Here’s the thing. Times are bad and your company is unwilling to loosen the purse strings to pay good talent for what they are worth. But it doesn’t make sense to underpay your employees. Or does it?
This year, most companies have shrunk their salary budgets, creating a severe dilemma for HR to come up with the best compensation and benefits package to attract, reward and motivate employees. The funds may be limited but there is no reason for HR to let their heads drop. Those who can make creative use of what little budget they have may well be the ones who would ride out the downturn in style.
So what should the components be made up of? We speak to three HR professionals who are willing to show us the money. Or rather how they calculate the best system to reward employees and still send a positive message about their organisation’s objectives.
Transparency is the best policy
One of the best ways to start is often the most overlooked one. A good company never short-changes its staff when it comes to rewards. To do that, the company has to be transparent about the components that make up the employee’s salary package.
The reason is as simple. It prevents people from wasting time at work devising ways to get more money. “If people know they are getting a fair wage, they hunker down and do their job,” says Billy Tan, regional HR director for leaf tobacco merchant Alliance One International Asia. “They don’t have to keep thinking about ‘Am I getting the raw deal?’”
But transparency doesn’t mean everyone should start trading salary information with one another at the watercooler. The figures themselves should remain private and confidential – in theory – yet somehow people will talk. And things have been known to get ugly once employees find themselves short-changed. OCBC Bank’s head of HR planning and employee communications Jacinta Low explains, “We need to demonstrate to individuals that our reward and compensation system is fair.”
So how do you build up your reputation as a fair employer? It takes years, says Republic Polytechnic’s director of human resources Anderson Lim. In case of pay disparity, honesty upfront would be the best policy. “If for some reason we need to pay them less, it’s better to be honest. We should not be clouded in a sea of suspicions.”
While not exactly trying to preach, Tan admits in a way there is a moral lesson for HR when it comes to money matters. “Everything must be aboveboard and on the table.”
The reconnaissance mission
You did not hear it from us but unofficially, the major players in all industries do talk to one another about salary rates. It is an open secret although no one would admit it as heads might roll if the exact compensation figures for their executives end up on the dailies’ front page.
But Republic Polytechnic (RP) seems comfortable with the open mining of salary information with its competitors. In fact, the schools have agreed to keep a large portion of their compensation and benefits packages similar. Not only does it keep employees from comparing, it conveniently eliminates the talent poaching war, which could cause a salary pricing nightmare in the industry.
“If we want to differentiate ourselves, it should not be by remuneration,” Lim says. “It should be by our work culture, products, work environment and other intangibles.”
So there is a corporate necessity with sharing as no one wants their wage levels to rocket based on the talent’s whim and fancy. By contrast, AOI depends on hearsay and even the new hire’s previous payslip to roughly gauge its competitors’ remuneration packages. Discussing employee wages with competitors might be an attractive proposition for some, just not Tan. “I’m sure they want to know what we are paying [as well] but their HR director and I don’t sit down, chit chat and share heart-to-heart secrets.”
Unlike the rest, OCBC Bank’s Low made no mention of any similar HR community groups or even sly salary probing within the banking industry. She is, however, aware of the advantages a competitive compensation brings. Other than the usual purchase of published reports and engagement of HR consultants, Low conducts annual market salary surveys for all her employees, including fresh graduates, keeping her company’s reward system “competitively market driven”.
The middle ground
When it comes to weighing their compensation packages against the market, the official stance for most companies is: “We are pegged at the market median”. That is the general compensation line but depending on financially viability, some companies would be above or below the bell curve.
While OCBC Bank would only say it is market competitive, both AOI and RP peg their compensation packages between the 50th to 70th percentiles of the salary market. The higher percentile allows them to differentiate themselves against competitors, which naturally attracts a higher calibre of talent to the company. “It’s because we don’t want average people,” says Lim.
This means the annual base salary (including taxes and allowances) and annual bonus variables for senior management staff are 70% and 30% respectively. Junior employees’ salary packages tend to have a higher fixed cash base of 85% and 15% of variables. Which makes sense because the more senior role you play, the more strategic your target goals become in relation to the business objectives.
That’s why HR would dangle high bonus variables to spur management employees into driving greater results for oneself and the company. Which naturally makes the shareholders happy too, adds Tan.
Although such a compensation ratio may be thrown out of the window when it comes to smaller organisations. Tan says, “Smaller companies may occasionally, because they want a proven talent, have no choice but to cough up more cash.”
The price is right
When it comes to determining the right base salary figure to pay an employee, all three companies rely on – five main factors – potential, seniority, job grade, current job size and contributions expected. These factors all lead up to an important component which keeps the entire workforce happy. It’s internal equity.
Unless it is a very special or newly set up position, AOI sees no point in upsetting its people with a wide pay disparity between similar job functions. “I cannot pay one $40,000 and another one $80,000,” says Tan. “That is totally unacceptable and it will cost a lot of distress and unhappiness.”
No doubt, unhappy employees will find means and ways to disrupt the company if they are not compensated accordingly. There is however an internal salary range these companies measure its value of the talent by. If a candidate fulfils all the required competencies for the job grade, HR would usually pay him or her within the grade’s allocated pay range.
Though it is unlikely HR would pay at the maximum range level if there are staff profiles similar in potential and age within the company. If the majority of them are paid $80, the new hire will most likely be paid the same even if the job’s salary range is between $70 and $100. But what if the employee asks for $75 when he or she is in fact worth $100?
“Then it is up to us to see if we should pay you $75 or $100,” Lim says. “The factors are based on how I feel you are going to contribute. Can I motivate you further if I pay you [the difference] later?”
So it isn’t true HR will pay the lowest possible wage they can get away with in this harsh economical climate. While it still depends on the CEO’s direction and business strategies, Lim says it would be short-term thinking on HR’s part if they undercut talent who can perform well.
“If you can do it well, we don’t want to cheat you because you would be unhappy,” says Lim. “We also don’t want to overpay you unnecessarily because we would be unfair to our staff.”
So what’s the right price? Tan says, “It depends on how good this fellow is and how badly you want him.” Sometimes HR might have no choice but to give employees between two and three 10% pay increments to attract or retain them.
The secret formula to performance payout
With the basics out of the way, it’s time to get to the nitty-gritty of the ever increasingly important performance-based payout. There’s no question that all HR professionals understand the value of linking pay with good performance a long time ago. Besides keeping employees running at tiptop condition, no one can ever accuse HR or even the boss for playing favourites.
For example, if you achieved 100% of all your objectives by yearend, you may expect a bonus of up to 20% of your base salary. If you achieve half, you get 10%. This policy of pegging performance goals to bonuses also helps motivate poor performers, which in turn raise the organisation’s performance level and effectiveness. Bear in mind though, the reward between star and poor performers must be significant enough, says Lim, to change the poor behaviour or attitude.
But again, bonus differences cannot be too drastic. “Too wide a divide leads to jealousy especially if it cannot be properly justified and would likely be perceived as nepotism,” says Tan. People would reason he is being paid extra because he knows how to “kiss ass”.
Similarly, any reward system must take into consideration not only the individual’s effort but also the entire team’s or the operating entity’s effort. It usually comprises a ratio of overall business results 70:30 individual key performance objectives. When you tie in both components, Tan says, employees would think twice before leaving their teammates behind. “No man is an island. If my colleague doesn’t do well, it will bring the unit down.”
OCBC Bank’s Low couldn’t agree more. “An essential part of the bank’s performance management process is that good performers are duly rewarded.” However, she would also take into account “the current economic conditions” before paying out performance bonuses.
But don’t be mistaken that HR will pay employees more if they exceed their performance targets which are set at the start of the year. To these HR professionals, it is simply out of the question. Bonus payouts are still pegged to 100% even if the employee had overachieved. Tan says, “If you locked in at 150% every year, I would think your goal was too easy.”
The importance of increments
Now the matter of salary and bonus increments can be a touchy issue for most people. Inevitably, there will always be employees who are paid higher than someone who might be performing the same job function. That can really frustrate HR when realigning the pay grade.
For AOI, it moderates the increments of the higher-paid employee and giving his lower-paid counterpart higher bonus premiums. “If performance is the same, I can consider giving this guy 8% [increment] and giving that guy with a higher base [salary] 4%,” Tan cites. “Bonus is a one-off. I can give you a one-and-a-half month bonus with 4% and one month bonus with 8%.”
Tan thinks this makes more sense than giving the same increment figure to both employees because it eventually narrows the pay gap for the company. Don’t forget a percentage applied on a higher base salary would still yield a higher payout than the one getting a higher bonus sum. Anyway employees can’t really complain, says Tan, since yearly increments are not prefixed and bonus amounts are subjected to performance.
Or another differentiating factor HR could use to explain pay discrepancies is by means of promotion. Giving the higher paid employee a senior title would stop the wagging tongues as he or she is now perceived to have more responsibilities and objectives to fulfil. Tan says, “That way, you can manage expectations.”
Of course, there are cases where no title is given to the employee who is doing a greater job volume than what he or she is paid to do. Say, the employee was initially classified as a grade C but is now performing the job scope of grade B. Instead of a direct promotion, RP hands out appointment allowances.
It’s a form of motivation while testing their promotion potential, explains Lim. “If they do well, that means this year they get a better performance grading and you reward them more.”
And that’s how you build a committed workforce, says Low from OCBC. “They need to be motivated and satisfied in their careers.”
The old gets more dough
Not surprisingly, age does matter. Unspoken but true. Even if companies are adamant that they maintain similar pay standards, the employee who is much older or has been at the job longer will always get slightly more money than the newbie.
But it doesn’t mean the employee who has been working with the company for 15 years would get 50% more money than the one who is in his fifth year with the company. The pay difference for the person’s seniority would only be 10% to 15% at best.
“You might have to maintain some difference,” says Tan. “But at some point in time, the one who is slower [paid lesser] will catch up at a faster rate of [pay] progression.”
Yet loyalty or length of service means nothing to the company if the employee can’t deliver the organisation’s objectives or add to the bottom line. Salary increments will remain pegged to performance. Even though RP recognises the contributions from long serving staff, the school does not encourage loyalty without good performance.
“We don’t want to reward you for the length you stay with us,” Lim says. Instead, he would rather profile or eulogise the long-timer and give a small one-off monetary sum as recognition.
No one size fits all
Given the pressure on companies to contain their wage bill these days, no one can say for sure what the best compensation and benefits practises should be. That’s not to say HR should standardise same percentage wage cuts across the board or even contemplate layoffs.
Like what Lim says, “It may work for some but will not work for most.” In fact, doing so might just push key talent into the arms of poaching companies as it appears the company doesn’t differentiate between top and non performers. Before adopting any one method, companies should know what resources they require which are crucial to their operations.
For example, if the company is short of cash but has stock options on hand, they may opt to freeze bonuses and give equity to employees instead. “This is one form of long term retention scheme,” says Lim. “The shares will definitely increase in value when the good times come round.” Employees would likely want to wait around to cash those options.
This is similar what OCBC has implemented for its employees in 2004. Its Employee Share Purchase Plan, a saving-based share ownership plan, helps them own the bank’s ordinary shares through monthly contributions deducted from payroll or CPF funds. In addition, staff participants will earn interests on the amounts saved at a preferential rate. Low says this helps “inculcate in all participants a stronger alignment to the interests and business performance of the group”.
This goes to show HR professionals are not viewing employees as an expendable item to reduce costs at all. In fact, HR is taking a longer term view, says Lim, and treating talent and top performers as valuable assets instead. In that sense, Low says a good compensation scheme should also encompass “important non-monetary components like career development, progression opportunities and quality work-life programmes”.
The final word is happy and satisfied employees are always likely to perform their jobs well, says Tan. “If they achieve their goals, it means the company, as a collective, achieves its goals.”
