for employees, as they save on tax and national insurance contributions, and for employers, as they also save on national insurance contributions. By contrast, under one fifth of public service sector employers have adopted this scheme. Interestingly, while 53 per cent of private sector service firms pass on their national insurance contribution savings only 43 per cent of public sector employers do so.
    
Other than pensions, there are a wide variety of benefits on offer in both sectors. Overall, our public service sector respondents appear to spend the same on their benefits as their private service sector counterparts. Both claim that their employee benefit expenditure, as a percentage of their total paybill, is 15 per cent, as measured by the median. However, private service sector firms were most bullish at the time the survey was carried out, with 46 per cent predicting a growth in their benefit budget while just 28 per cent of public sector firms predicted an increase.

Equal pay review
Our survey revealed a number of concerns. Firstly, while most private sector service employers claim to be linking pay to performance, only 42 per cent have actually checked that this is happening by carrying out an equal pay review. Given that most private sector service firms will already have much of the material to conduct an equal pay review from information collated for annual salary reviews, other factors must be causing their reluctance to ensure pay truly rewards performance. By contrast, 82 per cent of public sector service employers have carried out such a review.
    
Four out of five private sector firms give their front line managers formal responsibilities for communicating messages around pay - decisions that they or the organisation have made. In comparison, only two in five public sector employers use their line managers to communicate what the organisation is trying to do, what it needs its people to achieve and how it will reward and recognise them for doing this. Even though private service sector firms are more likely to use their line managers to deliver pay messages, the majority are not confident in the abilities of their line managers to undertake this task. Furthermore, most admit to not giving their line managers enough coaching and development to successfully undertake this role.
    
Of those public and private service sector employers with an employer brand (37 per cent) and an environmental policy (38 per cent) most are unsure how well their reward practices support them. Similarly, despite recognition of demographic changes, few employers in both sectors offer reward in a systematic and integrated way that appeals to all individuals irrespective of age, gender, race and so on.

Written reward strategy
Perhaps these findings are not too surprising. Most service sector employers in both the private and public sectors do not have a written reward strategy. They have not articulated the vision and mission of the organisation, what its aims and objectives are, what values, behaviours, attitudes and performances it needs from its employees and how it will recognise and reward them. As a result, many employers have objectives unsupported by their reward practices.
    
Similarly, while most public and private service sector employers have not achieved vertical integration, a higher proportion have not managed lateral integration in their reward practices, combining their financial and non-financial rewards in a compelling offering for existing and future employees.
    
Our survey reveals that reward strategies are changing in response to the challenges mentioned earlier, yet many of the reward initiatives discussed appear to be incremental and taking place in isolation from one another. What we need in both service sectors are employers creating an overarching narrative that joins up all these reward initiatives into a compelling story. A strategic and holistic approach helps employers create a compelling narrative of what the organisation aspires to achieve, what values, behaviours, attitudes and performances it wants and how it will reward and recognise these, both financially and non-financially.

Notes
1. Research for the CIPD ‘s annual reward management survey was carried out in late 2007. Overall, 603 employers employing over two million employees responded. By sector, 68 per cent came from the private sector, 19 per cent came from the public sector and 13 per cent came from the voluntary sector. The survey can be downloaded for free from www.cipd.co.uk/surveys .