Link between salary and seniority should be time-limited

That is what Professor Xavier Baeten, researcher Saïd Loyens (Vlerick Business School) and Bert De Greve (Hudson) propose in the white paper 'Future House of Rewards' that offers a fresh perspective on the future house of rewards. They have made recommendations for a more strategic reward policy that aligns the economic and social context with the wage setting system.

The research was conducted at the Centre for Excellence in Strategic Rewards at Vlerick Business School in collaboration with Hudson, which has a Chair at Vlerick on ‘Managing Talent of the Future’. The recommendations are based on a synthesis of academic research and an international comparative study, and attention is also paid to practical implementation.

How are wages set in other European countries?

Figures from the AWVN, the largest employers' association in the Netherlands, show that the difference between the minimum and maximum salaries for comparable roles is much smaller than in Belgium. 

Xavier Baeten explains: ”Depending on the level of the role, they limit the number of steps for wage rises within one salary band from three to ten. Secondly, wage rises in the Netherlands more often depend on a combination of years of service and individual performances. Thirdly, some businesses use individual, variable rewards, when employees have performed outstandingly or have reached their salary band ceiling. Finally, a number of businesses give their employers a share of the profit as a form of collective and performance-based wage rise.”

In Sweden, politicians and employees decided to end the link between wages and years of service in the late 1980s. “The basis is individual performance. What's interesting is that years of service play no role at all,” says Xavier Baeten.

Finally, in the United Kingdom, the 2010 Equality Act offers a legal framework to stop age-based discrimination. British employers are not allowed to link wage rises to the number of years' worked. Exceptions to this are in the first five working years, or when an employer can objectively show that such a link is necessary because of specific business needs. The salary levels of the large companies listed on the FTSE100 are established in accordance with the function group and the level of competence required. There are only three steps per salary band.

The foundations of the future house of rewards

“Simply copying what other countries are doing is not the solution,” according to Xavier Baeten and Saïd Loyens. “Therefore we have combined these insights with results from academic research to produce specific and well-founded recommendations for Belgium. In concrete terms, we have drawn up three pillars.”

1/ Experience determines the fixed rewards during the first years in the role

• This is simple, easy to apply and transparent. Furthermore, experience during the first years in a role is a strong indicator of future performance.
• A ceiling is necessary. An unchecked link between experience and the level of fixed rewards means an easy ride for lower-performing employees.
• A salary increase on the basis of experience needs to be conditional upon a minimally acceptable performance level.

2/ Individual and collective performances

• Research shows the positive effect of financial incentives on performance (both quantitative and qualitative). This can be done in practice through ‘merit pay’ (i.e. performance-based wage rises) and via a variable reward system. The latter is easier to achieve and is also more effective. An annual wage rise of 5% is the threshold to have sufficient impact on performance.
• Individual and collective bonuses also have advantages. The stimulating effect of an individual bonus has longer after-effects, while a collective bonus (e.g. share of the profit) can lead to greater loyalty, lower staff turnover and greater willingness to work hard.

3/ Customised solutions via flexible rewards

Flexible rewards can allow the needs of a very diverse, changing and older working population to be met.

• The focus is not so much financial, but is based on four strategic dimensions: time, pension, mobility, and training and development.
• Furthermore, offering a choice generates employee satisfaction and ensures a better insight into what exactly the benefits are.
• There can also be a positive strategic business effect (e.g. increasing the attractiveness of an employer).

“Of course, the aim is to introduce this new payment system in practice,” clarifies Xavier Baeten. “To make this happen, Hudson has formulated a number of suggestions and focal points, based on figures and its extensive practical experience.”

“Organisations can focus more on implementing a reward strategy, and within the proposed future house of rewards can still make many of their own decisions. The most important investment is to implement an accepted and efficient performance management system that is the basis for both individual and collective rewards. In addition, the new reward model is a lever for strengthening a participatory business culture, which ensures sustainable business results,” explains Bert De Greve, Associate Director at Hudson. “Furthermore, extensive individual and business-wide communication is an absolute necessity, so that employees fully understand the new house of rewards.”

Finally, Vlerick Business School and Hudson have identified another challenge for the government: they have flagged up the need to simplify the (para)fiscality of rewards, while at the same time making them more flexible. For example, it should be possible for an employer to make additional deposits from a bonus into a group insurance scheme, and that this is a favourable regime from a (para)fiscal perspective. Of course, the introduction of such flexibility must respect the collective labour agreements of the related businesses and sectors.