A systematic approach to reward risk identification]

Citation

Chapman, J. and Cotton, C. (2010), "A systematic approach to reward risk identification]", Strategic HR Review, Vol. 9 No. 2. https://doi.org/10.1108/shr.2010.37209bab.008

A systematic approach to reward risk identification]

Article Type: Rewards From: Strategic HR Review, Volume 9, Issue 2

Case studies and research papers that demonstrate best practice in rewards

Jonathan Chapman and Charles CottonJonathan Chapman works at Cranfield School of Management and Charles Cotton is based at the CIPD.

Since the collapse of Lehman Brothers in September 2008, the world’s media and political attention has been focused on the role remuneration structures in the financial services sector played in encouraging the excessive risk taking that occurred. Reward and risk have become almost inextricably linked together in the minds of both HR practitioners and HR commentators. But looking beyond the financial crisis and the immediate issue being faced in the banking sector of bonus scheme reform, how should reward professionals (and in fact all HR professionals) go about identifying risks in their reward strategies that need managing.

In June 2009 the Chartered Institute of Personnel and Development (CIPD) commissioned research to examine this issue and identify good practice in the field (CIPD, 2009). Through interviews and workshops with 23 risk managers, consultants, regulators and reward practitioners, supported by quantitative data from a survey of over 250 reward professionals, the research developed a range of tools to support reward professionals in managing reward risks. This article reports on one aspect of the research – reward risk identification.

What the research showed was that significant work was underway by organizations, often led by their reward teams, to manage risks arising from how they reward their employees. However, only 17 percent of organizations surveyed felt well equipped to manage reward strategy risks. What emerged was that reward risk management would be more effective if it was carried out proactively and systematically. The following models and processes can help identify the reward risks to which an organization is exposed.

1. Understanding reward risk management

Risk management is defined as the “coordinated activities to direct and control an organization with regard to risk” (AIRMIC et al., 2002). The research showed that it consists of three distinct phases as shown in Figure 1.

2. Reviewing the reward risk framework

The research identified 39 risks applying directly to reward strategy, systems and practices, clustered into seven reward risk groups. These risk groups are defined in Table I with the 39 risks identified shown in Table II. Considerations of each of these risk groups when taking both reward design and implementation decisions will help ensure that reward risk is managed proactively.

3. Identifying reward risk in your organization

While the generic risk maps developed through the research are clearly a helpful tool in identifying relevant reward risks it is important that the map acts as a prompt for discussion rather than a one size fits all solution to reward risk identification. It is important that reward professionals use a range of sources of intelligence to identify risks that may be pertinent to their reward strategy. This should be done by engaging with a range of functions and key individuals to get their intelligence on what might happen and to involve them in brainstorming activities drawing on their particular expertise. Key functions to engage with in identifying reward risks are internal audit, compliance, risk management, unions, finance, HR business partners and line managers. In addition, reward risks can be identified through review of management information to help identify emerging trends and concerns. Key sources that will provide insight to reward risks are:

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  Organizational and HR risk maps.

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  Exit interviews.

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  Equal pay audit results.

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  Management accounts.

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  Business forecasts.

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  Balance scorecard results.

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  Service level reports from suppliers (e.g. payroll, benefits, IT systems).

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  HR management information.

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  Press reports.

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  Academic research.

4. Building competencies

There is no definitive list of the skills, knowledge and competencies required by reward professionals to successfully pursue effective reward risk identification. However, the research identified a number of competencies from the CIPD’s HR Profession Map (www.cipd.co.uk/hr-profession-map) that are felt to be particularly relevant in adopting a risk-based approach:

1. 1.

   Curiosity:

2. 2.
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     Active interest in the internal and external environment.

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     Open-minded with a bias to learn and enquire.

3. 3.

   Collaborative working:

4. 4.
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     Works effectively and inclusively with colleagues.

5. 5.

   Courage to challenge:

6. 6.
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     Shows courage and confidence to speak up, challenge others when faced with resistance.

5. Pulling it all together

There are clear steps that reward practitioners and their HR colleagues can take to more effectively identify the risks that organizations face when managing their reward practices. A simple reward risk management process is shown in Figure 2. By adopting this systematic approach to reward risk identification you are more likely to identify the risk that could really damage your reward strategy.

About the authors

Jonathan Chapman has over 15 years’ experience in the financial services industry, having worked for the Financial Services Authority (FSA) as a banking and securities regulator, risk manager and more recently as head of organizational development, reward and industry training, and director of financial capability. Prior to this he worked for the Bank of England and for HSBC Investment Bank. He now works at Cranfield School of Management where he is conducting research into reward strategies in the financial services industry and delivering a range of executive education programmes, alongside carrying out consulting. Jonathan Chapman can be contacted at: Jonathan.chapman@cranfield.ac.uk

Charles Cotton is the CIPD’s reward expert. He has worked with some of the UK’s leading private, public and voluntary sector organizations to create a range of good practice reward products and diagnostic tools for HR practitioners. He manages the CIPD’s annual reward survey, which shows the current trends and developments in UK pay and benefit practice. He is also responsible for the CIPD’s public policy work in the area of reward and has given evidence to select committees on banking pay and MPs’ expenses as well responding to various consultations.