(Don’t) Show me the money


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(Don’t) Show me the money.
Thoughts from the field about building effective remuneration policies. http://www.pivotsoftware.com/ebook/

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(Don’t) Show me the money

  1. 1. www.pivotsoftware.com effective remuneration policies (Don’t) Show me the money
  2. 2. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 1 Disclaimer This document is intended as a guide only. Readers are advised that before acting on any matter arising from this document, they should consult Pivot Software. © 2010 Pivot Software Limited. All rights reserved.
  3. 3. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 2 (Don’t) Show me the money Thoughts from the field about building effective remuneration policies Contents (Don’t) Show me the money ....................................................................................................2 It’s not just about the money...................................................................................................3 Rem’s changing face .............................................................................................................4 Don’t be one-dimensional .......................................................................................................7 Dimension #1: Get philosophical ............................................................................................. 11 Dimension #2: External relativity ............................................................................................ 14 Dimension #3: The tough balance of internal equity ..................................................................... 18 Dimension #4: The individual ................................................................................................. 21 Remuneration strategy policy and template................................................................................ 24 Glossary .......................................................................................................................... 26 About Pivot Software........................................................................................................... 28
  4. 4. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 3 It’s not just about the money If your annual or bi-annual remuneration (salary) reviews were just about money the job would be easy. The human resource (HR) team could pack up and go home early. The reality is remuneration is far more complicated and emotionally fraught than a simple money equation. External market factors, internal relativities, company strategy, government regulations, company location or social standing and personal values are just some of the many variables that need to be considered and traded-off in the typical salary review. To help, we’ve developed a model we call “Remuneration in Four Dimensions”. It might sound a bit sci-fi but it is mainly built from common sense and sound practice we’ve seen in 20 years of being involved with Rem processes at big banks, government departments, insurance companies, energy companies and engineering practices in Australia and New Zealand. Remuneration: salary, pay, moolah, dosh, coin, lucre, wages, comp. There are lots of names for it. To keep it simple we just call it ‘Rem’.
  5. 5. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 4 Rem’s changing face Big hair and simple Rem Remember the 1980s? We do. Apart from disco and big hair, remuneration was also a lot simpler. Jobs were typically in a box - well defined and very precise. There was limited recognition of an individual’s contribution. People sought an employment deal based on security, stability and a paternal attitude from their employer. Negotiating over pay and conditions was left to the union and the employer. The remuneration approach was pretty simple – pay and benefits. An internal focus, particularly internal relativities, defined the way compensation was set. Employees could typically only talk to their colleagues about pay levels and there was little external data available to them. Labour was a lot less mobile – taking your skills offshore was relatively uncommon. Everyone was paid the same for doing the same work, even though there were outstanding performers and under achievers. The battle for talent didn’t really exist; most organisations either had a programme of developing internal talent or it was a seniority based on service model. The new reality Jobs today are more of a balloon than a box; they shift as economies change and company structures morph. Individual efforts are far more valued and recognised. Security comes from employability rather than paternal protection. Organisations have a much more holistic view of the whole employment relationship and its “value”. They also benchmark salaries against the external market, information that is typically available to some degree to employees through advertising, chats with mates and peers in other organisations. As much as employers may
  6. 6. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 5 wish to “threaten” by stating that your pay may not be discussed with others, ‘loose lips’ are common practice. Even with the recent global recession, the labour market power is shifting. In 8-10 years it is estimated that the world’s labour market will be 10% undersupplied. This means there will be more jobs than people to do them, as our population is living longer and the world population is growing, so we need more of everything but our active workforce as an overall percentage is diminishing. This puts the power back in the hands of the employee and employers need to be armed and ready for the discussions. In this infinitely more complex Rem landscape there is more pressure on organisations to have solid frameworks in place. Want some proof? A recent study1 from global consulting company Mercer suggests that inconsistency in adhering to pay principles has a dramatic impact on corporate costs and staff retention risks. The inconsistency pivots around the contribution of line managers, who are often less discriminatory in distributing available pay increases than their business would like them to be. This commonly stems from a lack of clarity on the guiding principles for making awards and a natural tendency for them to ‘generously’ reward mediocre performance (leaving them with insufficient budget to recognise top performance). 1 Source: Mercer website, published March 2010
  7. 7. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 6 Employees are also confused by the mixed messages they get from the company and their manager, ultimately preferring to trust the grapevine for reliable insights into the company’s pay principles. According to Chris Johnson, Head of Mercer’s Human Capital Business, “Our research shows that companies spend nearly 40% of their revenues on employee pay and yet they fail to deliver their pay policies effectively. Initial data suggests that this leads companies to waste nearly $NZ 8800 per employee, or nearly 8% of their payroll. Employees know that some of their colleagues are over-paid and others are underpaid: this undermines high performance and employee engagement.”
  8. 8. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 7 Don’t be one-dimensional ‘Holistic’ might sound fluffy, but a multi-faceted approach to Rem is a key to success. A one-dimensional, ‘show me the money’ policy is shown to be ineffective and can kill your hopes of an engaged, productive culture. In a study undertaken by global consulting firm Hewitt it was shown employees were willing to trade-off 15- 20% of their salary for other job benefits. That means you need to get the rest of the Rem approach right to attract and retain the right employees. The importance of having your remuneration process right was underlined in the recent “Best Employer Study”2 from global consulting firm Hewitt. It found two key remuneration factors that impacted on employee engagement. Hewitt “Best Employer study”: 1. Line managers had a good understanding of the remuneration process in their organisation and could explain that well to staff. The research showed that this correlated strongly with a positive perception of pay amongst employees. 2 Hewitt Best Employers in Australia and New Zealand 2008
  9. 9. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 8 Do Not Underestimate the Importance of Manager Capability 0 10 20 30 40 50 60 70 80 90 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% 90%+ Positive Perception of Pay Iamwellequippedtoexplainour rewardstructuretoemployees Manager 2. There was a greater differentiation of rewards to people based on their performance. In other words if the remuneration policy is well understood and consistently implemented staff are very happy about people being paid on performance. The multiple dimensions: Staff make all sorts of trade-offs when choosing a job. Money is one of the factors, but it can only balance out the positive and negatives if they are not too extreme. For example:
  10. 10. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 9 Element of employment deal Is it this? (+) Or this? (-) Brand Proud and strong in the community Employees would rather not say the name of your company when asked Industry Socially acceptable Ethically has poor public perception Working conditions Safe and pleasant Risk- filled; dirty; noisy Other benefits Discounted product Flexible start/end times Zilch! Team environment Socialising Friends at work No natural teamwork
  11. 11. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 10 Holistic view: Taking a holistic view of Rem is how you build a strong employment offer and improve employee engagement. And that’s why we have developed 4D Rem, a multi-dimensional way of looking at the Rem process.
  12. 12. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 11 Dimension #1: Get philosophical A lot of organisations talk about “flexibility” when it comes to rem. You can’t have flexibility without a strong base though. Flexibility can’t mean you just shift the goalposts whenever you want to retain an employee – it must be built on some solid and widely accepted principles. Otherwise the credibility of your entire process will be undermined. Putting this foundation in place is mainly about being able to answer some key questions about the drivers of remuneration in your organisation. While fiscal constraints are the main policy guidelines to work within, they are not the only ones. For example, some organisations will automatically match remuneration to labour market shifts and/or the CPI (consumer price index). But that is too one dimensional and ignores many other factors. You need to think more broadly. Who are your stakeholders? That is, who has a legitimate interest in the manner and amount of remuneration your employees receive? The difference between a small, private company and a large government organisation is considerable. You can’t underestimate the effect on your reputation/brand of not dealing with this effectively.
  13. 13. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 12 Organisations sometimes underestimate the role of unions or other employee groups in their organisation. You need to factor how much influence they have in the salary review process, either directly or indirectly. Is this influence working for or against what you are trying to achieve as an organisation i.e. retention of the people that help you be successful balanced with what you can afford? What is your company’s retention policy? If a high performer threatens to leave for more money at a competitor, what are the accepted guidelines for managers? Unless you have a clear policy these things tend to be dealt in an ad hoc way, causing resentment. If you don’t have a policy here, the actual practice (what is occurring in real life), becomes your known policy very quickly. A related point is an understanding of where your organisational brand sits in the market. Some organisations need to pay high because their brand is not well known or negatively perceived e.g. tobacco companies. Do you need to pay a premium? The flip side is industries or sectors that are relatively “safe havens” in volatile economic cycles - e.g. local government or utilities. Pay does not necessarily have to match the “high flying” industries/sectors in the up- cycles, knowing that job security and even pay levels can drop in these sectors when the high flying turns in to “downhill dives”. Regulatory compliance also plays a part, especially with growing public disquiet over salaries in areas like finance and banking. For example there are the Australian Prudential Regulation Authority’s guidelines that frame several aspects of the connections between incentives, risk and organisational performance.
  14. 14. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 13 There is also your organisation’s strategic direction. Are you in growth mode, battling away in a sunset industry, trying to reinvent yourself, or is the business being prepared for sale? The workforce mix will need to change or be protected whatever the strategy, and your remuneration approach needs to follow suit. Finally, there is the big one. How much dosh does the organisation actually have? What are the budgetary guidelines that underpin all of those many line manager decisions? It is not just simply divide what’s there though – what is the organisation’s approach – significant rewards for high performers or more even-handed policy? No Rem strategy is the ultimate; it has to be designed for your organisation’s situation. While fiscal constraints are the main policy guidelines to work within, they are not the only ones. You need to think more broadly.
  15. 15. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 14 Dimension #2: External relativity Market relativity – some people may think this is the easy bit – get some “market data” from somewhere and that’s it! Simply plug in the numbers and you have what you need. However, relativity is not that easy or scientific. It is a mix of solid statistics and educated judgement. A mix of art and science. Simply determining where a job fits on a scale of New Zealand market relativities is not sufficient. There are so many variations across locations, industries and other trends that you can end up getting it really wrong.
  16. 16. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 15 Some organisations build a remuneration policy on the basis that jobs within their organisations are relative to any other in the country. Pay therefore should be matched to whatever the “average” is for that position. This is too simplistic. A more realistic picture is to understand where your industry/sector fits relative to national scales. The nature, scale and dynamics of different industries tends to result in them paying over or under the average for jobs, from small to large. The market in the widest sense is actually what every job in New Zealand is paid, and as an organisation you need to know what “part of that market” you want to consider your “target” to ensure competitiveness in attracting and retaining people. The reality is the market operates on several different levels and you need to know where your organisation and sector fits.
  17. 17. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 16 Fundamentally remuneration is about demand and supply, so finding the right “price” for your organisation’s labour is crucial. Relying solely on market data is not the way to achieve this optimal price. You need to factor in a broader picture – the four dimensional approach to remuneration. It is also important to remember that while the market data appears scientific, it is only the process of analysis that is scientific (if purchased from legitimate market survey providers). There is no market survey in New Zealand that has information on what every job in New Zealand is paid.
  18. 18. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 17 Market data is affected by many things:  The organisations that have agreed to share their data and their methodology for determining what are “big jobs” and what are “small jobs”;  The definition of remuneration used i.e. do you include benefits that the organisation offers, and how is the value of those benefits reflected in the survey;  How big the sample data is and is it a fair representation of your “target market”. There is no point in trying to compete for staff with a big city-based multi-national company in your sector when you largely recruit from a stable local market at the opposite end of the country. It is wise to use your own judgement in addition to the statistical analysis. Have you had trouble recruiting? Are people really leaving your organisation for better money or is it something else? It is wise to under-react if possible to market data until you are sure the issues are real and not perceived. You need to know this information of course, as your employees, especially the more mobile or smart ones, will have an idea from talking to friends, colleagues and reviewing data online. You need to have a clear view of relativity so managers can have good discussions during salary reviews. Relativity is not that easy or scientific. It is a mix of solid statistics and educated judgement. A mix of art and science.
  19. 19. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 18 Dimension #3: The tough balance of internal equity You need to be focussed on this because employees are concerned about it. They want to ensure they’re paid fairly compared with their co-workers and in comparison with the market. Creating a system where we can benchmark jobs internally and establish some remuneration ranges helps us do this. This also ensures it is not just negotiation skills that determine pay.
  20. 20. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 19 Market information is not enough for several reasons:  If you focus solely on external market rates and market pricing, you communicate the message that the organisation doesn’t control remuneration policy – the market does, and this can place your organisation and its people at risk. The extent to which your organisation’s profitability is affected by the labour input cost is important to understand, so you can determine the extent to which you have scope to react to labour market volatility.  In larger organisations you may have your own “market” within your own business where different job functions are paid at different pay rates, even though you may consider them to be peers within your business. You may need to match and measure jobs across the business and arrive at an organisational “pay rate” that considers the rate for each function and creates some middle ground that will keep both groups happy. This will encourage people to move and contribute to all business areas, while retaining valuable organisational knowledge and skills.  Market remuneration information doesn’t recognise variations in job content which are not significant in the marketplace but are significant to your particular organisation. This can be especially important in a role that holds significant knowledge that is critical to the organisation’s survival. Internal equity and external (or market) equity are interdependent - each one is as important as the other. Internal equity is about recognising the culture of your organisation and understanding how important pay relativity is to team “harmony”. Simply using the line of “we pay what the market pays” and then realising that internal perceptions of an individual’s value or otherwise to the organisation does not match what they are paid, can really affect how people interact with each other. This is a risk because it doesn’t matter how much you tell employees they must not talk about their pay – they do.
  21. 21. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 20 Typically internal equity is developed on the basis of a job evaluation or a “job matching” process. Methodologies around job evaluation are well developed and understood in most large organisations. Jobs are split into ‘bite sized’ pieces – skills, experience, accountability, staff, budgets managed etc. Then they are scored on a standardised model using a methodology like Hay. A hierarchy is built in the organisation which then helps work out relative pay categories. Sometimes organisations feel they have done enough to have this in place, but unless you have more granularities you can cause problems. Sound policies are needed on whether an organisation wants to pay high performing people more than low performing people in the same “size” job What is the organisation’s approach to this and how is it communicated during the salary review process? There are also other issues relevant to internal equity such as industry or company trends. It is not good business practice to pay above market rates for a job that the company won’t need in the short to medium term because of a strategy change, unless it is critical to retain existing incumbents until this strategy plays out. Equally a role critical to the organisation’s success, if the skills are hard to replace, may need to be paid very well as the down-time trying to replace the lost skills could be very expensive These things need to be well understood and must underlie the internal equity decision-making process. Employees want to ensure they’re paid fairly compared with their co-workers and in comparison with the market.
  22. 22. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 21 Dimension #4: The individual The last, critically important, dimension of building a sound remuneration strategy is focussing on the individual. This means having a strong understanding of your current and prospective employees. Why do they want to work for your organisation? What do you offer over and above salary and conditions - career credibility, security, positive community, location and so on? How do their values align with those of your organisation?
  23. 23. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 22 Values Employees drivers are not always the obvious, and can vary across age, gender and ethnicity. You need to have in place ways of understanding these drivers and how your remuneration policy can support them. Recent research has shown that if an employee is happy in every other aspect of their working life, pay has to be about 15-20% “wrong” before they will consider moving to a higher paying job. It makes good sense then to get pay ’about right’ and then do everything you can to take their mind off the money! For example, a simple “thank you” doesn’t cost anything. Researching some recognition initiatives is a good investment. Paying attention to the generation employees belong to is relevant. Much has been made of the challenges of managing the Generation Y demographic. Within your Rem policy you need to recognise that:
  24. 24. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 23  Money is important at different stages of our lives  What people want out of a job is different at different stages  More generations are in the workforce now than any other time in history – what motivates each of them is not just money Ethnicity is another important part of the values mix. For example team and family are very strong in some ethnicities. Some nationalities don’t like to separate out individual performance or to be put on individual pedestals. Personal values need to be taken into consideration. What does the company look like from an environmental standpoint; social standpoint – does it fit with individuals and what is important to them. Are there any ethical issues employees have to confront? What are an individual’s family needs? For example with work hours are company expectations consistent with personal requirements. Why is an individual working, what is driving their day to day efforts? Good money may “compensate” for an imbalance of these things, but this is usually only a temporary solution.
  25. 25. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 24 Remuneration strategy policy and template When completing this strategy template, refer to the discussion points in each section of this book to ensure you consider your organisations unique attributes. Dimension 1: Remuneration philosophy Statements here need to answer the following questions:  Is Public or Shareholder scrutiny probable? If so this needs to be acknowledged as being a factor to consider.  Are remuneration costs a major expense for the business? If so a statement should be made to connect the need for remuneration costs to remain relative the organisational performance.  Will you differentiate individual remuneration levels based on performance? OR is it “Same job, same pay.”  Will you pay bonuses/incentives? If yes, will these be connected to individual, team or company performance or a mixture of all?  What is your stance on “attempts at poaching” – this is important for all management to understand and agree?  What are your organisational considerations when determining remuneration levels compared to the market? – eg: if company is on a growth curve – retention of skills is critical; availability of required skills. Dimension 2: External competitiveness  What part of the labour market do you consider your “market” to measure comparisons? – eg – public or private sector, what industry/ies, national or geographical?  Where in the market do you want to set your “average payline”? – eg market median, 75th percentile etc?  What comparison will you use? – eg base salary, “fixed package”, “total package including incentives” – you may state that you will pay “market median” for fixed remuneration, and 75th percentile for total package including incentives.  Will you pay differently in different locations?  Are some jobs in your organisation compared to a different market than others? – eg: engineers in the mining industry will be compared to the same jobs in that industry, but accounting roles with a mining company may be compared to a more general market segment. You may need to do differentiate critical roles from roles that are more easily to recruit for.
  26. 26. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 25  Where will you get your market data from? – eg a reputable market survey provider? Dimension 3: The individual  Describe and segment your workforce demographics – age, gender, ethnicity and consider some possible assumptions regarding individual needs to help determine what may appeal as an offering – some examples may be: o Recognition programmes o Flexibility of workplace location o Flexibility of working hours o Working around childcare or eldercare arrangements o Ability to support personal interests – eg sports etc  Use the demographics to make policy statements regarding the “Rewards for work”.  As an organisation are you committed to any benefit programmes such as Medical care subsidies; product discounts; supplier/ partner benefits? Dimension 4: Internal equity  Do you use a methodology for “measuring jobs”? – if so state it here.  If no formal methodology is used, make a statement regarding how internal relativities are determined – this may be seniority based on reporting lines, professional organisation standings/qualifications, management determination.  Do you use “salary bands” to group the pay rates for similar jobs – if you do, do you publish a) what band a person is in; and b) the salary range of that band? This needs to stand up to scrutiny, so it should be clear as to how a person ends up in one band versus another. If it can’t stand up to scrutiny you may have to consider non-disclosure and use as a management tool only; however in the absence of information individuals will draw their own conclusions.  Will you have different salary bands/ranges for different job families even though they may be considered peers in terms of organisational structure? – eg: Corporate and Administration pay ranges; technical pay ranges etc.
  27. 27. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 26 Glossary Base Salary (also referred to as Base Pay): Cash salary received weekly, fortnightly, monthly etc. Fixed remuneration (also referred to as Fixed Package): Base salary plus the calculated monetary value of “guaranteed” or set benefits including company car, company health insurance etc. Variable Pay: This refers to discretionary bonus payments, performance rewards, incentive pay etc that are not guaranteed or set and may be paid based on individual and company performance. Total Remuneration (also referred to as Total Reward, Total Package or Total Cost to Company): Fixed Remuneration plus any Variable Pay. Median (also called middle of the market or 50th percentile): This is the point or value below which 50% of data contributed to a market survey falls.
  28. 28. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 27 Lower Quartile (also called 25th percentile): This is the point or value below which 25% of data contributed to a market survey falls. Upper Quartile (also called Q3 and 75th percentile): This is the point or value below which 75% of the data contributed to a market survey falls. This is often referred to as the upper end of the market. Job Mapping / job scoping / job sizing: A systematic process for establishing the relative worth of a job within an organisation. Market Survey (also called pay and benefits surveys or pay benchmarking): Surveys that collect information on pay (market rates) and employee variable pay and benefit provisions in other companies.
  29. 29. (Don’t) Show me the money Copyright © 2010 Pivot Software Page 28 About Pivot Software Pivot Software helps organisations use technology to improve their control over complex and often emotional human resource processes. Productivity, enhanced transparency of outcomes and improved employee engagement are just some of the positive impacts of implementing our technology. As human resource professionals, we understand how well managed remuneration and performance management policies bring organisational values and principles to life. We enable HR interactions that are meaningful and beneficial. Conversations between managers and staff are supported, and not replaced, using our solutions which are as easy to use as a simple website. Over 50 organisations across Australia and New Zealand use Pivot’s solutions, with the majority coming from the energy, resources, financial services and professional services sectors. The HR policy and strategy needs of our clients are met using a secure, internet-based, highly configurable software-as-a-service model that fits within any corporate IT infrastructure. Our clients enjoy a time-saving solution designed for the task; not a generic tool that is ‘made to fit’. Pivot Software (New Zealand) Limited Pivot Software (Australia) Pty Ltd Phone: +64 3 359 1707 Phone: +61 2 9911 4016 Email: info@pivotsoftware.com Email: info@pivotsoftware.com Address: Address: Pivot Software Ltd Pivot Software Ltd PO Box 20 348 PO Box 5373 Bishopdale West Chatswood Christchurch 8543 NSW 1515 New Zealand Australia Copyright © 2013 Pivot Software All rights reserved. All trade names referenced are the service mark, trademark, or registered trademark of the respective manufacturer.