Resources

A very common area for disgruntled employees is to complain about their pay. True no one is ever happy about their pay, but this article is written to help provide guidance to HR about having the tough conversation. Let’s start by looking at the premise of pay. Pay generally has 2 parts – Fixed Pay and Bonus. Fixed Pay is what one should get paid based on the requirement of the role and this should be centrally controlled; only allowing for modifications when the core component of the job itself has changed. The bonus on the other hand is discretionary and is directly related to the performance of an individual as determined against their KPI. Fixed Pay should not be, to a large extent, dependent on the person doing the role. Fundamentally, Fixed Pay should be determined as a result of sizing a job. This can be done in various ways, with job evaluation being one of the most common approaches. Sizing a role means understanding what is required of the job. There can be some discrimination based on supply and demand for that role. If that particular job is in demand and candidates are hard to get or an organisation really needs to hire a particular candidate, there is some scope for discretionary payment. This is also the most debated topic among candidates looking for a pay increase.

Whether we like it or not, employees are always comparing their salary to their colleagues, friends or what the market is paying other similar roles. Their source for information is to look at free salary data like Glassdoor or Seek or from heresy. It gets very hard to have this conversation as it may come across being defensive without proper data or logic. However, if you understand how pay is determined, it might be easier to understand the basics of pay. Sizing a job depends on multiple factors including the complexity of the organisation, the specific market or industry, the financial accountability and problem solving requirement of the role and finally, the knowledge and experience along with the leadership component of the job. No two jobs are the same and hence, no two roles are paid the same. Understanding how these factors may differ in different situations is a good starting point to understanding pay differences.

According to Maslow’s hierarchy of needs, one of the basic intents why one stays engaged in a job is the knowledge that they are being paid adequately and fairly to commensurate for their efforts at work. However, often this process of determining the right pay can be much more difficult than it needs to be. Let’s look at this process to understand the complexities that arise with this.One of the common ways of determining pay is to size a job. In the absence of such methodologies, organisations often use salary survey data to match one job title to another. It is quite obvious how this could be quite meaningless.

 There are 3 main issues:  

•  Think about the variety of titles one role could be doing. Most organisations have their own nuances of allocating different titles to, quite specific but often meaningless to the outer world, mean different job types 
• The quality of the results is as good as the organisations filling in the survey. Most surveys have some kind of quality control but given the vastness of such data, this might not be as measured and controlled as you would think
• The range of salary associated with a role could also be quite broad – one such survey had a pay range for one middle manager role to be between $80,000 to $140,000. Apart from the almost negligible value this stand alone survey data provides, you can also imagine that this data is then superimposed with other market factors like number of years of experience, the bargaining power of the employee and the reporting relationship, along with the complexity of the organisation and other legacy factors.

Due to this, relying solely on paid or worse free surveys is not the most efficient way of deciding on remuneration outcomes. On the other hand, a more scientific methodology is to convert job or position descriptions to job size. However, Position Descriptions are mostly a copy paste of old, poorly written Position Descriptions, using outdated templates and are mostly inconsistent with other HR documents like recruiting briefs, individual learning goals or KPIs. Finally, most managers don’t have the time, desire or education to write a proper Position Description. To make matters worse, HR also has certain limitations like lack of skill or understanding how to size a role, lack of proper understanding of the role and most HR don’t consider internal relativity when they are sizing a role. Over time, this leads to poorly designed and sized role and with a lack of process surrounding regular updates of PD, very soon roles are paid out of market and it stays this way. If the role is paid quite lower compared to the market, this leads to higher than average attrition and in the reverse case, the organisation’s bottom line gets impacted quite severely. Worse still, most organisations aren’t even aware of this.

Remuneration review is often viewed with trepidation or with anticipation in mostorganisations. It is the time when employees get “rewarded” for their performance last year and is also, often the time when organisations better align employees pay with the market. This can be the most strenuous time for the HR as they try to balance multiple activities at the same time – collaborating with finance to set budget, assisting the business to conduct performance management on time and fairly, allocating Fixed Pay and bonus and managing
employee emotions; while completing all this on time and with extreme care and precision.

Most organisations conduct Fixed Pay review and bonus payout at the same time. It is important to understand these processes and the role a remuneration manager or HR can play at each of the steps in these 2 reviews. This article aims to draw up a primer that HR can use to best manage this time as well as prepare for the next round of remuneration reviews.

We first look at Fixed Pay review.

Let’s assume that the remuneration review process happens in June so that salary increases come into effect from August. In order to manage this complex project, we recommend you get started in February or March. The first step in this process is working with the Finance department to determine the budget – both for Fixed Pay and for bonus payout. This is a very important step to get right because this determines how much budget you might have access to. Having access to market information can be quite helpful for Finance – how much are other organisations paying, what has been the trend of increase, how much has the minimum wage, inflation and unemployment moved over the last years. An additional input that Finance would need is a simulation of various Fixed Pay gain scenarios to the overall budget. Given the current workforce and plans for growth, how much would certain % increase in Fixed Pay mean to the operating cost. In our experience, this can take anywhere between 2 to 3 weeks.

The next step is to calculate Fixed Pay increases. The important steps are then to understand whether a flat % increase applies to the whole organisation or is there a differential increase to different groups of employees. At this stage, HR also has a consultative role to play – at this stage, the position of the role in the context of the overall market is important. Looking at survey data, where does any role fit with other market roles (with regards to compa-ratio) and equally important, how about internal relativity?

An extension of this step is to decide on rules to address special cases. The rules should be decided and communicated clearly to all employees. Especially important are considerations for leave or leave without pay, roles that are leaving or joining, change of role, change of status of role and higher duties. How much is a minimum time for Fixed Pay increases to be effective. As is obvious, managing this process through Excel files, emails and word documents can be laborious and rife with errors. We recommend starting early, keeping the models ready and using a systematic approach to ensure all calculations are done on time and with a high degree of precision.

A common problem that we have seen in many organisations is the sheer lack of consistency among different employee lifecycle stages. This includes, but is not restricted to, position description, recruiting brief, KPI setting and individual learning goals. As is obvious, a lack of consistency in the process leads to significant staff morale loss, a lack of transparency and gradually over time, a lack of trust in management.

Let’s look at this in a bit more detail. Imagine an employee is recruited as a Sales Representative. A poorly written position description which was used for recruitment stated that the main accountabilities of the role was to acquire direct sales. However, a critical accountability, which was to pursue cross selling activities was not expressed by the line manager and thereby overlooked by the recruiting team. John, the incumbent thrives in building his own relationships but is hesitant to engage with current customers to cross sell.However, this is precisely what he is being measured on, as part of his performance discussion.

Imagine John’s frustration when he realises that what he thought the job entails is not what his performance is being measured on. However, the line manager is probably not aware why John isn’t performing to the best of his ability. Because of this, the line manager isn’t also able to determine cross-selling as an area of development for John. Where do you think this would end up in? 

Most certainly, not to the benefit of John, his manager or the organisation. Now, imagine a world where all these critical processes are tied in through one central data source which is monitored and updated regularly by the manager. Not only will this reduce the gap in expectation and reality, it will also ensure that the key requirements are being measured as performance metrics.

Profiler is an innovative HR product which helps improve quality of hires by translating the expectations of the manager to primary focus and competencies of the role. Please talk to us if you would like to know more about how Profiler can help you with defining roles more accurately.