By Claire West

The most likely danger currently facing organisations in pay terms is not that their bonus schemes are encouraging risky behaviour. Instead, almost 300 HR professionals identify poor communication of reward as the most common threat to organisational performance, in a survey commissioned by the Chartered Institute of Personnel and Development (CIPD).

Despite the media and regulatory spotlight on the dangers posed by bonuses around encouraging poor behaviour and performance, the CIPD survey finds bigger concerns around overall pay budgets failing to deliver improved performance. Money is being wasted because poor communication of pay and reward means budgets are being spent without anyone understanding what they and their teams are being rewarded for.

The survey has also identified the impact on employee engagement of pay freezes, cuts in employee benefits and restructuring of reward packages as another key area of concern. The findings will feed into a report, Managing Reward Risks: An Integrated Approach, to be published in September, which will help HR professionals to identify and manage the various risks around reward.

Worryingly, only a small minority (17%) of respondents believe that their organisation is prepared to meet the reward risks identified in the survey.

Those most common areas of concern are:

1 - Poor communication of reward leading to poor organisational performance

2 - Inability to adapt reward policies and practices to the changing business environment

3 - Reward failing to engage employees

4 - Reward failing to attract key talent

5 - Ineffective reward strategy causing poor employee relations

6 - Poor employee understanding of reward

7 - Line management reward capability — not being able to link pay and employee performance or communicate what is being rewarded and why

8 — Employees not perceiving reward as fair

9 — That bonuses and incentives do not motivate

10 - How people are rewarded not supporting the business strategy

The survey also reveals that risks associated with rewarding employees are becoming more of a threat and need greater thought in the current recessionary climate. Increasingly, attention is going to be focused on the risks around cash-flow management, pension costs and investment strategy management. Other increasing threats are the change management issues associated with evolving policies in these areas and the resulting risk of reductions in levels of employee engagement.

The top ten risks predicted to grow over the coming year:

1 - Inability to adapt reward policies and practices to the changing business environment

2 — Pension investment strategy returns not meeting expectations

3 — Pension cost management — organisations unable to meet increasing costs associated with providing an employee pension scheme

4 - Poor communication of reward leading to poor organisational performance

5 - Reward failing to engage employees

6 — Ineffective reward strategy causing poor employee relations

7 — Legislative change leading to more rules and red tape

8 — Poor employee understanding of reward

9 — Organisational cash flow — not having the money to meet reward commitments

10 — Failing to comply with regulatory requirements

Charles Cotton, Reward Adviser, CIPD comments:

“Far from being a source of competitive advantage, many of our respondents are worried that their organisation’s approach to reward is so unresponsive it could act like an anchor and drag it below the current turbulent economic waters.

“2010 is certainly going to be a very tough year with the key reward challenges being around dealing with pension commitments, as well as looking at changing the wider approach to reward, communicating this to employees and keeping them engaged.”

The report’s author, Jonathan Chapman, of Cranfield School of Management also comments:

“While our research identifies that reward risks are increasing and practitioners are struggling to manage them, we have uncovered successful examples of organisations getting on top of these threats and dealing with them effectively. HR professionals are beginning to respond to the increasing reward challenges through proactive assessment of their reward strategy and systems for risk to ensure they avoid unnecessary reward surprises”.