Using HRM incentives for performance
The ESE offers a large range of education programmes. In addition to the bachelor and master programmes, students at ESE can also study at Tinbergen Institute and ERIM as well as do a post initial master. In addition, ESE employees also offer, among other options, minors and honours classes that are given in cooperation with external parties, education modules for the Duisenberg School of Finance (DFS), executive courses, and courses as part of post-academic education. All these efforts reflect the ambition of the ESE to guarantee top quality and wide-scope education customised to the field of economics.
To ensure that an individual performs on a level that matches the ambition of the School, one can utilise a number of HRM-incentives. Although the intention is not to belittle immaterial forms of encouragement, this memorandum is not about a slap on the shoulder and a bouquet of flowers or a crate of wine. It concerns forms of substantive rewards. A material reward can serve several objectives:
- It can be indicative of the market value of a certain type of work.
- It provides a base for compensation for performed work.
- It provides stimulation and gives signals from an HR and organisational strategic perspective because it clarifies what the organisation expects of its employees.
- It works as an allocation mechanism. Rewards can lead to situations in which employees with certain competencies and productivity are justifiably rewarded, also by comparison to each other.
Differential rewards can be used both as an instrument for attracting employees and as an instrument for stimulating current employees to deliver certain performances and to reward them for particular performances. This memorandum deals with both aspects.
a. Attracting new employees
From a perspective of competitive considerations, it might be necessary to work with differential rewards when it comes to certain groups or positions.
We apply this system of rewards for example when we want to attract assistant professors. To one candidate we might offer a tenure track (which includes a permanent position on an associate professor level if a certain high performance level is met which has been agreed on in advance). Other candidates have to wait to see whether a place in the department is available in the long-term. The fact of whether the individual has a clear market value usually determines whether he/she is offered a tenure track. The market value can be reflected, for example, by the fact that the individual has already performed far better at his/her function level than what would normally be expected in the given function (for example P*/P or AA/A publications already during the doctoral phase), the individual might be approached by other reputable institutes, and/or this might be a case of an overstrained market for that particular professional field.
We hardly apply this system at the moment to other function categories. Nevertheless: if the School wants to attract an excellent professor in finance, for example, then the School would have to pay above the current (maximum) salary level (and perhaps more than the 10% labour market allowance that is commonly used nowadays!). Funds, which are received via DSF as well as money from sponsor activities, can be deployed for such purposes. The preliminary question is whether the ESE is prepared to abandon certain components in the current wages structure in order to strengthen the aim to develop into one of the top institutions in Europe and the world (in certain professions). As far as the Management Team and the department directors are concerned, this issue should be answered positively and it should be followed by a discussion with the Executive Board – whether or not with the specific approval of the Executive Board for each individual case– to offer extra remuneration for certain positions, which is above the 10% labour market allowance.
b. Employing incentives and rewards for the current staff
Suppose that football players get a bonus for every goal that they score. Will that result in more goal points? That’s doubtful. A striker will try to kick the ball into the goal by himself rather than pass it on to his teammate, even though the other player is perhaps in a better position to score a goal.
The basic premise of the HRM policy for current employees is that some individuals will contribute to a particular activity of the ESE while others will do so for another type of ESE activity. Within this philosophy, all employees (Academic Staff and Support Staff alike) contribute in one way or another towards the realisation of the School’s ambition. Therefore they determine jointly the total income picture of the ESE. Out of this income of course, the ESE first has to cover its costs (including salaries). Afterwards the management examines which employees – bearing in mind their job level and its related desired/expected efforts (!) – have done more than can be expected of them and whether a monetary reward/incentive can be linked to this supplementary performance.
In a discussion about rewards and incentives via the HRM policy, it is important to be aware of the fact that a financial reward is only one of the potential incentives. The conduct of an academic staff member is often also motivated (and certainly in the long-term) by possibilities for self-development, career development, acquiring inspiration, a chance to attract good PhD students, obtaining data, cooperating with other academics, creating free or research time, etc. The same applies to the Support Staff, who are stimulated via courses and possibilities for career development to do more than what is strictly defined within their tasks.
From this point of view, teaching a master honours class or teaching in the Duisenberg School of Finance, Erasmus Academy, TI and/or ERIM is already a positive incentive in itself: employees work with top students, strengthen contacts with top academics from other institutes and see their reputation enhance as a result of their efforts. However, if the particular employees carry out extra work activities (thus are not compensated because they are not required to teach or teach less within the ESE) and these employees have made certain efforts, while this is not defined within the nature of their position, then a form of pay supplement [1] for individual remuneration can be considered. It should not make a difference whether the performance is via the Duisenberg School of Finance or an honours class that was given, or via an extra effort in for example B1 or B2. An explicit choice was made within this system not to reward special activities differently on a general level, but rather to reward the individual for his/her overall performance as related to his/her level and position in the organisation.
When dividing the activities among the employees and deciding whether an individual has performed above average, we have to expressly take into account the fact that a great deal of travelling time might be connected with the activity and/or that the time slots in which the tasks have to be carried out fall on irregular business hours. For example, to lecture in DSF courses and to do radio and TV interviews, it is necessary to travel 3 to 4 hours per activity. This is in addition to the fact that these kind of activities regularly require working in the evening or in the weekend.
The rule that applies in general is that differential rewards are effective only if a number of clear preconditions are met.
- The evaluation basis: If activities such as master honours class, work activities for the DSF or Erasmus Academy (but also for TI and ERIM!), important publicity activities such as radio and TV interviews, etc. are undertaken by employees, then already at that point it should be clear to the executive management that these activities may be viewed as exceptional performance, which (in relationship to the rest of the tasks of the individual and his/her rank) may be considered as a plausible reason for a supplementary reward. This also gives the management the possibility to ask people to undertake such activities (partly) in addition to their regular activities.
- Management must weigh the performance so that it can obtain an overall picture of the employee. To ensure that ultimately the same evaluation system is used for all the performances in the entire ESE (and that the system of differential rewards remains manageable!), the dean and his P&O staff will perform an overall examination of the performances and the recommended rewards, before the management actually announces to the employee in question that he/she will be receiving an extra reward.
- The incentives employed must be adequate. Studies show that a reward, which is too limited (flexible or permanent) or given at a too low frequency, is not effective enough for stimulating the employees in the long term. In addition, the interval of time between the performance and the feedback (reward) should not be too long.
- Furthermore, it is important to realise that the factor of unpredictability with regard to the reward determines the effect of the feedback. If someone receives a bonus each year, then this individual expects it too. The reward thus is no longer considered something special and in the event that it is not granted, the individual might even perceive this situation as an insult. Therefore, giving an incentive occasionally results in a more positive conduct than in the case of an on-going remuneration. And finally, the value of the reward increases as the team in which the individual is involved thinks it is justified. The less clarity about why one person receives a higher reward than another member of the team, the lower its acceptance level.
The performance interview at the end of the year is a good opportunity to ‘draw up the balance sheet’ with regard to performances considered more than average. This is the chance to examine how someone has performed on the whole – given the function and its expectation pattern – and in relation to this, consider which additional rewards could be appropriate.
- In the event of an above average effort, a reward should be in line with the expectations or it should be another type of reward such as a course, trip abroad, etc. (variable reward) that is appropriate for the individual. In this case, we would have to make sure that all persons who have performed above average are rewarded proportionately for their extra efforts. Whether the reward is related to activities carried out for example the DSF, regular programmes or otherwise may not influence the level of reward bestowed on the individual.
- If someone (usually in a lower rank) utilises competencies that belong to a higher rank (for example, recruiting 2nd and 3rd flow of funds), then the reward can be in the form of an accelerated promotion in the scale or in a promotion to a higher rank (a fixed remuneration).
- If cooperation is what has actually led to a collective performance, then in addition to the aforementioned rewards, publicly disclosing the achievement (and therefore making it visible to everyone) is an excellent means to encourage someone to continue the engaging performance in the future. The reward (theatre tickets, wine, financial remuneration to be allocated for a certain activity/goal) can also be granted on a team level.
- In the event that the ESE wants to retain a certain talented individual, it has to consider what the appropriate incentive might be at that point. At times, providing enough funds for research might be sufficient; at other times, the prospect of a sabbatical, sometimes designating a particular title (such as a Desiderius Chair), or… In short, a customised incentive would have to be conceived at that particular point.
Following consultations with the directors of the departments and the Personnel Council within the School’s Council, the dean has decided the following:
1. A more systematic method of differentiated rewards will be employed for exceptional performance among the current employees. This will be related to the performance interviews.
- An explicit choice was made within this system not to reward special activities differently on a general level, but rather to reward the individual for his/her overall performance as related to his/her level and position in the organisation.
- Within the framework of the performance interviews, the management shall make proposals for exceptional rewards and the dean shall examine these proposals for consistency and clarity.
- When determining exceptional performance, we also take into account above-the-normal travelling times in order to be able to carry out an activity considered important for the ESE.
2. The HRM policy utilises a differential system of incentives and rewards for exceptional performances in which in principle:
- In the case of an above average effort, a choice is made to a pay supplement (variable remuneration) or remunerate in another way, which is in line with the needs of an employee who deserves ‘something extra’ for his/her efforts [2].
- In the case of utilising competencies that belong to a higher rank than the rank of that particular individual, the incentive used is an accelerated promotion in scale or in a promotion to a higher rank (a fixed remuneration).
- In the case of a collective performance, in addition to the aforementioned rewards, the achievement is publicly disclosed and also collectively rewarded.
Formulated by the dean of the ESE on 15 January 2009
