This is the fourth and final (?) installment in my series on Total Reward Strategy. Good thing I procrastinated long enough to gain my best tips on when to change your strategy. You see, this damn pandemic is teaching us that reward strategy should be reevaluated when there is a significant change in external factors, internal factors, or both.
External Factors
As Mike Tyson says, “everyone has a plan until you get punched in the face.” (Tyson is a boxer, not a C&B guy, although I once almost got punched in the face when localising an expat whose 12-year-old contract said nothing about localisation.) COVID-19 punched us all in the face. We will fondly remember life pre-COVID, when we didn’t wear masks and we didn’t feel a need for a reward strategy:
We could drift along saying we pay market median without actually calculating market ratios or validating our midpoints; promising to keep people whole with inflation at town halls, then letting managers base everything on seniority after attending a briefing on pay for performance. Pre-COVID our salary ranges were more like “a guideline” and we gave highest paid “loyal” people raises year after year for doing exactly the same thing at the exact same performance level.
In fact, a surprising number of employers have no C&B strategy at all. So they are doomed to follow history, follow the herd or follow hearsay. (Relax! No one ever got in trouble for doing what everyone else does.)
So back to the punch in the face. COVID.
The global pandemic affected every organisation. It affected us personally and financially and culturally. So we started thinking strategically about people and rewards:
- We stuck to our values and principles and delivered salary increases and 2019 bonuses in Q1
- Or we froze salaries and even reduced management salaries to save jobs
- Or good cash management allowed us to pay bonuses, give raises and save jobs as well, with the expectation that your industry—essential consumer goods, ecommerce or mobile computing—would thrive
- We made working from home a standard option and converted office savings into a tech allowance for WFH employees
- We reduced hours, not headcount, and reduced pay accordingly, adopting part-time work or job-sharing as a permanent option for staff
- We eliminated recognition and team activity budgets and repurposed the money for COVID-related benefits, wellness support, EAPs and outplacement support
- We reduced management salaries but replaced it with company share grants
- We protected jobs by protecting your top line revenue by meeting with your salesforce, adjusting targets and performance thresholds to keep their “heads in the game”
- We adopted OKRs in place of KPIs to be more agile and focus on the things that matter right now, not what mattered in Q42019
Internal Factors
Internal factors affecting rewards include culture, leadership, manager competence and reward philosophy. These will determine the policies, structures, frameworks, methodologies, technologies and the actual mix of rewards, when responding to external factors.
A paternalistic philosophy will protect employees from all forms of hardship, while a shared responsibility philosophy will measure what is intended against affordability. A decentralised culture will result in local resistance to a practice such as work-from-home in one location and strong adoption in another, while a centralised culture will be more consistent, like it or not.
When leadership changes, it is possible to see values, culture and rewards philosophy change also. It all flows from the top if there is strong leadership. Under weak leadership, anything goes and you get multiple subcultures under one roof.
Now I know when to develop a total reward strategy: you don’t. You make business decisions on your pay and benefits, and leadership sets the tone and ethos that will guide the organization’s response. This is what becomes your reward strategy. HR helps articulate this ethos and philosophy. The organisation then makes reward decisions, balancing money and value; optimising people, jobs, operational capacity and profit; rebalancing long term versus short term, variable cost versus fixed, team versus individual, retention versus attraction, make versus buy talent strategy, repurposing budgets from less essential areas to more essential.
In trying times, Maslow suddenly matters because physiological and safety/security needs are unmet or under threat, and they are normally met through income, job security and benefits. This too is total rewards strategy, making choices when something has to give. And it happens when it needs to happen. Let’s learn to recognise the onset of external changes that will demand a strategic decision, and let’s learn how to “read” the tone and ethos and beliefs which will shape the decisions that affect people, their families, jobs, customers and owners. Articulate the why (business reality), the considerations and the resulting reward decisions and together it constitutes a reward strategy for the moment. This strategy will remain in place until new business changes–internal or external–trigger new decisions on rewards.
This too is total rewards strategy, making choices when something has to give. And it happens when it needs to happen.
Reward strategy is important. It really affects thousands of lives. I suppose I have been involved in reward program decisions that have affected millions.. hopefully for the better!
We are talking about the biggest cost in most organisations: people. Let us strive to excel in total reward strategy, to get it right, then execute it well. And if we do it right, people won’t think about it, and will then be free to focus their energies on serving others.
NTUC recently proposed a Fair Retrenchment Framework, including protection for the Singapore “core.” This is great and makes perfect sense. Being based and registered in Singapore, my firm only uses local freelancers on an ongoing basis, although many foreign freelancers approach me about joining my team of associates. Occasionally, I use foreign talent when necessary, but I deliberately use Singaporeans to the extent possible. I the last 7.5 years, I have paid nearly $300k to six local associates, and less than $25k in total to my foreign associates.
I occasionally read posts that protest nationalistic policies in the U.S. where I am from, and I want to point out that what comes across as nationalistic is no different from Singapore’s aim of protecting Singapore. It is the job of 100% of governments in the world to do what’s best for their own country, while it is the responsibility of 0% of world governments to put the world ahead of national interest. If you know of John Nash’s Nobel Prize-winning equilibrium theory, you would know that everyone does better when you promote both your own interest AND the common good at the same time. This approach underlies PM Lee’s excellent recent paper on Pax Americana, addressing the possible scenarios involving the U.S. and China as China pushes for dominance. I for one hope and pray both giants can peacefully and constructively serve both their own interests AND the common good, so that the world becomes a better place for each and for all. I personally look forward to visiting China to tour many places I have not yet been to. I welcome Chinese companies as clients.
I first visited Singapore in 1989 when LKY was in his prime running country. Brewerkz had a single outlet at Clarke Quay with 4 outdoor tables. At the time the Merlion marked the coastline. I visited again in 1999 when conducting an HR Audit of my company’s APAC region. I stayed at the InterContinental on Middle Road, when you could look from the lobby and see Raffles Hotel. When I was able to move here in 2007, I was so excited with my Singaporean friends whom I’d known since my university days.
In my work, I have devoted my energies to building the HR profession, in the area of compensation & benefits, or total rewards as we refer to C&B plus all the other tangible and intangible rewards a person expects or gets in return for their work. I have hired and promoted Singaporeans in Singapore, while hiring no foreigners. I have repatriated over 50 expats, and localised the packages for another thirty. I have trained over 1,500 Singaporean HR practitioners on C&B, including how to use local and local plus packages for foreign talent and how to localise their expats. I have partnered extensively with SNEF and collaborated with Human Capital Singapore and other Singapore agencies, GLCs and “national” companies.
Personally, my best friends are here, and I support local businesses, from Sally the juice lady at Adam road food centre to the various kopitiams and coffee shops. I pick up rubbish from the grass instinctively, which it seems no one else wants to do. But I take some pride in my neighbourhood.
In short, I have done my best to give back to Singapore, my second home and the place where most of my friends and contacts are. Although my PR application has been rejected twice, and locals often pretend I’m not there on the sidewalks, I value every day I am able to live here. Imperfect, but Singapore is as good as it gets, so far in my 59-year life journey.
2020 will be remembered as the year of COVID-19, the year we all had to work from home.
It will also be the year when global mobility practices see a major decline, just as it did following the Global Financial Crisis of 2008-2009. Back then, it was about cost, and traditional expat packages were challenged and largely replaced with local and local plus approaches. It was mainly about cost and oh yes, it was also about promoting opportunity for local talent.
This time, talent mobility will downshift once again. This time it will be about cost as well, but equally about the fact that sending a person from country A to country B (and their family, etc.) is unnecessary, now that we can work and manage remotely. Besides, how important can face-to-face be if we’re wearing a mask and keeping 2m apart?
When economies weaken, governments properly should protect local jobs, so there will be a tightening on foreign workers and foreign talent. Employers can, and must, retain their best people, upskill everyone, tap into subsidies and loans, and do their best to keep people employed.
The expats themselves are asking to go home in many cases, anyway.
In the broad sense, this is good and makes sense. In the short term, it will be very disruptive to the foreign workers and foreign talent who must return home. (I am awaiting my own Singapore Employment Pass renewal as I write this!)
Cost Justification and Local Development
Years ago, we used to focus at how much expats cost, as a multiple of their salary. A traditional “balance sheet” package could cost 2-3x base salary. Since the Global Financial Crisis, the metric changed. Now we ask how much an expat costs compared to a comparably skilled local talent. This too is generally 2-3x, where the expat price tag at a department head level or above is 2 to 3x the cost of a local comp & benefits package. With this cost ratio, can you justify the cost of the expat? The traditional answer is that the local talent may have the functional knowledge, but they lack company knowledge, soft skills, etc.. so we need to send Bob to Shanghai for 2 years.
Bunk.
The notion that a local talent with all the needed skill sets is unavailable will be harder and harder to prove, especially now when you can just select the best local talent you can find, and then match them up with the would-be expat who can manage and coach and develop them remotely. Remote management can be supplemented with inbound or outbound business trips or even short-term assignments (3-12 months with a per diem allowance and serviced apartment, unaccompanied.) But even business travel and STAs may be less frequent due to potential travel restrictions, quarantine requirements and the traveler’s own reluctance to get on an airplane with potentially sick people.
Maybe the job should move to the right person–wherever he or she may be, and not the other way around.
We will always need “expensive” global mobility, but we need to be selective, and must be able to cost-justify the value for money, and ensure local development and opportunity is part of the game plan, not a story of neglect.
Talent Mobility
A few of us have been using the term talent mobility instead of global mobility. Here’s why: you cannot justify the cost of global mobility merely on the basis of the expat’s value anymore. Mobility must clearly support one or more talent objectives, such as building global experience and mindset among high-potentials, local talent development and retention, inclusion and diversity, etc. Global mobility is, or should be, at the service of your talent management priorities. Cisco, Wal-Mart and many others have put global mobility under talent management long ago, for this reason.
HR leaders should view mobility as a talent management tool, and conversely all talent management practices – performance management, selection, development, coaching, etc. – should be done in a special way for mobile talent. Again, TM and GM merge into talent mobility.
Final thought. Even if you can cost-justify an international assignment, and it fits a talent management agenda, local governments may not approve it. And besides, maybe the intended assignee doesn’t want to go, because 2020 was also the year we learned once again to appreciate friends and family and that indeed there’s no place like (working from) home.
During a crisis (such as the COVID-19 pandemic), businesses can fail, survive or find advantage. There are three numbers on the financial statements that will indicate a business’s fate: revenue, cash and.. payroll. An April survey of 4,000 SMEs in the U.S. found that most companies will hit a cash squeeze in 1 to 3 months. How long will your company’s cash last if you remain the current state?
Finance 101: variable costs are better than fixed.
Raw materials are a variable cost. When orders are down, thankfully you don’t need to buy as much raw material. Your utilities bill goes down when factories or office lights are down. Even your gig workers are a variable cost–when you don’t need them, they go away.. But when it comes to employees, salaries represent the single largest overhead expense in almost every business. There is a break=even point, the amount of revenue and margin dollars needed to cover the fixed costs of the business and turn a profit. All revenue is good, but not all revenue is good enough.
Compensation can be a variable cost.
Some companies, such as a very large south Asia-based semiconductor company, are well positioned due to their variable pay practices. Paying bonuses as large as 6 months, or even 12 months to managers, enables them to keep base salaries as low as 60% of market salaries. Quick quiz, which costs more: paying market salaries with 1 month bonus, or paying 60% of market salaries with a 6-month bonus? It depends. In times of strong performance, exceeding earnings goals, total compensation would be higher for this semicon. In an on-target year, however, total compensation costs would be lower (60% or market salary x 1.5 = 90% of market salary.) But in a bad year, such as in a crisis, this company is paying 40% less in total compensation than other companies. Sometimes a reward strategy is actually a business strategy, managed by HR. Imagine that.
Sometimes a reward strategy is actually a business strategy, managed by HR. Imagine that.
Terminology
According to WorldatWork, “Variable pay is compensation that is discretionary or contingent on performance or results achieved, and can be designed for any individual or combination of individuals… it is termed “variable” because the amount actually paid will vary based on whatever criteria the organization chooses.” (WorldatWork, GR6: Variable Pay) Variable pay encompasses bonuses, incentives and cash recognition practices.
There is a difference between bonuses and incentives, and before proceeding I want to set the record straight. Too many people simply refer to all variable pay as bonuses. This is nonsense among HR professionals.
Bonuses are simple, predefined sums of money that will be paid if you do x. If you do x, you will get y. That’s it. No formula. Bonus amounts might be pre-defined, or they may be completely discretionary. Examples include employee referral bonus, project completion bonus, retention/stay bonus, spot bonus, 13th month bonus or perfect attendance bonus.
Incentives have formulas for calculating the size of payment, based on pre-determined criteria, and are communicated in advance of the performance. Examples include corporate performance incentives, often called short-term incentives (STI), Associate Incentive Plan (AIP) or sometimes “bonus” because that’s a simple term everyone understands. But if it’s a formula-based payout, we in HR need to call it an incentive. According to this definition, sales commissions, long-term incentives (options, restricted shares, etc.), profit sharing, gain-sharing, revenue sharing and earn-out plans are all incentive plans/schemes.
It’s fine to brand your incentives as bonus plans, but when speaking to HR or C&B people, please do not call your corporate incentive plan a variable bonus; by definition, if it’s variable it’s an incentive, not a bonus. And please do not call your corporate incentive plan a variable incentive. All incentives are variable.
Smart Use of Variable Pay for a Crisis
So here are my suggestions for your consideration, in checking whether your variable pay practices are designed to help your business survive, or even find advantage when a crisis strikes. These are applicable in any economy but especially in times of crisis, because they will help ensure variable pay actually impacts results which in turn fund the payments.
- Use variable pay for a clear purpose, specifically to impact behavior. Behavior includes attract (join the company), retain (stay with the company) and perform (behavior and results). These behavioral objectives can be refined and put into the company’s own language around the value of talent, impact, contribution, competence, teamwork, engagement, etc. Be careful linking pay to behavior itself, as sometimes people do all the right things, try their hardest and still don’t get results, such as when there is a business crisis. Still, it’s behavior we want, because that what people control, theoretically at least.
- Set the mix of fixed and variable pay deliberately. People who receive 13 months of salary plus an additional 1 month of incentive (at target) would have a pay mix of 93/7. (13 months of fixed pay divided by 14 months of total target cash compensation, equals 13/14, or 0.93.) Ask yourself whether that is the right mix, considering who you want to attract or retain. Do you see your incentive merely as a “hygiene factor,” something which would be seen as a gap if missing, but otherwise taken for granted? Or do you intend your variable pay to be significant enough to get people’s attention.
What is the right mix to impact behavior that drives performance? I would challenge whether 1 month of incentive payment makes much difference to change behavior, when there will already be a 13th month bonus paid regardless of behavior or results. Try this: tell your 10-year old he will get 107.7% of his normal allowance if he gets all B’s on his report card, and a “super stretch” award of 115.4% (double the bonus) if he gets all A’s. Although the allowance is paid weekly, he will have to wait til 3 months after the end of the school year. If his jaw drops, then the variable component is big enough. If he is not excited, then next year, do not increase his allowance, but instead change the variable portion significantly. Once you believe the incentive will actually make a difference in his grades, you have the right pay mix. Better to pay 2 dollars and get better results than to pay a dollar that makes no difference. In times of crisis (all the time actually), every dollar you spend must create more than a dollar of value. - Once the reward is significant enough to motivate behavior change, make sure the performance targets are achievable. Sales or earnings targets set in Q4 2019 are no longer valid in most industries. Your employees have already concluded those targets are impossible. Even “threshold” performance is probably too high for many. Now is the time–in the midst of a crisis period–to revisit performance targets and thresholds, to ensure they remain “difficult but doable” just as they were pre-crisis.
- Keep the metrics simple and focused by type of worker. Segment your workforce and avoid one-size-fits-all. Sales people should generally be on a separate incentive arrangement from others. Blue collar, store-based, field employees, etc. should be incentivised on operational productivity, quality, customer satisfaction, attendance or other relevant metrics, but not on EBITDA which they neither understand nor impact directly.
- Avoid over-weighting individual performance. Whether you use traditional performance ratings, OKRs, MBOs, SMART goals or competency levels, any measurement or assessment of individual performance (or contribution or impact) is risky in times of financial crisis. If the company is running out of cash, you cannot afford to make promises to employees that their bonuses/incentives are dependent on their ratings. On a scale of 1 (low) to 5 (high), the average rating in most companies is around 3.2, even in a terrible financial year. There is generally no correlation between individual performance ratings and financial performance. If you feel a need to reward individuals–especially high performers–in a poor year, you can set aside a small budget for discretionary bonuses, while canceling other bonus payments due to weak financial results.
- Communicate at department level to support behavior change. Even if everyone’s incentive payment depends on profitability with no link to individual performance, every department manager can (and should) still explain to their staff how their efforts make a difference to the overall company results. Any line manager who is incapable of explaining how their department affects the financial results of the company should not be a manager.
Vision is an indispensable part of supervision, right? To supervise, you must have your workers within eyesight. So says conventional management. I think it’s time to retire the term supervision, and replace it with management which is the essence of planning, controlling, directing, measuring and rewarding work. While prisoners working on a chain gang fixing highway ditches require close supervision (so they don’t try to run away), there are few remaining occupations where work must be physically supervised, or “overseen” as the word means.
Everything they say about the future of work is being accelerated by COVID-19. Not just working from home and Zoom calls. We will see greater use of contingent and fixed-term contract workers, who can be laid off simply by not renewing their contracts. We will see greater use of robots and kiosks especially in traditionally close-contact occupations such as coffee shops and fast food. But we will also see a human element we have not seen before, an awareness of the need for connection when physical distancing is needed. This human connectedness both requires and builds trust.
Trust and human connection will be the non-tech element of the future of work.
In 2016, I created a Flexible Work Arrangements course in collaboration with Singapore National Employers Federation and Singapore’s Ministry of Manpower. I am an MOM-approved Work-Life trainer. My manager training objectives were adopted as the national standard. So let me suggest to you some very practical suggestions for your company’s COVID and post-COVID policies and practices for workplace flexibility.
- State the company’s philosophy, for example:
At ABC company, we believe people should be accountable for delivering their best work every day, regardless of where or when they perform their job tasks. The outcomes matter more than the number of hours worked, except of course for those eligible for overtime pay, whose time must be paid fully for hours worked.
We believe people want to be trusted and treated as adults, and want to show they can deliver great work when given the freedom to work at home or during alternate work hours. Some departments, locations or function may require people to be onsite and work specified hours, due to customer considerations or other valid business reasons. And we also believe in building relationships with one another helps build trust, teamwork, and a sense of commitment. We seek to find the right balance as an organisation where we have sufficient human connection and presence “at work” while at the same time, allowing as much flexibility as we reasonably can, following a few basic guidelines and procedures... - Train managers. They must be able to (and yes, these are the manager learning objectives I referred to earlier):
- Describe common flexible work arrangements, their features, and reasons for using them
- Assess which types of flexible work arrangements may benefit their department or business unit internally
- Evaluate external/customer impact of implementing a flexible work arrangement
- Establish rules or guidelines for reviewing and approving requests for flexible work arrangements in their department or unit
- Maximise productivity, performance and teamwork for flexible work arrangements
- Improve, modify or end a flexible work arrangement that is not working
- Communicate effectively with employees and customers regarding flexible work arrangements
- Track and approve FWAs like you track and approve leaves. Use your leave management process for flexible work arrangements, so you know who is on what arrangement, what manager approved it, when it was approved, and when it expires. The expiration date is very important, otherwise, you will have people kicking and screaming when you tell them they need to start coming into the office. I once had two employees who each had asked me to take a work from home day for some personal reason. I said sure, that’s fine. One of them took a Monday off, the other took a Friday off. Two months later I was relocated to Singapore. I got a call from my boss a few months later when I had been back-filled. Apparently these two people told their new boss that I had approved Monday (and Friday for the other person) as “their” work at home day. Like it was a permanent endowment, set up as a perpetual trust for them and their children and their children’s children.. Good gosh. People get possessive about flexible work arrangements! Approve FWAs for 3 months maximum, after which time the manager can renew it, or end it, to ensure there is enough office presence, or because someone else has a need for it, or simply wants their turn, due to the manager’s need to have x% of staff in the office every day.
- Give managers a FWA Planning Worksheet. List the job titles down the left (not people, but only the job titles in the department.) For each job, you have several columns for FWA policy setting. Column 2 – list a possible FWA, such as flexible scheduling. Column 3 – what are the department’s needs in terms of scheduling. If there is no fixed scheduling requirement for the department, and it doesn’t matter when people work, then say “n.a.” If you need minimum 50% staff in the workplace from 9 til 6, then say so. Column 4 – Risks.. what business or customer or supplier risks might there be if people worked alternate schedules? Missed phone calls? No one free to handle someone who physically walks over for help? Note these risks. Column 5 – Risk Mitigation.. how you will handle the risks. For example, set up a hotline for people to call instead of physically walking to the department expecting someone to assist them on the spot. Do this for every job, and for every type of FWA that could be considered for each job.
- Revise regularly. As our organisations evolve from crisis-mode to recovery and to some kind of new normal, we should revisit all the above periodically and adjust. Do this every 3-6 months until we are back to normal. Assign business leaders to a workplace flexibility council, and have HR facilitate. Involve internal audit–you’d be surprised how valuable their inputs are on this topic!
My Intent
This second installment covers base pay actions to help control cost, intelligently. Let me briefly remind you of my intent, which I shared at greater length in the first of this series. I want to be helpful and not hurtful. For years, I have been influencing decisions on rewards, employment, work at home, etc. I am still learning, and I don’t have all the answers. Hoping to be helpful, here are my thoughts for your careful consideration. This is not actual advice for your organisation, but only considerations.
Base Pay
Salaries are the biggest cost in most organizations. Here are several ways to control base salary cost intelligently, considering both short- and long-term effects. There are many mistakes to avoid.
Pay for Work, not Time
Pay for work completed, not for time. Clocks were not meant to measure work. The best measure of work completed should be determined by every manager who is accountable for work outcomes. In manufacturing, companies measure units produced, or equivalent units (when there are a mix of simple and complex products). Measure only quality output, not sloppy output. There are industrial engineers and quality experts to help determine how to measure output of quality products.
When it is impractical to measure output by individual, we can try to measure team output. If that is impractical, then we generally fall back on paying for time worked. But remember, this is does not guarantee output is sufficient in terms of quantity or quality.
For knowledge workers–anyone who works at a computer, or works by speaking or managing or thinking–measurement of work is very difficult, so we have generally fallen back on paying for time, paying a monthly (or biweekly or semi-monthly in the U.S.) salary, rather than paying for output. The best we can do for knowledge workers is to use pay for performance–merit pay and variable pay where we link raises, incentives and bonuses to specific measures, using SMART goals, KPIs, KRAs, OKRs, the “what and the how” and other constructs cooked up by various industrial psychologists (both qualified and not) that help define output.
Now more than ever–especially when distancing makes supervision more difficult, let’s really figure out what the outputs are for everyone. I am not saying “crack the whip”. I am saying that pay for time is not sustainable if productivity drops while revenues are also dropping. Business continuity and survival require higher than ever productivity. If the sales people are still selling (see previous blog on Rewards Considerations for Business Crisis #1: Sales Compensation), then those orders must be fulfilled effectively. Productivity is a matter of survival. Roles that do not contribute to sales, or to delivery of what is sold are in question!
So as I address below some specific actions, remember, I am talking about limiting or managing a cost which is not directly proportional to output. If I had the data, I would correlate pay versus output and time. I suspect output could explain less than 50% of what we pay people (i.e. r-square of <.5) while time worked would probably explain pay more strongly, for a given occupation.
Following, in no particular order, are the ways you can manage base pay during a crisis, brought about by a virus, or any other cause.
Flatten the Curve: Focus on Basic Needs
A business crisis is no time for anyone to earn millions while the many struggle to pay their rent. Your people may still have their jobs, but your people may have a family member who has lost theirs, or whose self-employed income has dropped off dramatically (I think of the taxi drivers, normally the most productive workers in the world.)
Flatten your pay curve by freezing or reducing pay for the well-paid, and redirecting that money in the form of subsidies to help people with basic costs of living. Tap into government funding or loan guarantees to keep payroll paying, but your cuts should start at the top.
Salary Freeze
A very simple first step is to announce a salary freeze. Absolutely no pay increases allowed. In my current open survey on Impact of COVID-19 in Rewards, Policies and Practices, Asia, 17% of over 100 companies responding indicated they had implemented a salary freeze in response to the COVID-19 crisis.
A salary freeze usually goes along with a hiring and promotion freeze, although if someone leaves, you may need to promote someone from within to cover higher level duties, but you can do it on an “interim” or “acting” basis, while keeping the position officially vacant.
Pay Freeze
A pay freeze goes further than a salary freeze, putting an end to raises as well as bonuses or any other one-off payments. Some allowances that are considered perquisites, such as car allowances, might be frozen.
Modified Salary Increases
In the same survey 17% of responding companies indicated they were implementing reduced or modified salary increments/increases. For example, the salary increase budget of 3.5% for Singapore increases may have been reduced to only 2.5%, perhaps with greater restrictions on who gets a raise. In some organisations, the budget may be reduced to only a fraction of the original budget, and those getting raises would only be key performers, key position holders, business critical roles, high potentials, successors, or other special categories of people, if their pay was deemed to be low versus market pay.
Salary Reductions
Reduce salaries, starting with the highest-paid management. Reductions should be in percentage terms, not dollar amounts, to ensure the highest-paid are contributing the most to cost savings.
Salary reductions should be across-the-board and immediate. Those organisations that have current salary ranges, performance ratings and talent management practices may be in a position to include performance, pay equity or other criteria to guide pay reduction decisions, but generally speaking pay reductions are normally done using a universal standard such as 5% or 10% or 30%.
Communication
Communicate to affected employees what will happen in the future. The first question on everyone’s mind will be whether their pay will be fully restored. Some will even claim they are entitled restoration as well as “their” merit increase.
Upon recovery from this crisis, employers can restore pay following the guidelines they communicate now. If pay cuts are a matter of saving jobs and saving the country, then “bite the bullet” and communicate that there the company will review pay following recovery, dependent upon the strength, timing and circumstances of recovery, as well as economic, industry and business conditions. Communicate that there is no guarantee that salaries will be restored to contractual levels, but only an intent to restore pay to a level that aligns with market conditions, to enable the company to retain needed talent.
Salary Ranges
My advice to everyone (yes, this is actual advice for your organisation) is to ensure your salary ranges are up to date. Yes, I mean it: if your salary ranges are 1 or 2 or 5 years old, update them! Do this because once the crisis is over, those who are most important to your company–the highest performers, etc.–these people will be the most marketable. Your salary ranges can tell you whether any key people are low internally or externally in the market, if your salary ranges are calculated from actual market data. (See How to Build a Salary Structure from Market Data, in my YouTube channel.)
Contract Considerations
Except for Americans where employment is “at will” and people generally do not sign an employment contract, and ignoring the billion-people+ in the world who work on a cash basis, most of the rest of us have an employment contract, according to the laws of the country where we are employed.
Contracts serve society by creating a barrier for employers to simply reduce pay or fire workers. In times of crisis, however, courts are hesitant to block employers who wish to reduce pay or at least curtail raises or other forms of compensation, because the alternative would be layoffs, i.e. redundancies. It is a matter of public policy that giving everyone a 10% pay cut (or mandatory unpaid leave, etc.) is preferable to job cuts. It is advisable for employers to contact their manpower/labor ministries prior to enacting pay cuts of any form, to ensure they will not get into trouble.
Of course, before making pay cuts, make every possible effort to save non-people costs, such as freezing travel and entertainment, negotiating reduced facility rental or material costs or other supply costs.
People-Centered Approach
Many organizations are deliberately seeking to take a people-centered approach to employment practices. By putting people first, ahead of profits, these organizations believe all stakeholders are best served in the long run. Make sure all employment actions taken in response to this, or any crisis, reflect your company’s values, as well as the better values of society.
My Intent
I want to be helpful and not hurtful. For 35 years, I have been influencing decisions on pay, benefits, working time, paid leave, unpaid leave, salary continuation, layoffs, furloughs, severance, pay cuts, reduced/deferred/cancelled bonuses, reduced performance targets, stay bonuses, salary freezes, salary range freezes, and of course work at home and staggered or flexible hours. I am still learning, and I don’t have all the answers, and if I don’t know your unique situation, I have no answers for you. But out of a sense of duty and intent to be helpful, here are my thoughts for your careful consideration. This is not advice for your organisation, but only considerations.
The intent is to do what is best for you, and for others, at the same time. I just spent 20 minutes refreshing my understanding of the Nash Equilibrium and Nash Bargaining theory, as it is relevant to these times. Here it is in simple terms: if we only do the selfish thing, things are likely to go very badly for all. If we only care for others, things also likely to go bad for ourselves. Best if we consider the needs and intentions of others along with our own–their economic prosperity and health–as we make our own decisions, things are most likely to work out best (least worst), i.e. equilibrium or harmony, if you will. Or as Jesus said, “love your neighbor as yourself.” John the baptizer said “let him who has two give to him who has none.” (I imagine most religions would teach the same.) If we don’t follow these principles, government is likely to step in and distribute things.
Business Continuity Philosophy
Rewards are the biggest cost for any organisation, generally speaking. When business is bad, employers have three choices, basically:
- Business as usual–aim for profit, sustainability, going concern principle; don’t cut payroll, training, insurance or paid leave, growth mindset, hope for the best
- Minimize costs–save the business first, avoid illegal or non-contractual actions, owners/shareholders needs prevail, finite mindset, assume the worst
- Optimize costs and revenue–multi-stakeholder approach, care for each stakeholder and for the common good, simultaneously; help yourself and help others, hope for the best but plan for the worst
This article assumes option 3. Option 1 may work, but it may not, and you need a plan B. Option 2 may work short-term but burns a lot of bridges, including suppliers and your workforce. Option 3, however, has the best chance of long-term success, at least in my view. Which option is your organisation taking? if you’re taking option 1, you would not be reading this blog. If taking option 2, you might find some cost-cutting ideas from this blog, but ignore the rest.
Hope for the best, plan for the worst.
You want your business to survive, maybe thrive in some areas. Your restaurant has closed its doors, but take-out and delivery business is booming, and you finally have linked up with the delivery services. What was only 5% of revenue is now 100% of your revenue and has tripled from pre-crisis levels.
How can rewards help?
Protect Revenue with Smart Sales Compensation
Protect the top line. Retain your sales people and keep their heads in the game. How?
- Continue salary at a level where they (sales) can at least pay their bills each month. Normally sales people should be paid lower salaries than others at similar job levels, but should have higher variable pay opportunities in the form of sales incentives and commissions. If you have paid your sales people 90% salary and 10% bonus (a 90/10 pay mix), you need to change, now. Go to 70/30, or even 60/40, both now and going forward. Never to back to “1 month bonus” like everyone else. It’s stupid for sales people. In fact, such a mix almost guarantees your sales people are not effective sales people.
- Allow sales people (who are paid low salaries) to take a recoverable draw on commission. If there is no one buying, and you are confident sales will recover after the crisis, let the sales person borrow against future commissions to be earned later in the year. Pay now, earn later.
- Reset performance targets, i.e. quotas. If you stick with quotas set prior to the crisis, sales people have concluded their efforts are wasted. They will not push. Keep their head in the game. Incentivize your restaurant managers on the basis of take-away and delivery. Assure them that dine-in business will not be counted during the social distancing phases. This shows you are fair, and it gives your sales people a reason to shave and look nice when they zoom their customers and prospects.
- Focus on account management, as there is probably more to lose in terms of current customers and current business, compared to new customers and new products. Re-assign your “hunters” to be “farmers”, i.e. assign territory sales people to look after key accounts. Protect what you have.
- Speaking of account management, forgive or adjust some of your receivables, as a sign of goodwill, especially if customers will pay your invoices without delay. Cash flow is always tough; in this crisis, it’s a matter of survival. Be smart, and show a little love to your customers, they will remember for a long time. Enlist your sales people to support cash flow. Collections is not their job, yes yes, I’ve heard it a million times, but sales is. The relationship with your customers began with your sales people. Empower them to cut their customers a little slack on invoice amounts, if they will in return pay what they owe. It’s good for cash flow, and good for the long-term relationship.
This is the third of a 4-part series on Total Rewards Strategy.
You need a total rewards strategy to avoid blindly following history (what you’ve always done), the herd (what everyone else does) or hearsay (an interesting practice you heard about recently.) You have a good idea of what goes into a reward strategy. So how do you develop a strategy? I do not believe there is a strategy checklist, or that there is only one way to devise a strategy. Like a sculptor, you have finite material (clay; or in our case reward budgets and managerial competence) and we must make something out of it. And we may have to change it down the road, meaning we cannot let the clay harden! So how do we craft reward strategy? Here are my best tips.
Alignment to Business and Talent Objectives
First and foremost, the total reward strategy must align to the needs of the business and key talent objectives. If the business is facing disruptive competition that offers better value for money, your organization absolutely will have no interest in adding fixed cost such as salaries or healthcare. Full stop. Incentives linked strongly to profitability will be essential. Under cost pressure, healthcare strategy will likely focus more on prevention (reducing demand) as well as employee cost-sharing which shifts existing cost (of healthcare supply) as well as reducing demand by prompting employees to think twice about spending money out of pocket to see a doctor.
If an organization is in aggressive growth mode, then attraction and retention will be equally critical. Some rewards are better for attracting, such as salaries and benefits. Others are better at retaining, such as learning and development opportunity, culture, workplace flexibility and everyday good leadership.
A hospital needed to retain operating room nurses who could find easier work schedules at other hospitals. The hospital needed to ensure retention of both experienced and inexperienced nurses to ensure quality patient care and sustained staffing. They implemented premium pay practices based on performance and competency (evidenced through an annual exam) to support higher pay and retention for the best nurses, while allowing less competent nurses to leave voluntarily (for reduced work hours) by not paying them richly. Result? A highly engaged and well-paid group of 18 nurses are now doing the work formerly done by 24 less engaged nurses.
Observe and Rationalize
A rewards strategy–what you will offer, at what level, in what proportions, what you will not do, etc. results from logical, common sense thinking about the business and people priorities, the external business environment, as well as observation, understanding needed behaviors and how rewards can influence behavior. Having a rewards philosophy, relevant benchmark data, and willingness to innovate are highly beneficial.
Let’s begin with observation. Suppose you just joined your organization. Keep your mouth shut and your eyes and ears wide open. Start by observing your reward practices and how they work, and then questioning those practices in your mind only. Say nothing. Yet. Question their existence. This is harder than you think. Why are support staff not on any bonus? Why do we provide 20 days annual leave from year 1? Why do we not have a promotion budget? List your programs and practices and note your observations and questions for each. Say nothing, yet.
It’s hard enough to keep your mouth shut. What’s harder is actually deciding the purpose behind each reward practice. I’m not just talking about the “strange” practices. I mean all practices. Learn to question everything and try to articulate (in real words) what the purpose of salaries is, what the purpose of the sales commission plan is, etc. What are their primary and secondary objectives. If you cannot find a way to state the purpose behind each reward practice, then why are you spending money or time on it? See if you can actually list your reward practices, and write the purpose and objectives for each. Once you have determined whether a reward practice is for attracting talent, retaining talent (or both), aligning efforts with business strategy, etc., you will have a good start toward articulating your reward strategy.
As you are considering each of your reward practices, you are likely to come across one or two that don’t make good logical sense to you. You may be offering gold for long service awards which costs a large amount of money, or your annual corporate incentives may have six performance measures which seems too complex to you. This is where you must discipline yourself to think critically and respectfully. Without self-disciplined thinking, you will jump to intuitive conclusions that certain practices are stupid, unfair, excessive, cheap, etc.
Before doing what is rational, rationalize what you do.
The key to avoiding kneejerk reactions is this: before doing what is rational, try to rationalize (identify the reason for) what you do. Each reward practice—salary, car allowance, incentive pay, medical insurance—exists for a reason. Not only is there a reason for its existence, but there must be a reason for the quantum of salary, incentive, allowance, leave days, etc. Do your best to determine that reason. Go beyond “it’s always been provided” or “salaries have always been low”. The words “always been” are an observation, not a reason.
For every observation, there are alternatives. For example, just looking at cash compensation:
- Instead of salary only, an alternative is slightly lower salary plus an annual incentive.
- Instead of salary and bonus only, we could offer lower salaries plus fixed cash allowances which are excluded from bonus calculations and may be tax-free as well
- Bonuses could link to individual performance ratings, or maybe we could adopt a profit sharing incentive with no individual consideration, but use a spot bonus for individual recognition.
- Instead of setting salary ranges at market 50th percentile salary, let’s use 75th %ile for strategic functions, key contributors and high potentials, 40%th for those in roles that will be automated, using the additional money to provide them with job skills training, and 50th for everyone else.
The list goes on and on. There are choices galore in total rewards.
Prevalence Benchmarking
I am shocked at how many organisations do not benchmark compensation and benefits effectively. In the U.S. and Europe, it is assumed you will acquire good quality benchmark information from the big “data product” firms. In developing markets, and even some Asian developed markets such as Singapore, the use of benchmark data is insufficient and immature.
Benchmark data from the big firms is expensive because the databases are huge, the result of collecting far more information from participants than any one participant will ever need, in order to enable the firms to generate more products to sell you. This serves a good purpose for those who need a car report or severance pay report. But these mammoth surveys carry a heavy price for participants, not just in dollars but in staff resources and stress. There are cheaper benchmark data alternatives emerging, many of which use artificial intelligence or machine learning, along with non-traditional information sharing arrangements that extend outside the C&B “world.” Be informed and be careful where you get your data.
Benchmarking is important if you are in a competitive industry, care about cost, or care about attracting or retaining talent. (That covers just about everyone, but to illustrate my point, what if your organization is a monopoly with no competitors and you can raise your prices–or taxes if you are a government–without limit? In that case, comp and benefits costs wouldn’t matter, and you can just pay everyone richly. When you pay everyone richly, you will attract everyone (the good talent and the others as well,) so you’d better select very carefully! Paying richly also retains effectively, because no one wants to take a pay cut to change employers, so paying richly means you will have to deliberately manage out poor performers, using a performance improvement plan and progressive discipline practices within a legal environment that generally protects workers job security. But for the rest of us, costs matter. And we prefer to be selective about who gets paid richly and who should not. So benchmarking is important so we know how of a reward would lead, lag or match the market.
Isn’t benchmarking about strategy implementation only? We agree that benchmarking is essential to implementing strategy–for example, a strategy that you will pay top performers at market 75th percentile total cash compensation will require you to benchmark your total cash against market 75th percentile–it is also important in developing strategy..
How does benchmarking help develop strategy? By paying attention to emerging trends, especially which practices are helping other employers attract or retain or motivate employees. If you read that workers of all ages are seeking workplace flexibility and certain employers are introducing flexible work arrangements, such information does not require your organization to adopt workplace flexibility (that would be following hearsay), but it is a very useful “data point” for strategy discussions. It should cause you to ask yourself (and your leaders, HRBPs, etc.) whether it would be effective in supporting business and talent objectives.
Benchmarking is helpful in identifying potential new rewards, and potential sources of funding for new rewards. For example, if a survey shows the prevalence of eldercare benefits has risen, you may want to consider it. But to pay for it, you may discover that your expensive company cars are no longer prevalent in the market, so you could reduce the company car policy, and use that money to support eldercare.
Keep in mind these important tips when reading surveys:
- Pay attention to the entire range of practices. Don’t focus only on the most prevalent practice! It’s useful to know that 71% of British companies provide a leased car to managers, but it’s also useful to know that 15% of companies provide a taxable cash car allowance in lieu of a vehicle, to simplify administration and avoid fleet maintenance tasks. (These numbers are fictitious, by the way.)
- Pay attention to trends. A “P50 thinker” reading the above car survey will immediately recommend offering leased cars, since it is the industry norm, or “best practice” they may believe. But what if older workers are happy to take the train, or you’ve introduced a work-at-home policy and therefore many prefer the cash option. What if the previous year survey showed 75% of companies offering leased cars and only 10% offering a cash option, indicating a trend away from leased cars, towards cash car allowances. In this instance, a strategic thinker will see an opportunity to differentiate his company in the market place by offering a cash option before it becomes standard practice, if current and future employees would prefer the cash.
Consider Business Life Cycle Stages
Business life cycle stage is essential to understand. If you are in start-up phase, you are investing in product development and distribution. The company most likely lacks cash (or investors are looking for profitability quick) so reliance on rich salary offers is not a good idea. Instead you will offer ESOP shares and excitement, in lieu of cash. This drives talent strategy as well, as you will be hiring a lot of healthy singles and only selectively hiring mid-career types needing good health benefits or supplemental retirement contributions.
If you are in growth phase, you have established a customer base, but you are hiring fast and need a productive, entrepreneurial workforce, perhaps even agile with the ability to make decisions below management levels, on the fly, with few formal meetings or email chains. In terms of rewards, this means job descriptions will be burdensome but necessary to give job candidates a sense of role focus and role clarity. Yet bureaucracy kills agility, so keep the JD’s light and emphasize “other duties as assigned”. Use gig workers to maximize flexibility and to focus on deliverables, not pay for “butts in seats” from 9 to 6. In growth stage, incentives will focus on top line growth, specifically profitable growth, as discounting (as a means of growth) will kill margins. Consider incentivizing sales people on gross margin dollars, not the top line. Maximize contests and recognition and variable pay–as long as it is self-funding, make payments exciting.
Final thoughts
Beware the trap of P50 mentality. Sure, no one ever got in trouble for doing what everyone else does. At least to this point. But if you are now involved in steering reward strategy, you must abandon P50* mentality, and dump the consultants who conduct benchmarking, find a market gap, then give you their $10,000 advice to simply close the market gap to bring you closer to market practice. No one ever won an Olympic event by coming in at P50, and your organization will not win any talent wars either, by paying P50 across the board. Investors don’t invest equal amounts of money to all stocks, but they pick their bets and weight their positions carefully. We must do the same with scarce reward budgets.
Investors don’t invest equal amounts of money to all stocks, but they pick their bets and weight their positions carefully.
Reward strategy is not permanent, just as business conditions, talent market conditions and the regulatory environment are not static. Strategy is dynamic in rewards just as with anything in life involving decisions. Don’t seek perfect; aligned is the goal. Align your rewards practices, that’s all. A little more of this, a little less of that. Like a chef, you will develop with experience a sense of the right total reward recipe for a given situation.
Don’t worry if it’s not perfect. If it works well for your organization, I will be the first to call it best practice!
*P50 refers to 50th percentile, i.e. market median or “middle of the pack”
This is the second of a 4-part series on Total Rewards Strategy.
1. Why do employers need a total reward strategy?
2. What’s in a total rewards strategy? (this blog)
3. How do you develop a total rewards strategy?
4. How do you apply a total rewards strategy?
What’s in a total rewards strategy?
A total rewards strategy is the pattern for the design of your base pay structure, use of allowances, design of incentives, benefits, or other rewards. It defines the intended linkages to performance or other criteria, and a few other decision points. The strategy differentiates the mix of rewards, both externally and internally, assuming you do not intend to blindly follow the market, nor do you intend to treat everyone equally within your organization. (We treat everyone fairly, but not equally, unless all “talent” is the same.)
No Strategy = Stragedy
To be clear, in the absence of a rewards strategy, you are doomed to one of the following:
- you will do what you’ve always done (“time tested”, or Einstein’s insanity definition)
- you’ll follow the herd (“P50 mentality”, or in Chinese 中庸)
- you’ll copy someone else (an admired company in your industry)
- you’ll follow “best practice” you recently read about or heard at a conference
Without a guiding strategy, or in the presence of mixed practices, managers will feel anything is fair, as long as you can sell it to your boss and get away with it. Certain jobs or people get overgraded and over paid, and the ripple effect drives up costs. People hear that other departments allow work at home for similar jobs when their own boss does not allow it. Engagement drops, people start to leave. If there is no guiding reward philosophy and strategy, the rule is there are no rules. A strategy tragedy.
Reward Strategy
If your organization rejects the above defaults, then it should attempt to articulate an actual strategy that reflects the intent of the business. Here are some of the common components:
- Purpose of the rewards strategy — sets out the reason behind the rewards strategy, why it exists and why it should be followed. for example “the purpose of company ABC’s total rewards strategy is to guide the development and implementation of the company’s total rewards practices, to ensure rewards practices support business needs and talent strategies.” Or “to ensure the company’s ability to attract and retain talent at affordable cost” or “to support fulfilment of the company’s vision, mission and values in all reward practices.” State the purpose for having a rewards strategy.
- Scope — state whether this rewards strategy is applicable to the entire company, group, subsidiary, business unit, global v regional, acquisitions, job levels, workforce segments, etc. You will likely have different strategies for different locations, businesses or employee groups, so here is where you define the groups that are within the scope of your rewards strategy.
- Total
Rewards Objectives — a list of specific total rewards objectives, which
is more specific than the purpose statement. The objectives should cover the
most important goals or objectives related to rewards. Most typically,
objectives include:
- Support business needs which vary over time or between locations and business units
- Support the company’s vision, mission and values, especially values that relate to people: does your company want to empower employees? If so, that suggests a shared-responsibility philosophy. If all the decisions are made at the top, this suggests a paternalistic approach to rewards (leading you to offer defined benefit pensions, inflation-based raises, full-cover health insurance, full expat packages, etc.) If your values include “diversity and inclusion” that suggests your definition of dependent for benefits eligibility would be broader.
- Attract and retain talent needed by the business at any point in time. This is the classical purpose of rewards and belongs in every total rewards strategy. The key here is “at any point in time” since the specific talent needs change with time. In startup and growth phase, field sales talent may be more critical than during maturity or decline where account management and ecommerce may be more critical.
- Reward high performance or “motivate” employees. This is a common objective, though many organizations will be more specific, defining performance in terms of team versus individual performance. Some employers will use “contributions” or “impact” instead of the word “performance.” Some reward excellence or other specific language used in the organization. It’s good to link what you reward to the company’s values and business mission, vision and overall strategy.
- Ensure rewards are externally/market competitive. This is an essential objective of rewards. Normally this statement includes reference to the employers you compete with for talent, i.e. orgnaizations you “hire from, lose to.” The relevant labor market can vary by job group. This statement can be generalized to avoid signalling that certain functions or roles will be paid more competitively than others. The reality is that some functions, groups or individuals will be paid above market norms, though this may not be documented, as it can change very fast.
- Ensure rewards are internally fair, equitable and legally compliant
- Ensure reward decisions are made with sufficient control and consistency while giving the business the flexibility it needs
- Control costs associated with rewards
Culture, Philosophy and Business Strategy
Culture impacts reward strategy. Culture is what is ok, what is not ok, what is expected, what is tolerated. Culture is the holistic interrelationship between beliefs, traditions, rules, values and norms that guide behaviour.
Rewards Philosophy refers to deeply held beliefs and attitudes towards work and rewards. A CEO of a semiconductor company believes a VP who is paid at market median is paid enough, and is therefore not eligible for an annual salary review. Many companies in the Philippines believe that it is HR’s duty to “pass the hat” every time an employee’s family suffers a death or serious illness. Many companies believe same-sex partners should be covered as dependents on medical insurance.
Business Strategy is the fundamental way a company makes money. Some companies compete by their operational excellence (e.g. Toyota). Others focus on product leadership and speed to market (e.g. Apple or Netflix). Others compete on customer-centricity/intimacy, such as facebook. Operational excellence companies value cost-efficiency, and so will seek to control fixed compensation costs and leverage incentives and maximise automation opportunities. Product leadership companies will pay market-leading salaries to attract and the retain the world’s best talent for key roles.
Some organizations—even listed companies—seek to be like a family, or retain family values. Some family businesses seek to be more like private companies. What does this mean for rewards?
- A paternalistic company values loyalty and hard work, and in return employees can expect job security and annual raises (rarely put into writing, but this is a very common philosophy, especially with family-run businesses.) A paternalistic company is likely to pay bonuses in good times and bad, keep people whole with inflation, keep all their expats whole economically, regardless of the type of contract or duration. Paternalistic companies believe in defined benefit pensions and full-cover medical insurance. They generally feel that employees are entitled to many things as long as they remain loyal to the company. It is very much like a family.
- A shared-responsibility philosophy thinks of itself as a business, or like a sports team. Reward practices are based on business needs and the laws of supply and demand. Success is shared, but individuals who don’t “pull their own weight” or contribute will not survive long, compared to those working within a family culture. The company will pay what’s competitive with no particular promises. Rewards depend mainly on performance of the job and achievement of objectives. Employees are more likely to share in the cost of healthcare through deductibles and co-pays. Retirement contributions are defined contribution with no promises of what you will have at retirement age. These companies make few promises to expatriates, putting most of them on local or local-plus packages: if they want to live in a palace, they must actually use some of their salary instead of the company paying for it.
- Companies that believe in high performance will never pay bonuses for perfect attendance or give spot awards for working an extra 30 minutes.
Sadly, many if not most companies have a mix of reward philosophies, not a single coherent set of tenets regarding work and rewards. These are companies without a compass, benchmarking and doing whatever is prevalent, giving DB pensions in one location and DC in another. Full-cover insurance in one place and using co-pays in another, covering employees-only on medical in one country and broadly-defined dependents in another. This is done in the name of following market practice, or worse, because it has always been that way.
Considerations for your Rewards Strategy
- Segmentation of the workforce – it is possible you will have a different rewards strategy for senior executives than for other white collar workers, or for blue collar workers. So before writing your strategy, think about how you will break down the workforce into broad groups, usually no more than 2-5 groups. Sales, unions, senior executives, white/blue collar, direct labor versus indirect…these are the typical groups who are identified and given a unique rewards strategy. Other possible groups with their own rewards strategy could be globally mobile employees (expatriates), project-based employees (whose salaries must be covered by project revenues) or contract employees who may not get normal benefits or bonuses.
- Market positioning — this is where the company states that rewards should align to “market competitive” levels or align to industry norms. It may state that “superior performers will receive superior pay”, etc. This statement is often intentionally vague because a company may use market 50th percentile in general, but use a higher or lower percentile for certain positions or groups of employees. Many companies state only that total compensation should align to the market, providing some flexibility on the mix of rewards. One location could have lower salaries combined with more generous allowances or incentives, for example.
- Organizational levels and grading – this sets out the essential framework for job grading, job evaluation, number of structures, number of grades, job evaluation governance, emphasis on market versus internal factors affecting grading, and may provide guidance on job titles/designations as well. A $40 billion government linked mortgage company in the U.S. has a policy that no more than 2% of its white collar workforce can be a Vice President or above. This is a permanent part of their reward strategy, which also includes criteria or being an officer of the company, including both traditional job evaluation factors as well as some individual competency criteria. A German manufacturer of insulation products has a rewards strategy that states the Hay system is their official and exclusive job evaluation methodology. Many companies actually list their job grades in their reward strategy and title guidelines by grade, so it is 100% clear that you must use Manager–>Senior Manager–>Director–>Senior Director, etc., following the corresponding grade levels. You may not realize this, but without clarity around grading and titles, these practices easily get out of control in a large complex, multinational organization, resulting in excessive costs, dropping engagement, and potentially litigation relating to discrimination. Do not assume grading is bureaucracy.
- Pay for Performance–this section is enormously important, and should address several questions:
- What is performance–is it organizational performance that counts, and individuals make a “contribution” to it, or demonstrate “impact” on organization performance? Or is performance only about an individual employee completing all their tasks and KPIs, doing only what is on their job description? It is important to lay out all the dimensions of performance in a clear statement, including individual, team/unit and global/overall performance, etc.
- How base pay is linked to performance–is it a link to ratings? KPIs only? Importance of performance versus compa-ratio, market trend or other factors in determining pay adjustments
- How incentives are linked to performance; short-term versus long-term incentives
- Use of recognition to reward performance
- How salary budgets are linked to performance–yes, some companies provide bigger salary increase budgets to better performing business units. (Hmm, do you think weaker unit performance will improve by dragging down salaries? But if the business is open to letting weaker units die, then this is a rational approach.)
The total rewards strategy may also include additional sections on benefits (with specific guidance on health, wellness, eligibility, flexibility, retirement, time off), work-life practices such as flexible work arrangements, compliance, administration, governance and communication. Some of these sections should acknowledge the role of local (country) HR leaders in providing specific oversight and guidance in program design and implementation.
It is possible to create a lengthy rewards strategy if you find yourself listing all the various rewards principles and methods you have ever learned. If you’re not careful you may end up with a book no one has time or interest to read. Your strategy will change with time so make sure the contents are actually relevant to your company at this point in time, and don’t necessarily state all the “how to” details.
This is the first of a 4-part series on Total Rewards Strategy. Follow this site if you want to make sure you receive all the remaining installments.
Why does an organization need a total rewards strategy? What is it and how do you develop a strategy? What are its components? How is it applied?
This blog series attempts to set out the core elements of total rewards strategy. I will break the subject down addressing various elements in a logical sequence:
- Why do employers need a total rewards strategy?
- What’s in a total rewards strategy?
- How do you develop a total rewards strategy?
- How do you implement a total rewards strategy?
Why do employers need a total rewards strategy?
Consider these scenarios:
- A large mature manufacturing company is failing, losing market share fast, watching their prices fall and customers walk away as disrupters enter with alternative products and services. Yet fixed costs–mainly salaries–are still rising as the company has traditionally rewarded “loyalty” keeping people whole with inflation and paying bonuses in both good years and bad. Margins are dropping fast.
- A startup company has grown to 250 employees, adding staff almost daily, and feels they can no longer negotiate each pay package from a blank sheet of paper. People are talking and there is a buzz about inconsistency. There are rumors about discrimination on the basis of gender, religion and politics.
- A growing company with 2,000 employees has adopted “industry best practices” and finding that their culture has lost its spark, people do what’s in their job description and little more. The company pays “market median” through benchmarking and HR follows the “correct” methods in everything it does, so as not to be questioned. Sales, margins and other indicators are merely acceptable. Despite acceptable staff turnover, CEO does not feel the company is attracting or retaining the best talent.
What do these scenarios have in common?
Their reward practices do not align to business needs. Pay practices are inefficient, ineffective or killing margins. The pain and risk caused by these results are enormous:
- In the first case, the large mature company has followed paternalistic pay practices within a competitive industry. (This is more common than you might think.) As a result, layoffs are almost certain. There is little money available for R&D. The company is headed for decline. The “good people” are leaving to join the new disruptors. Those who stay claim loyalty, when in fact no one out there can match their current pay and most of the “loyal” employees have not invested in their own development. Many feel they are no longer marketable and most are correct. In fact, the company has assumed their customers were loyal. Until they weren’t. They assumed their distributors were loyal, but the end customers now buy online, not in stores. Disruption is leading to extinction for this company.
- In the second case, the startup has no system. A manager in software engineering has hired a guy he used to manage at a previous company, at a salary 40% higher than the average salaries offered to females in the same year. Not only are people concluding there is gender pay discrimination, but they talking about favoritism. Lack of any sort of pay structures, policies, philosophy or process is resulting in a patchwork of pay decisions explainable only as favoritism and bias. As a result, HR is swamped with emails and meetings about pay issues, salary proposals, justifications, accusations and so on. They are so busy driving a broken car they have no time to fix it.
- In the third case, the growing company decided a few years ago they needed a pay system to ensure fairness and consistency. Tired of negotiation, they had progressed beyond startup stage to growth stage where processes and systems are put in place. That year, HR was given a KPI to “implement a compensation system including grading and salary ranges by end of the year.” HR embarked on a benchmarking study to determine industry best practice, and attended a course to learn the “correct” way to develop salary ranges (like using +/- 20% range width..) The completed their KPI, addressed all the outliers, froze people over the max, calculated compa-ratios, linked annual raises to performance ratings, and implemented a salary proposal worksheet to set starting salary offers more fairly and consistently. Managers received an email with all the pay policies they had to obey. Pay decisions are now made much faster, with little room for bias. The problem now is that managers feel their hands are tied when they need to make a mid-year off-cycle pay adjustment to retain their top innovators who are making an exodus to their competitor. In fact, the forced ratings curve has resulted in a key player on a strong team getting a low rating (someone has to get a low rating..) and has just tendered her resignation. What’s left are the mediocre talent. And no surprise.. business results are mediocre.
If these three organizations had deliberate, written reward strategies, they would be able to develop their pay practices accordingly, rather than leaving pay decisions to well-meaning managers who fall back on their own instincts from previous experiences, or just keep the status quo. With a written rewards strategy, HR would have a blueprint against which to evaluate current practices and to guide new ones. With a written reward strategy, the organization could target certain talent and effectively get and keep the best, while deliberately enabling low contributors to leave voluntarily by NOT putting golden handcuffs on them through guaranteed minimum raises.
Consider:
- We have marketing strategies because you just can’t make and sell everything to every type of customer through every channel. You have to make choices. We will do this; therefore we will NOT do that.
- We have finance strategies because you just can’t spend whatever you want and borrow money to do it. You have to make choices. We will spend money on this, not on that. Like value investing, money goes where better returns are expected.
Employers need reward strategies to guide overall rewards program design and to guide specific reward decisions, to achieve business objectives and support the talent strategy. You have limited dollars, so you have to make choices. Some types of workers get more and some get less. Within a group, some individuals get more, some get less. There are more than 100 types of specific pay and benefit practices and no organization offers them all; you much select those practices that will have strong appeal to those having the talent you need.
“Now hold it! Marketing and Finance are more important than HR in this company. We are viewed as an administrative function.” For many of you, that’s a fair point. Let me ask you, why is HR viewed as an administrative function? Is it because HR is not allowed to be strategic? Or is it because HR has not brought any strategic ideas to the table? Just asking. Break the mold, shatter the stereotype of the HR profession. Have a talent strategy, and to enable it, have a rewards strategy.
There is a strong case to be made for controlling cost, maximizing efficiency and effectiveness, aligning rewards to business needs, supporting high performance and so on. If others aren’t being strategic about rewards, and you are, you have a chance to outdo them and win the talent you need more successfully than they do.
Thomas A. Farmer