RESPONSIBLE REWARD vs. RESPONSIBLE PAY – February 2020
As Responsible Reward is attracting more and more interest from both investors and corporates, articles and videos are being produced on the topic. I recently came across one which I felt was misleading. As I believe the concept of Responsible Reward is so important to responsible businesses and investments, and this is my area of specialisation, I would like to address a misconception.
I’ll explain what Responsible Reward is, how the concept came about, and how it is different from Responsible Pay (also known as Fair Pay).
What is Responsible Reward?
Responsible Reward is not the same as Responsible Pay.
In my 30 year career as a Reward practitioner, I had never come across the terminology of ‘Responsible Reward’.
Responsible Reward is a term that I introduced in 2018 in my well-received report, Responsible Reward: fulfil your Environment, Social and Governance (ESG) promises through performance and pay, endorsed by Jean-Pascal Gond, CSR Professor at Cass Business School, London.
The concept came to me three years ago, when I researched the UN-supported Principles for Responsible Investment (UNPRI), and its executive pay recommendations.
By signing the UNPRI principles, investors are expected to request their portfolio companies to define and embed ESG material risks into their executive pay structures.
When I conducted research for my report, I found a few academic papers on related topics to Responsible Reward. Having personally attracted much attention on the subject across continents, I’ve collected, and people have sent me their articles about the topic. The oldest article I could find was by Rob Lake in 2005 which Rob wrote from an investor viewpoint. Very little has been written so far on Responsible Reward by reward practitioners.
My definition of Responsible Reward is the intersection of responsible investment and reward through the integration of ESG measures, also known as extra-financial measures, alongside financial measures into incentive pay structures.
It is about linking your sustainability and your remuneration strategies. It looks at how you do business, what ESG KPIs you have determined, and ensuring they’re appropriately reflected in your annual and long term incentives.
It’s important to note that Responsible Reward looks at all three pillars of the ESG factors, not just the Social factor (‘S’), which is the only factor measured in Responsible Pay.
Responsible Reward aligns your Employer Value Proposition (EVP) to the United Nations 17 Sustainable Development Goals (SDGs), mapping your reward offering against the Goals. For example, your benefits strategy would be aligned to SDG #3 ‘Good health and well-being’ which means different things to different firms, thus creating your unique EVP. It may also vary from country to country for a given firm, depending on local challenges, expectations and practices.
A Responsible Reward approach incentivises and recognises the progress and results a firm is making in the achievement of its sustainability agenda. It also carries penalties where a senior individual or a whole business has failed to do so.
I purposely did not trademark ‘Responsible Reward’ for two reasons. Firstly, because I believe it is a catalyst in achieving the SDGs. I want the concept of Responsible Reward to flow freely globally because of the positive impact I know it will have.
Secondly, the term ‘reward’ is also referred to as ‘remuneration’ or ‘compensation’ and they can be used interchangeably.
I have, however, trademarked my associated 5-step E.A.R.T.H.® (Evaluate current situation, Ascertain targets, Realise changes, Tell the story, and Help monitor progress and results) methodology which I use to integrate Responsible Reward into my clients’ operations.
What is Responsible Pay (or Fair Pay)?
Responsible Pay is focused mainly on the ‘S’ (Social) factor of the ESG measures. The ‘S’ factor has two angles: the external communities with whom a business interacts, e.g. clients, suppliers, business partners, physical and digital communities. And the internal community, i.e. its employee population.
Responsible Pay focuses on employees, usually directly employed, and its remit may also extend to recruitment suppliers.
It ensures employees receive at least the national minimum wage and ideally the Living Wage. It also takes into account Equal Pay, the newly required Gender Pay Gap, and CEO: employee pay ratios. Pay inequalities such as the Fat Cat Ratio, where a CEO earns in 3 days what the average employee earns in a year are high on the agenda of investors as they constrict societal progress and development.
In a nutshell, Responsible Pay links mainly to SDG goals #5 (Gender equality) and #10 (Reduced inequalities).
Responsible Reward is a much broader concept than Responsible Pay. In fact, Responsible Pay is embedded into Responsible Reward.
It’s necessary to look at all three ESG pillars at the same time, not just a portion of the Social pillar to become an investor and an employer of choice.
If you want to stand out from the competition, attract more business and talent to help achieve global goals, then let’s have a conversation. Email me at email@example.com
Corinne Carr is an independent remuneration consultant and founder of PeopleNet Ltd. Her Responsible Reward: how to fulfil your environmental, social and governance promises through performance and pay report outlines her proprietary E.A.R.T.H.® methodology (Evaluate, Ascertain, Realise, Tell, and Help). For more on responsible reward, watch her 2-minute explainer video.