At the next training session, on compensation, I told the Resu group about a friend of mine whose company was swamped with orders just as it was about to close down for a two-week vacation. Desperate to fulfill these orders, rather than using temps who would not be familiar with the business operations, the company offered employees of all levels two weeks' pay in lieu of leave to multi-task. I asked the participants for their views on whether this offer would motivate people and, if so, which members of staff would be likely to respond to the offer.
The responses were varied. The Facilities Group, for example, felt that the managerial group would be unlikely to take up the offer, but would "go on vacation, especially if it is during the school holidays. The non-managerial staff would take the pay and carry on working because they need the money more."
The Sales Group thought that the majority would carry on working because "Two weeks' pay can be quite substantial, whatever the category of employees."
The Production Group thought that some might take one week's vacation and one week's pay, if they have not had a vacation with their families before this, assuming this was permissible.
The Finance Group had a quite different view: "We feel managers should understand the importance of clearing the build up of orders and carry on working. Non-managers may or may not take the leave, depending on their financial needs but the majority are likely to take the pay."
The HR Group summarized the different viewpoints for me. "It is clear," they said, "that different people have different value sets. We cannot assume that non-managers need more money and therefore they will take the pay in lieu. Likewise, we cannot assume managers will forgo their pay because they are paid more. We therefore cannot assume that pay is the main motivator for all people."
Following this discussion, I told them what actually happened. Much to the surprise of those present, the majority of the company's managerial staff took pay in lieu of leave and the majority of the non-managerial staff took leave in lieu of pay. The reason for this was that the non-managerial group had already clocked up a great deal of overtime and wanted a break to be with their families. Contrary to what many believe, money isn't everything and neither is it the mother of all motivators.
There are many ways of rewarding people for good performance. Increasing base pay is the obvious example, but awarding variable bonuses or offering one-off monetary incentives can motivate just as well. In fact, I recall reading a study done some years back that showed that the motivational value of a salary increment, for whatever reason, normally does not last more than two weeks.
To give a business perspective to what is often considered an HR concern, I sought the groups' views on compensation as a business enabler by posing the following questions as it pertained to their company:
These were the consolidated answers from the groups:
Percentage of Payroll Costs to Sales Revenue:
High, edging towards 40 percent.
Effectiveness of Payroll:
Ineffective: Perception is that Sales and Marketing jobs are paid more than Admin Support and Production.
Ineffective: Bulk of payroll goes to chiefs; less goes to the warriors.
Ineffective: Overtime costs have become permanent features.
Effective: Staff turnover figures are still below industry average.
Effective: We are paying competitively at market rates. Key managerial vacancies are filled within requisition period.
Effective: No one is exceeding established salary ranges.
As these responses indicate, views on such matters are varied and dependent on the criteria adopted for determining what constitutes effective or ineffective use of payroll to attract, motivate, and retain talent for greater productivity.
Finance people generally agree that for greater productivity, fixed costs must be controlled to make room for more variable costs. Basic pay is compounded over the years, which means that managements need to find a balance between basic pay increases and variable bonuses as a compensation package—which makes the linkage to the results-management system more meaningful.
Line managers will find it useful to have a macro view of compensation systems within which the people under their charge are compensated or rewarded and how these relates to the results-management system.
The three key components of a sound compensation system are as follows:
This is the process by which jobs within the organization are compared to determine their relative worth to the organization.
There are two general approaches to job evaluation—the quantified and unquantified approaches.
The quantified approach uses factors common to jobs, and assigns point values to the factors for each job. The point values are then added up for all the factors, and ranges of points are established for job gradings.
The unquantified approach looks at whole jobs based on job descriptions. It then ranks them, categorizes them, or classifies them into job groups and grades.
Job factors include professional and technical and/or managerial knowledge and skills that are required to do the job. The competency levels required, as well as the degree and magnitude of accountability for results, are taken into consideration.
Also included for evaluation is the effort required to perform the job, or the level of difficulty inherent in the job. This is different from the level of difficulty experienced (while trying to accomplish targets) as a result of unforeseen circumstances or conditions outside the control of the performer.
Other factors could include working conditions—the amount of problem solving required, or environmental factors such as dust, noise, heat, cold, and danger, and so on. Within these main factors there could be sub-factors. For example, for problem solving, we could be looking at the level of analytical or creative thinking required.
The jobs are evaluated factor by factor and awarded point values. Benchmark jobs are evaluated first, followed by other special jobs within the organization. These special jobs are evaluated using the factors in the benchmark jobs as a basis for comparison.
Benchmark jobs are representative, universal, or commonly occurring jobs that can be found in many organizations. Benchmark jobholders could include Sales Managers, Engineers, Production Supervisors, Accountants, IT Analysts, HR Managers, and so on. However, jobs should be evaluated based on the job content, responsibility, authority level and accountability level, rather than simply on job title.
Evaluations are normally done by a committee of senior management personnel trained in the chosen evaluation system, with staff specialists included. The senior management staff are usually drawn from key functions such as Sales, Production, Engineering, IT, or HR.
However, no system is perfect. What we aspire to are acceptable perceptions of validity and reliability of evaluation. The evaluations are reviewed regularly, especially when the organization is being restructured and job functions are merged or split.
After the evaluations are done, jobs of the "same worth" are grouped into the same job grades, each of which will have a salary range assigned to it. Each salary grade will have a minimum base pay, a mid-point base pay, and a maximum base pay.
The mid-point value of a job is taken to be the "going rate," or market rate, for that job. It indicates what the employee should be paid if he is performing a "full job."
The mid-point pay is not to be confused with an employee's actual performance. It does not imply average performance. Any pay below the mid-point, therefore, indicates that the employee is not yet performing the "full job" for which he has been employed. A new employee is not normally placed on the mid-point base pay, unless he has a wealth of experience and can undertake the "full job" immediately upon joining the organization.
The maximum for each range is often 20 percent above the mid-point, and the minimum is often 20 percent below the mid-point. This means that there is a 50 percent difference between the minimum and the maximum, as illustrated in Table 5.1 below.
Given acceptable performance and normal increments, a new engineer in a stable job market joining the organization at the minimum of the range at $2, 000 would normally reach the mid-point salary in about four years and the maximum in about eight years, assuming moderate increments and that there are no drastic labor-market changes, promotions, or salary re-structuring. Fast-track, top performers would expect to reach the maximum in a shorter time, of course. In practice, when there is a shortage of a particular job type, most job-holders expect to be promoted or upgraded before they reach the mid-point.
Table 5.1. Sample Salary Ranges
Salary Range | ||||
|---|---|---|---|---|
Job Title | Job Grade | Minimum | Mid-Point | Maximum |
Manager X | 1 | 2, 400 | 3, 000 | 3, 600 |
Manager Y | 1 | |||
Manager Z | 1 | |||
Engineer | 2 | 2, 000 | 2, 500 | 3, 000 |
Accountant | 2 | |||
Systems Analyst | 2 | |||
Usually those employed at the minimum of the range have minimum experience and basic qualifications for the job, and they gain experience as they progress in the job. When an acceptable performer reaches the maximum in his salary range he might expect to be promoted to the next salary grade. If he is not, he remains at the maximum until the mid-point moves with the market. Sometimes, specific expertise is scarce. It is then necessary to accommodate a particular individual by paying him or her above the maximum, and this is referred to as a "red circled" rate, personal to the incumbent.
Conversely, sometimes a person could be paid below the minimum. This might happen where a new recruit from another organization might be asked to undergo a period of probation while he proves that he can perform to the required level. This lower, "green circled" rate, however, should be regarded as a temporary measure.
Thus, salary ranges are necessary to:
provide a basis for comparing relative monetary values of jobs;
gauge a performer's length of service in a certain position;
spot talent that has been recognized by their position in the salary range;
pay attention to high performers;
gauge the suitability of under-performers;
ascertain the competitiveness of the pay structure relative to the market; and
track adherence to salary policy during high and low demand for a particular job type.
An organization's salary ranges reflect its salary policy. The salary policy is an open declaration of how the organization wants to pay or reward its employees. Having a stated policy in the employee handbook enhances the credibility of the compensation system, as it makes it transparent, even though personal pay is a private and confidential matter. Most salary policies will state pay equity, making clear the relative values of jobs to the organization as reflected in the salary grades and ranges.
They will also state how competitive the organization intends to be—whether consistently above the market, matching the market, or slightly below the market.
They may also assert whether the organization wants to pay for performance or for seniority. If they pay for seniority or length of service, the salary ranges will be very long, as observed in some collective agreements in the past.
In salary policies, there could also be a statement about the non-discriminatory nature of the pay system in tandem with the organization's hiring policies. There will be a declaration about equal pay for equal work and paying for performance, regardless of age, gender, race, nationality, language, or creed.
The basic purpose of every organization's compensation system is to attract and retain competent people. Having done that, the next thing is to motivate them for greater productivity, as part of a results-management system.
Even though salary administration deals with numbers and is quantitative in nature, to the individual employee, salaries will always remain emotive issues. How often have you heard comments such as "I don't think people in our department are fairly paid, compared to other firms;" "My university classmate, performing the same function in ABC Co., is paid so much more than me;" "I thought I performed well last year, and yet I received only an X percent merit increase;" "I've been here 10 years but that newcomer is getting about the same pay as me;" or "admin people are more valued than operations people"?
Such complaints and laments are commonplace and employees will always compare salary according to their notion of fairness. These comparisons will be more acute if they are not aware of how a sound compensation system is arrived at. If an employee feels unjustly compensated, it will be a dormant push factor, and retention will be more challenging, especially if there are pull factors as well.
Ensuring external competitiveness is one way for an organization to verify employees' claims by comparing what it does with what is done by other organizations or the market in general. Part of this process is to conduct salary surveys.
Salary surveys are a common mode of collecting data to establish market competitiveness and salary trends. These trends are relative to supply and demand for talent, as well as macro-economic conditions.
Companies can obtain competitiveness data by conducting their own survey, or participating in surveys by external agencies, organizations or special-interest groups.
Whichever mode of data collection is used, how useful the data is depends on the validity and reliability of what is collected and collated. Relevance and consistency of the salary data are key considerations in salary surveys.
Factors to take into account when participating in, initiating, or organizing a salary survey include: characteristics of respondents such as relevance of data sources (comparing like with like with respect to business type, industry type, age of the company, and workforce); benchmark positions available; sample size; and components of the overall compensation package.
Determining the statistical techniques used to establish the market trends, the industry or market rates, and the organization's position relative to them will usually be the responsibility of the survey agencies involved.
For each year, however, the company will have to decide on a salary policy line, the short-term annual objective against which the salary administration will be done. The relative position of that salary line (see Figure 5.1) vis-à-vis the market is determined by business conditions, the company's financial health, and its ability to pay for that year.
The rationale for the salary policy line adopted for the year will then be communicated to management for understanding and acceptance before being used to determine the mid-point of the salary ranges, which could be above, equal to, or below the market average. Once the mid-point is adjusted in accordance with the annual salary policy line, the whole salary range will move.
It is worth reiterating here that paying the highest salaries does not necessarily produce exemplary commitment. Salaries are not motivators per se. They are reinforcers for good performance and inducers for weak performance. Salaries complement sound performance management.
"What performance should we be paying for?" I asked the workshop participants. This is what they came up with:
Pay for results, not for activities—the distinction here is between "productive" work and "busy" work. The organization should pay for performance, not simply for "busyness." These results should not be achieved to the detriment of others in the organization.
Pay for intended outcomes, not for perverted outcomes—in the case of the Sales team this had meant incorporating collections (poor collections were, as we saw in an earlier chapter, its own "perverted outcomes") as a key result area for paying commissions.
Pay more variable bonus on results and less on length of service—paying variable bonuses based on company and individual results will not burden the company with high fixed base-pay costs in the near and long term. In some countries, an employer may need to contribute a certain percentage of base pay to retirement funds or medical funds. Benefits such as loans, un-utilized paid leave, medical insurance premiums, and overtime are also computed against an employee's base pay, making it necessary to moderate base pay increases. These, plus cost-of-living increases and performance-based merit increments, often lead to a need to increase prices of products and services and, ultimately, to loss of business as customers go elsewhere.
Base pay and variable bonuses need to be balanced against other factors such as work environment, superior–direct report relationships, inter-functional working relationships, company policy on work-life balance, and the balance between cash compensation and benefits/welfare compensation, all of which have an impact on the company's ability to retain its staff.
Pay for adherence to corporate values and for willingness to improve skills and knowledge—a company's values, and the development of skills and knowledge, are part of its intellectual capital, its inner strength. They must be cultivated and recognized by being built in to the company's pay-for-performance policy. Developing competencies through off-site or on-the-job training and experience such as multi-tasking is more cost-effective than hiring temps who are not steeped in the culture of the company. Staff who display such competencies need to be rewarded. This ties in with both of the following points, too.
Pay for innovations and improvements made.
All of these components can become fixed or variable increments to the base pay. But rewarding the performer also has to take the long-term impact on the business into consideration.
Between them, the participants drew up the following outline of their proposed reward system:
Performance Appraisal | Forms of Reward to Consider |
|---|---|
Managerial/Professional/Technical results for the period past | Variable Bonus: Organizational level for all Individual level on merit |
Base-pay increment | |
Competency development applied on the job | Variable one-off incentive |
Management, with advice from the salary administrators, can decide on the percentage of the salary budget to allocate to each component. The allocations can be guided by the organization's business performance, labor-market conditions, industry trends, and the prevailing economic conditions.
A cost-of-living allowance can be added as a separate component to add to the base pay but that would have the effect of inflating base salaries again.
Consider the following scenario:
A company has two Engineers, A and B. Engineer A is new and B is more senior.
Engineer A's base pay is $2, 500, while Engineer B's is $3,500. Both have the same appraisal rating—Exceeds Expected—for the results they achieved for targets. Such a rating commands a bonus of two months' pay.
Taking into account the difference in their base pay, is the bonus fair to Engineer A?
Few would dispute that this decision is fair, even though the absolute amounts are different for the same performance rating. People generally accept variable bonuses based on base pay. Furthermore, the targets for the more senior engineer may have been more challenging than those for the new engineer.
But what about annual merit increments, which are also based on base pay? Should the two engineers receive the same percentage salary increase? The general response to this from within the group was that Engineer A should receive a higher percentage increase. Otherwise, he would always lag behind Engineer B, and the focus should be on performance rather than length of service.
In such circumstances, companies should have some kind of guide (similar to that shown in Table 5.2) to take account of this need. This could then be adjusted annually, depending on survey results and the selected salary policy for the year.
Table 5.2. Sample Salary-Increase Guide
Position in Salary Range | |||
|---|---|---|---|
Performance Rating | 80% | 100% | 120% |
Far Exceeds | 15% | 9% | 5% |
Exceeds Expected | 13% | 7% | 3% |
Fully Meets | 10% | 5% | – |
Partially Meets | 5% | 3% | – |
Does Not Meet | – | – | – |
Even though such matters usually fall within the general responsibilities of the HR department, all line managers must at least be able to explain the rationale behind the company's salary ranges. The compensation system has to support the company's performance measurement, management, and appraisal systems. All systems and sub-systems must operate effectively to ensure that the whole organization is not dysfunctional.
Having a consistent compensation system also enables staff to be transferred between affiliate companies without causing chaos, confusion and possible discontent borne of envy or perceptions of unfairness.
Every line manager also has a responsibility to see that their people are compensated properly and fairly, to reduce de-motivating comparisons and misperceptions.
Monetary rewards can be a good motivator but they are not the sole motivator.
The line manager, while desiring to reward his direct reports for good performance, needs to understand the big picture of the compensation system, to better appreciate his role in management.
A comprehensive compensation system encompasses paying for the job, paying market rates, and paying for performance.
Embedding monetary rewards into base pay is increasing fixed costs that compound over time, and this has to be borne by the organization into the future.
There are many ways of providing variable monetary rewards to reinforce good performance and increase productivity, and yet not subject the organization to long-term overheads.
Paying for performance does not mean paying only for results achieved for the year. It also incorporates areas outside current job duties, including rewarding employees who adhere to the organization's core values or who obtain competencies for enhancing its productivity and long-term competitiveness.