What every CEO needs to know about employee remuneration

Employee remuneration, beside it being one of the major expenses most businesses incur, very few CEOs understand how it should work. They rely mostly on the human resources manager for advice. This is all good but it’s better to get advice when you have basic understanding of remuneration systems to avoid being misled.

Pay structure – Every CEO needs to ensure their business has a formal pay structure supported by a sound remuneration policy. A pay structure that puts people in grades and each grade will have a minimum, midpoint and maximum salary. The minimum salary reflects what the business is willing to pay for any position at entry into that grade. The midpoint is a premium reserved for above average performers. It is normally a reflection of your target market position (25th percentile, median, 75th percentile etc.). The maximum salary which in normal cases no employee should earn, should be carefully watched. If an employee is being paid at the top of their salary range as a reflection of their contribution they are probably due for promotion. So what should you get from your human resources manager? Maybe every quarter? Request for a compa- ratio report that shows how far individuals are progressing within their pay ranges. The compa- ratio range is 80% to 120%. Anyone being paid below the 80% is being underpaid, anyone paid above 120% is overpaid. Check that your top and consistent performers are being paid between 100% to 120% compa- ratios. This is the starting point although other more technical analysis can be done depending on the technical know-how of your HR advisor.

Starting salaries for new employees – Remember that giving someone a salary is taking a risk as this new person may or may not deliver. If you start the new employee close to the mid-point (market premium) and they fail to deliver it means you are losing value. It is always recommended to start all new employees at the minimum of their grade. If the new employee demands more you need to say to them I will offer you the minimum of e.g. $2000 and will add an extra $1000 to take you to the midpoint after probation if they happen to be a good performer. The other way to deal with this is to say I will offer you $2000 as guaranteed pay and the extra $1000 will fall away if I discover that your value is not at market premium. This should normally happen after the probation review.

Performance Related Pay – If your organisation pays or decides to pay a performance related pay you must check if the system has been designed properly. The best systems are those that are self- funding. You only share out of the value that has been created after taking care of the shareholders. You must be careful that you are not rewarding people for what you are already paying them to do. In the market most systems we are seeing are poorly designed.

Benefits – Look at each benefit and see how it’s supporting your business. You may be aware that most companies give benefits not because they make people perform better but instead they give because other companies are offering the same benefits. In order to stop their own employees from leaving, they copy what their competitors are offering. Benefits such as loans (housing, car and personal) should first be accessed by your top performers. In practice, most policy documents use length of service for accessing such benefits. It is a bad policy that offers a benefit on the basis of time served; instead it should be value given by the employee. Convert to the total cost to company model or remuneration to avoid incurring unforeseen and unbudgeted staff costs associated with such practices.

NEC Salaries – send senior people to the NEC to negotiate. Most NEC negotiated remuneration systems are putting a lot of companies out of business. Keep track of what is happening at the NEC and have a strategy to influence decisions there. Do not leave this important role to the HR professional in your business.

Higher salaries – higher value – Once you give an employee a higher salary it does not follow that they will consistently deliver higher value to the business – due to a number of factors. Tying your business in a high cost structure without corresponding value being generated is not good business practice. Instead, in the current environment, opt for once off payments that do not add to your fixed cost should you decide to award any form of increase.

Retention Allowance – This should only be given when it’s really necessary. Again please do not give this as a fixed component of the salary. Remember skills are not always in scarce supply. A skill that is in scarce supply today maybe in abundant supply two years later. Instead, offer a discretionary retention allowance that is not guaranteed. It can be withdrawn if the incumbent’s performance deteriorates below a certain level and should definitely fall away if the skills supply situation changes.

Memory is the Managing Consultant of Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm. Phone 481946-48/481950/2900276/2900966 or cell number 077 2356 361 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com