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The role of rewards in enabling organization Innovation May 2015
WorldatWork Total Rewards Conference
Presenters Tom McMullen Hay Group Chicago
[email protected] +1.312.228.1848
Dow Scott, Ph.D. Institute of Human Resources and Employment Relations Loyola University Chicago
[email protected] +1.312.915.6597 Erik Larson Hay Group Chicago
[email protected] +1.312.228.1827
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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About Hay Group Hay Group consults with 9,000 clients worldwide in a wide variety of areas, including: Organizational effectiveness Managerial and executive assessment Compensation and benefits Performance management Executive remuneration and corporate governance Employee and customer attitude research
86
4,000+
10,000
Offices in 48 countries
Employees worldwide
International clients
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About Dow Scott Dow Scott, Ph.D. is a Professor of Human Resources in the Quinlan School of Business Administration at Loyola University Chicago and President of Performance Development International; a management consulting firm. Dr. Scott’s consultation and research focuses upon:
Compensation and incentive pay Attendance improvement Team and HR development Recruiting and staffing systems HR program evaluation
Performance Development International, LLC PDI is dedicated to helping our clients create a competitive advantage through people. We are committed to providing quality and personalized service. We support our clientele through: Customized evaluations and assessments of specific HR strategies, policies and programs. Development of “state of the art” customized HR programs and high performance organizations. Employee involvement at all levels, thereby fostering commitment and accountability for results. Linking HR programs to organizational performance.
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Background
Innovation mandate Conference Board identifies top CEO challenges: Rank
2015
2014
2013
1
Human Capital
Human Capital
Human Capital
2
INNOVATION
Customer Relationships
Operational Excellence
3
Customer Relations
INNOVATION
INNOVATION
4
Operational Excellence
Operational Excellence
Customer Relationships
5
Sustainability
Corporate Brand and Reputation
Global Political / Economic Risk
Source: Conference Board CEO Challenge Survey, 2013 - 2015
“Best Companies for Leadership” are more likely to reward innovation and collaboration than other companies. (Hay Group, 2014) © 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Innovation and human capital challenges
Human Capital Priorities
Innovation Priorities
1
Improve performance management processes and accountability
Create culture of innovation by promoting and rewarding risk taking and entrepreneurship
2
Provide employee training and development
Engage in strategic alliances with customers, suppliers, and other partners
3
Enhance effectiveness of senior management team
Find, engage, and incentivize key talent for innovation
Improve employee engagement
Apply new technologies (product, process, information, etc.)
Improve leadership development progress
Adopt a user-centric approach to innovation
Rank
4 5
Source: Conference Board CEO Challenge Survey, 2015
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Key research questions
How do companies view innovation and how is it measured?
How important is innovation and who champions it?
What types of rewards are used to encourage innovation and how effective are these rewards?
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Question 1 How important is innovation to your company? 1.
Not on management’s radar
2.
Mainly “talk” and no “walk”
3.
Made a moderate investment
4.
Made a big investment
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Methodology
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Data collection
Surveyed Hay Group registered website users and WorldatWork Members
Over 166 organizations participated
Organizations primarily in North America
Respondents are primarily HR and reward professionals
Literature review and interviews
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Respondents
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Industry sector
Representative mix of industries
Industry Healthcare Manufacturing Wholesale/Retail Trade Consulting Finance/Banking Insurance Business Services Education Services Government High Tech Service - Non Profit Oil/Gas/Natural Resources Utilities Communications Construction/Real Estate Publishing/Newspaper Transportation Other
Particpation 15% 13% 9% 9% 5% 5% 4% 3% 3% 3% 3% 2% 2% 2% 1% 1% 1% 6%
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Company size
By Revenues Greater than $5B 22%
Less than $250M 32%
By Employees $1B to $5B 24%
$250M to $1B 22%
Greater than 20,000 EE's 20%
2,500 to 19,999 EE's
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
Less than 499 EE's 33%
500 to 2,499 EE's 23%
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Research findings
Innovation focus 66% of companies have a formal definition of innovation Function or group whose primary purpose is innovation
R&D Department (11%)
Center of Excellence, Taskforce, etc. (31%)
No function devoted to innovation (58%)
Primary focus for Innovation
Develop new products or services (42%)
Process improvement to enhance quality (37%)
Process improvement to enhance efficiency & lower costs (31%)
Re-tool or re-purpose current products of services (28%)
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Champions of innovation
Group Senior Leadership HR Function Marketing Function Business Unit Leadership Ad hoc, project, or process teams Operations / Manufacturing Logistics Function Cross-functional Teams External Partners R&D Function Permanent Innovation Function
Innovation Champions 99% 98% 91% 89% 78% 75% 68% 67% 61% 57% 49%
Effectiveness 76% 56% 64% 71% 65% 55% 46% 62% 62% 78% 77%
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Importance of innovation
Innovation is considered everyone’s job
73%
Core Value
66%
Senior management takes advantage of every opportunity to champion innovation
54%
Clear vision and strategy for innovation
48%
We have strong processes, measures, and controls in place to manage innovation We invest more resources in research and development than do our major competitors
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
43% 27%
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Process innovation metrics Usage of Metric
Metric Used to Reward *
Effectiveness of the Metric
83%
81%
68%
75%
68%
76%
67%
44%
62%
67%
60%
63%
66%
58%
72%
54%
50%
71%
Financial results of patented ideas
30%
24%
67%
Development of patentable ideas
29%
28%
85%
Number of approved patents
28%
24%
79%
Metrics for Measuring Innovation Level of internal customer engagement, satisfaction, or retention Potential or actual revenue/profit of innovative initiatives Level of employee engagement, satisfaction, or retention Number of innovative initiatives implemented Quality/value of innovative initiatives in the pipeline Number of innovative initiatives in the pipeline
*Percentage is of those that use the metric as a measurement for innovation © 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Product / service innovation metrics Usage of Metric
Metric Used to * Reward
Effectiveness of the Metric
68%
76%
68%
46%
61%
88%
44%
53%
71%
39%
44%
76%
37%
48%
70%
Development of patentable ideas
24%
33%
77%
Number of approved patents
24%
26%
77%
Financial results of patented ideas
24%
30%
77%
Metrics for Measuring Innovation Level of external customer engagement, satisfaction, or retention Potential or actual revenue/profit of innovative initiatives Quality/value of innovative initiatives in the pipeline Number of innovative initiatives implemented Number of innovative initiatives in the pipeline
*Percentage is of those that use the metric as a measurement for innovation
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Question 2 Which reward program most effectively encourages innovation? 1.
Incentives: innovation focused
2.
Incentives: include innovation
3.
Smaller periodic spot awards
4.
Non-financial recognition
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Effectiveness of reward programs in encouraging innovation Reward Program Used Promotional consideration Bonuses or incentives Non-financial recognition Spot cash Base-pay or merit increases Rewarding for patentable ideas Rewarding for patentable ideas and patents obtained Equity awards
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
Usage 67% 62% 61% 60% 37% 31% 28% 20%
Effectiveness 53% 73% 66% 59% 50% 71% 67% 65%
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Particularly effective programs Annual incentives and bonuses
Annual incentives and bonuses
“Our Share our Savings Program-employees make suggestions for cost saving improvements and if implemented they are awarded a cash bonus.” (Traditional Suggestion Program)
Spot awards
“Upton Bonus (after Upton Sinclair): cash or vacation bonus given to employees who demonstrate unconventional application of expertise to come up with new services, processes, or clients.”
Non-financial rewards
“If an employee develops an idea, the company provides marketing support & the product becomes theirs to own & take accountability for. Employees feel like product owners.”
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Question 3 How will your company invest in innovation? 1. More: in new programs
2. More: in existing programs 3. Same: keep current programs 4. Less: scaling back programs
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Future focus on encouraging innovation
Increasing the current level of innovation investment and development (56%)
Maintaining the current level of innovation investment and development (41%)
Decreasing the current level of innovation investment and development (3%)
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Specific future focus areas Half of respondents said they are currently developing a reward strategy or program to encourage innovation
The other half mentioned greater usage, adoption and/or retooling of:
Incentive and bonus programs
Spot bonus rewards
Non-financial / recognition awards
Talent management programs emphasizing innovation/collaboration
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Conclusion and recommendations
Rewarding innovation The performance model and desired work culture should drive the design of the reward program as it relates to innovation
Performance measures should be balanced between:
Hard (e.g., financial results) & soft (e.g., behaviors, perceptions) metrics
Process, product, service innovation
Short-term and long-term objectives
Individual, team and corporate objectives
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Rewarding innovation
(con’t)
Innovation cultural attributes – includes experimentation, interaction, collaboration, time to play, tolerance for failure Rewarding innovation is about signaling priorities and reinforcing performance via multiple rewards (i.e., financial and non-financial) It is easier to develop rewards that encourage process improvement than those that stimulate/reinforce breakthrough ideas or risk taking
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
Rewarding innovation
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(con’t)
Spot awards 1. Align your recognition program with 3. Use recognition insights for culture & core values talent management 2. Gain executive participation and 4. Invest in the program to get an ROI accountability 5. Open it up – let everyone recognize everyone Source: The Business Impact of Recognition Systems (Hay Group, Globoforce, 2013)
Management / professional plans Innovation is an increasingly used metric within existing plans R&D and innovation COE’s often have unique incentive plans focused on more direct measures (e.g., patents) Scanlon / Gainsharing plans Productivity improvement plans – focus on process innovation Formal employee engagement process Rigorous evaluation and implementation of suggested improvements Research demonstrates these plans are effective © 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Implementing & sustaining reward programs Effective reward programs are more about effective implementation than superior design
Effective communication, ongoing engagement of employees, etc.,
Leveraging the value of total rewards via the role of line managers
Ongoing monitoring and measurement of reward ROI to ensure the organization is optimizing its reward spend
Quantitative / qualitative measures
Refining reward and performance programs based on assessment
Source: Reward Next Practices (Hay Group, D. Scott, 2013) © 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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Thoughts, comments, or questions?
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Presenters Tom McMullen Hay Group Chicago
[email protected] +1.312.228.1848 Dow Scott, Ph.D. Institute of Human Resources and Employment Relations Loyola University Chicago
[email protected] +1.312.915.6597 Erik Larson Hay Group Chicago
[email protected] +1.312.228.1827
© 2015 Hay Group. All rights reserved; Dow Scott, PDII, LLC
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