Section 1.

2: Click to edit Master subtitle style Reward Elements

Do reward systems influence an organisations success?

The amount paid and the way it is packaged can motivate, energize and direct employees behaviour. Plays an important part in attracting and retaining qualified, high-performance workers. Payroll costs comprise a large percentage of total costs and as such decrease profits.

Key concepts
The employee rewards proposition Key remuneration and benefit processes in

the employee rewards proposition: Pay reward equation Fixed and variable compensation Incentive pay and line of sight Benefit selection and design

Remuneration and benefits can on its own no

Employee rewards proposition

longer secure an appropriate talent pool for a high performance organisation.

An organisation aspiring to high performance

status has to brand itself as an attractive proposition to both existing and prospective employees.

In branding itself it has to create what is

generally referred to as an employee rewards proposition.

EMPLOYEE REWARDS PROPOSITION

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COURTESY OF BAT SA

FROM BAT SA

Remuneration Architecture Map

KRAS KRAS

MACRO MACRO PROCESSES PROCESSES

Remuneration that is:

Pay Reward Equation Competitive & Flexible Competitive & Flexible Monetary Incentivisation Benefit Selection and Design Non Monetary Recognition Empowering & Transparent Empowering & Transparent R & B INTELLIGENCE EXTERNAL STAKEHOLDER MANAGEMENT INTERNAL STAKEHOLDER MANAGEMENT

R&B Communication & Training Decision Governance

Effective Delivery Effective Delivery

Infrastructure Selection Infrastructure Efficiency

Pay Reward Equation

Key Issues and Principles

Key Issues

Key Principles

Line Managers with adequate remunera You cannot pay everyone the same salary, information and appropriate decision sup you therefore have to find a fair basis for placed differentiating the salaries of employees.to make fair decisions with regard salaries of their staff.

In order to make this happen you howev

Illustrated in model form, you need

- For certain tools to be in place and ope - For certain key role players to assume responsibility for certain decisions; - For certain measures to be in place in to monitor whether the desired outcom being achieved

Pay Reward Equation Macro Model

Actual vs. Target Employee Internal Equity Salary Distribution Perception of Audit Checklist Salary Fairness Board Compensation Committee Guidance (BCC) From Line HR Managers Decides what the Overall Increase Budget is Grant Salary Increases to Individual Employees Measure

Role Players

Decisions

Salary Equity Model Tools Job Evaluation Salary Surveys and Market Anchors Performance Management

Pay Reward Equation

Performance Management

The likely performance distribution a high performance organisation

Stars Nearly There & Solid Citizens Inadequate

15% - 25%

65% - 80%

5% -10%

Issues relating to traditional performance management

12% 10% 8% 6% 4% 2% 0% 12% 8% 4% 0%

How many performance categories ? How do I reward my stars and stay within budget ? and then came the right question What salary distribution am I targeting and in relation to which

Pay Reward Equation

Performance Management

A 4-Point Performance Rating Scale

EXCEED SUCCEED

Outstanding Performance which has exceeded normal exp by far. The Individual scored a hat trick of 3 goals, including a goal, and prevented a definite goal by the opposition.

Good Performance which met expectations. The Individual made a valuable contribution to the tea

NEARLY THERE

Signs of below average performance which did not meet e The Individual had a very quiet match, but will be reta team because of his potential. Will however be droppe team if his performance does not improve.

INADEQUATE

Performed well below normal expectations Scored an own goal and continually lost the ball to opp An opportunity has arisen for a new player to prove him

8 7 monthly salary (R000) 6 5 4 3 2 1

Ensuring Equity: Developing a Pay Policy Line

PAY

Line of Best Fit

40

80

120

160

200

240

280

320

Job Evaluation Points

Developing a Pay Policy Line

8 7

Predicted Salary = R7,128

monthly salary 5 (R000) 4

Predicted Salary = R6,486

PAY

3 2 1

Job Evaluation Points = 315

40 80 120 160 200 240 280 320

Job Evaluation Points

Pay Grade Structure

8 7

monthly salary 5 (R000) 4

PAY

3 2 1

100

150

Job Evaluation Points

200

250

300

350

Pay Reward Equation

Salary Equity Model

Understanding what a comparatio is..

A comparatio is your salary expressed as a percentage of the reference

market salary (market anchor) for your job grade: Salary Market anchor for job grade

100

Example: Market Anchor Salary R1000 R 1100 R 1000 x 100 = 110 Comparatio R1100

Salary Surveys & Market Anchors

Pay Reward Equation

What do you need from a Salary Survey in order to calculate Market An

M rk t D ta a e a
LQ s - /tile 700 00 Salaries 600 00 500 00 400 00 300 00 200 00 100 00 0 L /tile -Q s Md n e ia UQ s - /tile F 485 87 565 42 607 08 E 340 34 340 68 330 93 D 193 81 262 01 287 18 C 97 50 167 05 100 17 B 58 88 67 22 69 46 A 46 45 40 72 49 77 Md n e ia U /tile -Q s

Upper quartile, Median and Lower quartile values for each of your job grades Anticipated annual movement in each of the above

R s o s ilit L v ls( o Ga e ) e p n ib y e e J b r d s

sion by company as to which pay line should be used as reference for mark

Salary equity model

140 Exceed Comparatio
Employee A

130

Reward for exceptional skills Market Anchor

125
115 Market 90th Percentile

100

110

30% monthly premium for performance and skills contribution

100 Market Upper Quartile

90

95 Succeed

90 Nearly There Inadequate

Pay Reward Equation Determining Who gets What Increase

Does my % increase tell me something Unfortunately not, as a matter of fact it Example:

The purchasing power of person B has increased with 20% more than the purchasing power of person A, yet when judged against the % increase on its own, it creates the perception of no differentiation between A and B

Target Process Pay Reward Equation Results Macro Model

Actual vs. Target Employee Internal Equity Salary Distribution Perception of Audit Checklist Salary Fairness Board Compensation Committee Guidance (BCC) From Line HR Managers Decides what the Overall Increase Budget is Grant Salary Increases to Individual Employees

Measure

Role Players

Decisions

Salary Equity Model Tools Job Evaluation Salary Surveys and Market Anchors Performance Management

Pay Reward Equation

Targeted Process Results
Employee Perception of Salary Fairness:
Measure through perception survey

Internal Equity Checklist:

Assessment of the comparatio of individual employees relative to the following criteria in order

to determine whether a special adjustment could be considered for the employee:

Employees with exceed performance ratings falling outside the desired comparatio range for exceed performers: No comparatio adjustments for employees: With personal grades, OR That have been in their current position for less than 12 months. Comparatio adjustments can be considered for employees: Outside the exceed comparatio range AND Who received an exceed rating for the last three consecutive years.

Employees with succeed performance ratings falling outside the desired comparatio range for succeed performers: No comparatio adjustments for employees: With personal grades, OR That have been in their current position for less than 12 months. Comparatio adjustments can be considered for employees: Outside the succeed comparatio range

There are two options for granting such special adjustments: As individualised lag adjustments during the annual salary review As an interim adjustment between salary reviews

Monetary Incentivisation & Non-Monetary Recognition

Key Issues Key Issues and Principles

Key Principles

How do you ensure that the hearts andUse a short term incentive arrangement minds of employees are focussed on to focus and inspire employee outputs delivering high company performance ? which contribute to high company performance. How can you reinforce constructive employee behaviour in the company ? Use a Non-Monetary Recognition arrangement to reward constructive employee behaviour.

Monetary Incentivisation & Non-Monetary Recognition

Short Term Incentive Schemes

Business Imperatives for introducing a short term incentive scheme

In the emerging world of work, business success is increasingly

determined by team effort rather than individual effort.

Money can influence behaviour which in turn can influence

main stream company results.

Monetary Incentivisation & Non-Monetary Recognition Short Term Incentive Schemes Key Design Criteria for short term incentive schemes
Inclusiveness:
Include everyone.

Reward team results as opposed to individual

results Line of sight:

Simplicity:

Ensure that employees see a link between what is

required of them and the incentive payments.

Keep it simple.

Incentives must become part of the daily

business agenda

Incentive targets and achievements against these

targets must be common knowledge for employees and a source of daily inspiration for behaviour

An Example.

ModelShort Term Incentive Schemes Incentive Scheme Design Company Charter

with KRAs & MOSs Bonusable Items for Incentive Payment

Monetary Incentivisation & Four Company Non-Monetary Recognition and Functional Performance Levels
Stretch

Senior Management

Target

All Employees up to Senior Management

Functional / Unit + Charter

with KRAs & MOSs

Minimum

Inadequate

Company

Two Thirds

One-

An Example.

Monetary Incentivisation & Non-Monetary Recognition

Short Term Incentive Schemes

Communication - The Enabler of Success

Annual Road Show
Provide feedback on past financial year results. Communicate Company Charter for new year

Monthly Feedback Reports by Line Managers on

both Company and applicable Functional Charter.

Half-year Status Report through MD Video

Presentation.

Monetary Incentivisation & Non-Monetary Recognition

Short Term Incentive Schemes Monthly Feedback Report Template
weighting

share productivity supply chain cash profit inadequate minimum target stretch

30% 15% 15% 10% 30%

Monetary Incentivisation & Non-Monetary Recognition

Short Term Incentive Schemes Modern vs. Conventional Approach to Incentive Schemes Modern Approach
Inclusive of All

Conventional Approach

More exclusive and often limited to Management specific Functional Groupings Incentive Payment based on Company (i.e. Sales Force) and Functional Team Performance ONLY Incentive Payments often (at least partially Line of sight between Company / Team linked to Individual Incentive Targets, Objectives and Individual Contributions believing that the Individual Incentive created through Line Manager Centred Targets are required to create line of sight Communication Model (thus avoiding the complexities of individual incentive targets)

Creating line of sight through annual incentive scheme.

Line of sight in objective reward

company charter functional charter individual performance contract

Line of sight in objective setting

Bonusable objectives (5) Line of sight objectives Functional objectives Individual objectives (key result areas)
Individual performance rating

Company performance rating

100%

Annual incentive payment to senior management

67%
Functional performance rating Annual incentive payment to all other employees

33%

Individual salary

Monetary Incentivisation & Non-Monetary Recognition

Employees that feel valued are likely to engage in constructive behaviours

Non-Monetary Recognition

to the benefit of the company.

Such constructive behaviours can be facilitated by providing non-monetary

recognition in one or more of the following ways:

Personalised Thank You Cards Small Gifts / Vouchers to Express Gratitude Achievement Oscars / Certificates

Benefit Selection and Design

Deciding on Which Benefits Offer

Defining open ended liabilities:

Any benefit where the cost of the benefit to the company is

significantly or fully determined by factors outside the direct control of the company, is an open ended liability. Examples of open ended liability benefits:
Employee

is given a fully paid and maintained company car to use for business and private purposes. Company contributes 50% of and employees medical insurance premium. The company pays the employees monthly electricity bill.
The other major problem usually associated with open ended

liability benefits is the remuneration inequity it creates between same status employees.

Benefit Selection and Design

Deciding on Which Benefits Offer

Values generally vary due to individual utilisation of benefits

Electricity Benefit

Car Benefit

The fluctuating benefit values due to differences in individual benefit utilization results in remuneration inequity between same status employees.

Basic Salary

? Size of total remuneratio n package value fluctuates due to actual benefit utilisation by employee

Traditional remuneration package with open-ended liability benefits

Benefit Selection and Design

Deciding on Which Benefits Offer Defined company contribution benefits. - The acceptable alternative to open ended liability benefits - In a defined company contribution benefit the cost of the benefit to company is directly and fully governed by company decision makin
Open ended liability examples
Employee is given a

Defined company contribution alternatives

Car allowance of a particular value plus

fully paid and maintained company car to use for business and private purposes.
Company contributes

reimbursement of business related travel at a set rate per kilometre.

The company pays an allowance of a

50% of and employees medical insurance premium.

particular value towards the medical insurance premium of the individual. The allowance is reviewed during the annual salary review.
The employee is paid a fixed monthly

allowance for electricity expenses which is reviewed during the annual

Benefit Selection and Design

Deciding on Which Benefits Offer

Same value benefits to same status employees

Electricity Benefit

Car Benefit
No fluctuation in benefit values due to differences in individual benefit utilization, results in remuneration equity between same status employees.

Basic Salary

Creates the platform for individual benefit choice on an Modern remuneration package equitable basis. with defined company contribution benefits

No fluctuation in size of total remuneration package value due to actual benefit utilisation by employee

Benefit Selection and Design

Deciding on Which Benefits Offer
The starting point in deciding which benefit to offer is a benefit audit In a benefit audit you:
List and briefly summarise the current benefit practices in

your company. Identify whether any of your current benefits practices are an open ended liability for your company. Survey and summarise the benefit practices offered by your key competitors for talent (or a representative sample of such key competitors). Identify and note any labour law or other regulatory provisions applicable to the benefits listed in the benefit audit. Identify the desired scenario for your company on each of the benefits listed in the benefit audit. This should also include a desired position on benefits not offered by your company, although offered by at least some of your key competitors (as identified through the survey). Identify the priority, timing, actions and resources required

Main types of employee benefits

Pension schemes: generally regarded as most important Personal security: enhance personal and family security

regarding illness, health, accident or life assurance

Financial assistance: loans, housing schemes, relocation

assistance, discounts on company goods and services

Personal needs: interface between work and domestic

needs holidays, other leave, child care, career breaks, retirement counselling, personal counselling, fitness and recreational facilities
Other benefits: improve standard of living subsidised

meals, clothing allowances, telephone costs, cellphones, credit card facilities

Intangible benefits: characteristics of organisation

contribute to make it attractive and worthwhile place to

Taxation, flexible benefits, total remuneration

Most benefits taxable exceptions pension

schemes, medical to some extent Flexible (cafeteria) schemes allow employees to decide within limits how to structure benefit package Total remuneration based on principle of treating all aspects of pay and benefits as a whole cost to company value of each element to individual can be assessed to adjust package according to organisational and individual needs competitiveness in market can also be considered.

Responsibility for reward

Trend to devolve more responsibility for pay decisions to line

managers
Dangers: inconsistency between managers decisions,

favouritism, prejudice, illogical distribution of rewards

Research has shown many managers tend not to

differentiate between performance of individuals most people clustered around midpoint

Must be briefed thoroughly on their responsibilities, the

organisations pay policies, principles to be followed in conducting a review and how to interpret and apply pay review guidelines the need to achieve equity and a reasonable degree of consistency across the organisation emphasised should be given training and guidance

Communicating to employees
Reward systems send messages about the beliefs on what is

important when valuing people in their roles: this is how we value your contribution, this is what we are paying for transparency essential
Employees generally should understand:
The reward policies in setting pay levels, benefits, progressing pay Pay structure grades and pay ranges, how structure managed Benefit structure range of benefits, details of pension scheme and other major

benefits Methods of grading and re-grading jobs job evaluation scheme and how it operates

Communicating to employees
Employees generally should understand:
Pay progression how pay progresses in pay structure, how pay decisions affecting

employees collectively and individually are made Pay-for-performance schemes how individual, team and organisation-wide schemes work and how employees can benefit from them Pay for skill or competence - how skill- or competence-based schemes work, the aims of the organisation in using them and how employees can benefit from them Performance management how processes operate and parts played by managers and employees Reward developments and initiatives details of any changes to the reward system, reasons for changes and how employees affected

Communicating to employees
Individual employees should know and understand:

Their job grade an how it was determined The basis upon which their present rate of pay has been determined The pay opportunities available to them the scope in their grade for pay progression, basis of link between pay and performance, acquisition and effective use of skills and competence in career development actions and behaviour expected of them for their pay to progress Performance management how performance reviewed their part in agreeing to objectives and formulating personal developmental and performance improvement plans Value of employee benefits they receive level of total remuneration, including pension, medical, etc. Appeals and grievances how they can appeal against grading and pay decisions or take up a grievance regarding any aspect of remuneration

Grade and pay structures

Provide framework for managing pay Although grade structures increasingly used a

part of non-financial reward processes mapping career paths without direct reference to financial implications Usual outcome of formal evaluation programme new/revised grade structure with market rate analysis provides basis for designing and managing pay structures

Grade structures
A grade structure consists of a sequence/-

hierarchy of grades/bands/levels into which groups of jobs that are broadly comparable in size are placed. May be a single structure with sequence of narrow grades (often 8 12) or relatively few broad bands (often 4 - 5 ) May consists of number of career/job families (grouping jobs with similar characteristics), each divided into 6 8 levels

Definition of grades, bands or levels

By means of range of job evaluation points

jobs allocated to grade/band/level if points fall within range/bracket of points In words describing the characteristics of the work carried out in the jobs that are positioned in each grade/level these definitions set out key activities and competencies/knowledge and skills required at different points in the hierarchy By reference to benchmark jobs/roles that have already been placed in the grade/band/job family level

Pay structures
Pay structures provide framework for

managing pay Grade structure becomes pay structure when pay ranges/brackets are defined for each grade/band/level or when grades are attached to pay spine Some broad banded structures, reference points and pay zones are placed within the bands, these define the range of pay for jobs allocated to each band May be single structure for whole organisation or one for staff another for manual workers

Types of pay structures

Two main types:

Graded, broad banded, family structures:

pay ranges/scales for jobs grouped into grades/bands/job family levels define different levels of pay for jobs/groups of jobs by reference to their relative internal value determined by job evaluation, external relativities established by market rate surveys and where relevant negotiated rates for jobs also provide scope for pay progression linked to performance, competence, contribution or service Pay spines: hierarchy of pay/spinal column points between which are pay increments and to which grades are attached

Rationale for grade and pay structures

Provide logically designed framework within which

an organisations pay policies can be implemented Enable organisation to determine where jobs should be placed in a hierarchy, define pay levels and the scope of pay progression, provide basis upon which relativities can be managed, equitable pay achieved and monitoring and controlling the implementation of pay practices can take place Medium through which the organisation can communicate career and pay opportunities available

Criteria for grade and pay structures

Be appropriate to culture, characteristics and needs of

the organisation and its employees Facilitate the management of relativities and achievement of equity, fairness, consistency and transparency in managing grading and pay Be capable of adapting to pressures arising from market rate changes and skill shortages Facilitate operational flexibility and continuous development Provide scope for rewarding performance, contribution and increases in skills and competence Clarify reward, lateral development and career opportunities Be constructed logically and clearly so that basis of operation can be communicated to employees Enable organisation to exercise control over implementation of pay policies and budgets

Types of grade and pay structure

Single or narrow graded structures: consists of a

sequence of job grades into which jobs of broadly equivalent value are placed pay range attached to each grade
Maximum of each range typically 20% - 50% above

minimum Also described as % of midpoint Midpoint often reference point/target salary, rate for fully competent employee usually aligned to market rate in accordance with organisations policies (called market stance) Pay ranges provide scope for pay progression usually related to performance, competence/contribution May be 8/more grades in structure Grades may be defined by job evaluation in point

Single or narrow graded structures

Differentials between pay ranges typically around

20% - usually overlap between ranges (can be as high as 50%) Overlap provides flexibility highly experienced person at top of range may contribute more than one that is still learning at bottom of next higher grade midpoint management techniques analyse and control pay policies by comparing actual pay with midpoint which is regarded as policy pay level comparatios can be used to asses the relationship between actual and policy rates of pay as a % - if coincide comparatio = 100%

Advantages of single or narrow graded structures

Provide framework for managing relativities and for

ensuring equity All jobs in single structure not divisive (criticism against job family structures) Enable process of fixing rates of pay and pay progression practices to be controlled Easy to manage and explain to employees

Disadvantages of single or narrow graded structures

If too many grades, constant pressure for

upgrading leading to grade drift Can represent an extended hierarchy which may not longer exist in a delayered organisation May function rigidly, which conflicts with flexibility required in new team and process based organisations

Broad banded structures

The number of grades compressed into a relatively

small number of much wider bands in which pay is managed more flexibly than in a conventional graded structure, increased attention to market relativities Each band can span pay opportunities previously covered by a number of separate grade and pay ranges - range of pay therefore wider than traditional graded structure (widths of 50% - 75% or 75% 100%) Typically 4 6 bands in structure Band boundaries often defined by job evaluations Jobs may be placed in bands by reference to market rates or combination of market rates Bands can be described by overall description of jobs allocated to them (e.g. senior management) or by reference to the generic roles they contain

Broad banded structures

Replacing narrow/single graded structures in many

organisations Originally developed in USA (early 90s) to allow unlimited progression through bands many organisations have found lack of structure unrealistic and unmanageable Some method has to exist to control progression otherwise costs increase too much, also difficult to ensure rewards matched levels of contribution - people unrealistic expectations of future earnings Most common solution to insert reference points into bands which indicate normal rate for a job and are aligned to market rates ranges for pay progression may be built around the reference points (called zones) Erosion of original broad banding concept advanced by recognition in many organisations that in interest of equity and equal pay, job evaluation has to be used to locate reference points for jobs within bands or to define segments

Advantages of broad banding

Flexibility:

Scope to adapt rates of pay more readily to

market increases Reward lateral career development without being restricted by rigid grades Reduction in cost of implementing a new pay structure as more jobs are incorporated in the bands, with less need to increase the pay for jobs placed below the new pay ranges in a structure with narrower grades Provides role specific and performance management focus on reward moving away from overly structured and bureaucratic approach of typical multi-graded structures Reduce time spent analysing and evaluating jobs fewer levels to distinguish

General disadvantages of broad banding

Harder to manage than narrower graded structure considerable demands on time of line and HR managers Inflated employee expectations of significant pay opportunities doomed if proper control of system is maintained Can be difficult to explain to employees how broad banding works, how they are affected and decisions on movements in bands can be harder to justify objectively employees may be concerned about apparent lack of structure and precision These disadvantages lead to introduction of bands within bands/zones different from grades? (zones operate more flexibly w.r.t. grading, pay progression and reaction to market pressures)

Equal pay problems of broad banding

Reliance on external relativities (market rates) to place jobs in bands can reproduce existing inequalities in the labour market Broader pay ranges in bands mean they include jobs of widely different values/sizes, may result in gender/race discrimination Women/race groups may be assimilated at present rates in lower regions of bands and find it impossible/very difficult to catch up with males who are place in upper ranges of bands based on existing pay rates

Objections lead to greater attention to placing jobs

in bands on basis of internal relativities, on basis of analytical job evaluation sensitive to market rates but not slaves to them not reproduce external discriminatory practices Scepticism about broad banding concept lead to more attention to career family and job family structures