As Robert McNamara, the Former American Secretary of Defense said ìBrains, like hearts, go where they are appreciated.
The definition of “appreciation” in a corporate context manifests itself in multiple forms, the most prominent one being through Compensation. ‘How’ and ‘How much’ to compensate have been the recurring questions for deliberation in organizations around the world. Employers need to constantly re-evaluate their approach in answering such questions while assessing the key factors driving this need, like:
- Disruptive business models and changing organizational structures
- Shifting workforce demographics and needs including the increasing proportion of Millennials, surging focus on Diversity & Inclusion; and rise of the ‘Gig economy’
- Increase in employee mobility
- Dichotomy of expectations: demand for flexibility in choices vs. the need for simplicity
- Easy access to information and comparison points
- Changing labor and tax laws
A recently concluded EY survey found that 44% of employees feel that employers do not provide accurate, helpful information about employment benefits
Within this environment of change, it is important for employers to reflect and re-shape their strategies for attracting and retaining top talent. Presented below are some key focus areas and leading trends to consider:
Concept of Total Rewards
In the currently concluded ‘EY Rewards Survey 2016’ both employers and employees were asked to rate the top 5 factors they thought were required for an effective work environment. Both groups rated ‘monthly take-home salary’ as the No. 1 priority, but differed greatly in their view on the relative importance of other reward factors. This presents an immense need for better alignment. Employees look for a story — one that underpins possibilities for professional achievement with the ambition for prosperity. Employers need to script and tell that story — the story of Total Rewards.
While the concept of Total Rewards has been around for a number of years, there has been an increasing appreciation of the concept in the past few years. The Total Rewards concept urges employees to view a holistic proposition comprising of multiple pay components including cash-in-hand, retirals, variable pay, long-term incentives, monetary/non-monetary benefits, development avenues and career progression trajectories. The advocacy, understanding and practice of the concept have been on the rise with a growing number of organizations using it to project a ‘full-package’ deal.
Pay structures are also going through evolution. While the proposition of “Lifetime Earnings” was a major influencer of employee choices in the bygone era, it no longer creates adequate enthusiasm. This has led to the evolution of a variety of design principles and approaches, such as:
- A new take on Egalitarianism: One of the earliest approaches followed by organizations was the egalitarian approach based on the premise that employees appreciate uniformity in rewards, irrespective of the criticality of their role in the business value chain. Most businesses gradually moved away from this concept. However, we see some new age organizations, including a leading e-commerce company, using an adapted version of this approach where compensation is differentiated on the basis of skills & competencies, but benefits are fully harmonized across hierarchical levels.
- Differential pay structures as a proposition: Organizations have traditionally favored uniform pay structures, making variations only with change in hierarchy. Organizations are now opening up to giving more autonomy to employees in deciding their pay structures, like the “My Pay-My Way” concept followed in some organizations. While this increases operational hassles for the organizations in administering multiple components and pay structures, the proposition resonates well with a diverse workforce.
- Increased monetization of benefits: Inclusion of non-monetary rewards and benefits into the pay structure has been on the rise. Organizations today are not shying away from monetizing non-cash rewards or benefits when presenting a total pay package. For instance, monetization of a school admit offered to a teacher’s child in the education sector or monetization of medical facilities provided by health care providers to its employees.
Market Parity – Pay Positioning
Organizations with strong brands sometimes chose to position themselves at or below market median. This is because the brand pull, along with the “opportunity to learn and do great work” becomes the key value proposition. However, in most organizations today, pay positioning is rarely uniform. Positioning variations typically come on account of:
- Niche skills: A skill may be defined as niche because of (a) low supply but high demand for the skill; (b) difficulty/ time taken to develop the skill; (c) difficulty/ time taken to replace the skill; or (d) impact of the skill on business. Organizations are willing to shell out premiums as high as 30-35 percent for “niche skills” like Data Analytics with Actuarial, and hence, may adopt a strategy to peg niche skills at a percentile much higher than the rest.
- Criticality of role in the value chain: The higher the criticality of a role, the stronger the business case for a higher percentile positioning. For instance, in the case of the education sector, IB Schools may be willing to retain a strong 90th percentile for all their HoDs and experienced teachers.
- Seniority: Organizations invest heavily in their leaders, across the cycle of acquisition-development-retention. More often than not, senior roles are pegged at 66th percentile or higher, across industries.
- Existence of "Ghost" Roles: Sometimes, certain key roles get chaired by “favorable incumbents” even though their functional competencies are not at the desired levels. In such instances, organizations often back these incumbents with able juniors who become critical and get positioned at the higher end of a pay band.
Pay for Performance
Performance based variable pay is an important tool in aligning employee efforts to organizational goals. Design considerations for variable pay schemes are increasingly getting based on:
- Differentiation: Organizations are moving towards greater differentiation between high and average performers. Low performers are excluded from variable pay-outs in most organizations. The growing trend has been to fold both line and support functions into variable pay schemes and move almost totally away from fully-fixed structures.
- Proportion: The proportion of variable pay is seen to vary by sector, functions and levels. Not only does the proportion of variable pay increase with seniority, but so does the relative linkage to corporate performance. For example, at a junior level (individual contributor role) in an IT services organization, an employee typically has 6%-8% variable pay, of which 0%-10% may be tied to corporate performance and 90%-100% to individual KRA achievement; while at a senior position (leading a function) has 25%-30% as variable pay of which 50%-60% is tied to corporate performance and rest to individual KRA achievement. This is on account of the increase in line of sight, decision making authority and ‘skin-in-the-game’ expected with seniority. An exception to this is seen in the case of smaller start-ups where employees across the hierarchy are able to see a clear linkage between their actions and corporate performance. Some such organizations apply a flat proportion of variable pay across levels.
- Team/group rewards: It is essential to design variable pay in alignment with the business work-flow and culture (aspects like individual vs. team contribution and process vs. results). This is leading to increased instances of group/team-based incentives, especially in case of teams where the need for collaboration is high or mission critical.
- Empowered managers: Most organizations determine the total variable pay pool for the organization and then cascade it to sub-units. Heads of each of these sub-units are given the autonomy to determine the quantum of variable pay for each individual in that sub-unit. Organizations that have abandoned performance ratings and bell curve are embracing this practice faster than others; the concept being that for the system to succeed, managers must have robust performance discussions and the associated autonomy to determine the reward quantum. Apart from traditional measures of performance, allocation by managers, who have a close line of sight, also helps better recognize aspects such as new skills & competencies acquisition, need for correcting internal disparities and need for focused retention of individuals. In fact, we are likely to see a broader and deeper adoption of this practice in the coming years.
It is essential to design variable pay in alignment with the business work-flow and culture
Benefits
Even though benefits may not be a prime factor in talent attraction in most cases, it does play a key role in employee engagement and retention. A recently concluded EY survey found that 44% of employees feel that employers do not provide accurate, helpful information about employment benefits.
‘How’ and ‘How much’ to compensate have been the recurring questions for deliberation in organizations around the world
What organizations need to remember is that it is not about how much they spend on a benefits program, but the ‘perceived value’ of the benefits in the minds of the target employees that becomes critical for the success of the program. Hence, ‘listening’ to the needs of the employees and thorough communication of the benefits are key.
Flexibility is the new mantra. Organizations are moving away from a ‘one-size fits all approach’ to having a customizable basket of benefits as they look to cater to the varying needs of a diverse workforce which typically is a mix of Gen X and Millennials, local and global, early starters and matured professionals. The proposition of employee wellness is still nascent in most Indian organizations but certainly one on the rise. Organizations are expanding the spectrum of benefits from mediclaims & health-insurances to a range of innovative ways for improving the overall health & fitness of employees. Examples include availability of fitness centers, showers & changing rooms, bicycles for commute, wider health check-ups, yoga/dance classes, counseling and weight management sessions.
It is also essential to mention that the growing focus on Diversity & Inclusion (D&I) is also impacting the corporate thought. From a Total Rewards perspective, benefits are an important tool in improving the D&I quotient. That is why many organizations implemented the six-month maternity leave policy ahead of the Government regulation. An increasing number of organizations are providing flexi work-hours, flexi workplaces and career-breaks. Some other benefits that are gaining prominence include longer paternity leaves, adoption leaves, transfer of leaves among employees, child-care, fun at work.
The future holds promises of growth and innovation. Organizations aspiring to remain competitive will need to be agile and innovative in managing the rising complexities in workforce management. Orchestrating a fit-for-purpose Compensation & Reward strategy will be a key propeller in this quest.