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The pros and cons of keeping compensation information confidential

May 17, 2012 By Leave a Comment
Compensation communication ?

A lot of companies, especially in the Middle East, like to keep a lot of compensation information strictly confidential.

The kind of compensation information which may not be shared :

  • Salary ranges (and sometimes allowances) are not communicated, sometimes even to HR Business Partners or recruiters
  • Incentive rules are not explained, either in writing or verbally
  • Promotion criteria are fuzzy and look random
  • Pay for performance principles, if they exist,  are vaguely described
  • Performance ratings and how they are decided (for example, is there a moderation/calibration system in place ?) are not shared with employees
  • Eligibility rules to various schemes, allowances or benefits are also not communicated.

There are numerous possible reasons for that lack of communicating pay rules to employees :

  • Not wanting employees to compare themselves to others and creating a “competition” environment
  • Wanting to keep an opportunity to change or adapt programs should circumstances change or require it, without any legal restriction
  • Maybe the organisation, in effect, has a lot of issues with internal equity : people in similar roles may be paid quite differently andmanagement does not want that fact to be known
  • Another advantage : strict confidentiality means no need to make any communication effort
  • It could also be that the company does not want to make public some of its pay and benefits practices. In the GCC, some examples could be :
    • different salary ranges for different nationalities
    • eligibility to benefits that could be different/lower for females vs males or Nationals vs expats.

I believe that respecting confidentiality is totally normal, and mandated, but not for all aspects of the compensation philosophy. Long-Term Incentive Plan eligibility, actual salaries and bonuses, and programs targeted at very small populations like high potentials (so that you don’t raise expectations from employees) should all be kept confidential.

I am however a big believer of communicating as much as possible in the area of pay approaches.

There are many disadvantages to not communicating pay information :

  • Not knowing means employees “make it up” – creating rumours and unnecessary frustration
  • Not knowing means employees go to their managers and HR one-on-one to ask questions – it translates into a lot of time spent repeating the same things to different people, as well as loss of productivity, rumours, lost focus
  • And no official central communication means employees may be given potentially inaccurate information especially if managers are not highly aware, themselves, of the programmes or don’t have the maturity to answer some of the tough questions
  • No coherent, overall communication means messages are not consistent and it creates confusion amongst employees
  • No written rules means that if you need to investigate a case later on, you will have difficulty to figure out what happened and why – you expose yourself to the risk of employee complaints, or worse, potential legal action or reputational damage to your organisation
  • Last but not least, not knowing how bonus is calculated, or salary increases decided, or the criteria for promotions, means that the programs lose :
    • a lot of their motivational effect on existing employees, who discard them as they fail to understand the logic – so they think that things are random, unfair or even driven by favouritism
    • a lot of their attraction on candidates and potential hires, who discount them (especially bonus information) and therefore negotiate higher base pay in order to “compensate” for the perceived uncertainty of the pay system, even if in reality, there are rules and some form of stability in the payment.

Of course, communicating around pay and benefits means more work upfront for the HR community to design and explain the rules, train managers as needed and try to convey information appropriately.

However, the benefits are important in terms of perceived coherence + fairness in the system and process. It reduces the time spent correcting misperceptions about pay. It signals to your employees that you find them mature enough to understand that not everyone can be paid the same, and that things can change. It supports a culture of openness and trust.

So next time you design an incentive scheme, remember the operative word is “incentive”…. and consider transparency and open communication.

 

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Ten steps for building a salary structure

May 15, 2012 By Leave a Comment

Today, I am delighted to host a post which was originally published by Warren Heaps at International HR Forum.

“Ten steps for building a salary structure” will give you an overview of the different actions and choices you need to make when creating your salary structure for the first time. It provides background thinking on what to do, for example when you are setting up in a new country, or if you want to create a salary structure in your current country, but in a totally different market. Local and GCC regional conglomerates that have independent companies in diversified sectors may be interested in this kind of approach, for example if they have construction and infrastructure, and now want to expand into retail activities.

So there you go, dive in it !

Ten steps for building a salary structure

A salary structure is commonly used by employers to set out the range of pay, from minimum to maximum, associated with each salary grade or band. By associating each position with a grade or band, employers can use a salary structure to help manage compensation in an optimal way.

Here are ten steps to develop a salary structure for your organization, with some special considerations for international developing markets:

1 -Establish your compensation philosophy. Each employer needs a policy which outlines their desired market position. What percentile of the market is your target?   Which comparators are appropriate?  Is the target the same for all grades?   A well-articulated compensation policy provides valuable guidance for the development of a salary structure.  In large organizations, there is often a corporate policy which forms the basis for local policies.

2 – Gather market data. Identify surveys with your desired comparators (as specified in your comp policy). Most employers prefer at least two survey sources. In international markets this can be challenging, especially in developing countries and smaller markets. Consider sector-specific surveys as well as multi-sector options – certain jobs are found across many employers, not just your sector.In smaller international markets, leading employers often provide a better proxy for the most competitive market than do sector surveys with many less sophisticated employers.  Don’t overlook international organizations like the World Bank and the UN; they pay very competitively and are often well-established in the smallest of countries.

3 – Identify benchmark jobs.  Benchmark jobs are those that are representative of roles found across many organizations – standard roles such as Manager, Accountant, Payroll Administrator, Secretary, Clerk and Driver.   Benchmark jobs are easy to understand and match to, and will appear in multiple surveys, enabling the use of multiple sources.For professional roles specific to your sector, sector surveys could be a good source.  In other cases, and with multi-sector survey sources, look for those that utilize well-developed career ladders, enabling easy cross-occupational job matching.  As an example, such an approach would examine Analyst positions across different functional areas (e.g., finance, HR, procurement, marketing, etc.).

4 – Measure your market position. There are several ways to do this. If you have a lot of benchmark jobs, tabulate the average of all of the roles in the same internal level or grade. Weighted averages incorporating number of incumbents associated with each survey data point is a common approach. Select the market reference from the survey most appropriate under your policy.In developing countries market data is more volatile.  A good approach is to use minimum and maximum values to “bookend” the data in these markets.  This helps eliminate outliers and capture more realistic market survey values.

5 – Calculate the compa-ratio. This is the ratio of your data to the market — 100 means fully comparable, while a ratio under 100 indicates a below market position, and over 100, above market. There are different approaches to summarizing the data — by position, by grade, etc.Whatever approach you use, the compa-ratio analysis will illustrate which parts of the organization are competitive against the market and which ones require some attention!

6 – Check your budget.  This is a critical step.  In Step 5 you can calculate the average difference between your current scale and the market.  This indicates about how much of an increase would be required to make your scales fully comparable to the market.  Your internal budget constraints, though, will dictate how close to this ideal you can achieve.  In addition to internal budgets, consider the average market movement in your surveys, and the general inflation rates (never use inflation to determine how much more to pay staff – this is determined by cost of labor, not cost of living).

7 – Start allocating.  This is the start of an exercise which will repeat many times, until you get the desired result.  Build a model of your organization, ideally with the number of incumbents in each grade.  Using your overall percentage of market (Step 5) and budget number (Step 6), start increasing your scale (use midpoints, or the mins and maxs).  See how close you can get to fully comparable to the market, and how much it will cost.  Does it jive?  If not, tweak the data a bit.  You can adjust the percentage each grade is increased, as well as examine the spans (range from min to max) and inter-grade differentials, in order to gain better market alignment.  Obviously, the incumbent count of each grade will impact the overall costing model.

8 – Final adjustments.   Once you have built your new scale and matched it to the market as closely as possible, and within your budget, give it a once over.  Does it make sense?  Are the increase amounts distributed in a pattern which will cause unrest amongst your staff? Strive to achieve a scale which will reflect your comp policy and enhance internal cohesion in the organization.  This step is the art of compensation, not the science.

9 – Management approval.  Review your proposed scale with management, presenting your rationale, budget and overall market comparisons.  Discuss concerns you may have uncovered about specific positions or grades, and educate your management about the process used.  Outline your implementation plans.

10 – Communicate.  Develop appropriate communications for managers and staff.  Let them know all of the work that went in to the exercise, and how the organization compares to the market.  Be careful here — you need to obviously put on a positive spin — that’s why statistics are so flexible!

You’re done!  That wasn’t so hard, was it?  Now you need to figure out how to allocate individual increases, taking into account performance and other factors.  But that’s a story for another post.

 

Warren’s bio

Warren Heaps is a Partner with Birches Group LLC in New York City.  He has over twenty-five years of experience in Human Resources, most of it focused on international HR.  Warren brings strong knowledge of compensation, benefits, and expatriate compensation, with a particular specialty in developing markets. Birches Group LLC is a consultancy specializing in labour market data in developing countries.  Birches Group conducts compensation and benefits surveys in over 140 countries across Africa, Asia, Central and Eastern Europe, Latin America and the Caribbean, and Oceana.  Our survey methodology is designed to work effectively in smaller markets where survey samples are typically smaller than in more developed countries.

Specialties:

  • Local National Compensation in developing countries
  • Expatriate compensation
  • Job evaluation and performance management tools

 

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2 more tips to prepare your files for submission to compensation surveys

May 13, 2012 By Leave a Comment
Salary Survey

Third post in my monthly theme around Compensation Surveys. So far I have covered Why you should participate to compensation surveys as well as 4 habits to simplify your participation to salary surveys.

Today let me give 2 more tips to help you prepare your submission.

Employee identification

In a survey you should always strive to submit as many data points (information about specific employees) as possible. It ensures that you get survey results for as many positions as possible. When all survey participants submit all relevant employees to a survey, the quality of the results also goes up as data really represents what companies are paying, not what they are choosing to share (and by contrast, actively hiding).

For example, even if you have known outliers (people paid way above or below what your internal rate is for that position), you still need to include them as they will be useful in determining data at the fringe of the survey results such as the lower quartile / 25th percentile, and the highest quartile (75th percentile) or even the 90th percentile.

I have seen in the past some companies use the “Company employee identification” field in an incorrect manner. This field is reserved for inputting something that helps you identify the employee should you need to provide clarification or review the data at a later stage. It will also be helpful the following year when preparing to the new round of the survey as you will be able to use this year’s submission file to prepare for next year’s.

It is not good to input there :

  • the name of the employee (confidentiality issues)
  • the initials of the employee (confusing)
  • the internal employee ID number (can lead to confidentiality issues).

I advise to create a simple formula around the ID number of the employee, such as “multiply ID by 3″ for example.Why ?

  • It maintains confidentiality
  • It is easy to retrieve the real employee whenever is required
  • Employee ID does not change throughout the life of an employee, while the name may change (woman getting married or divorced).
  • Employee ID does not lead to mistakes based on incorrect spelling of employee names, which can be quite frequent in the Middle East (think “Abdulla” vs “Abdullah” vs “Abdallah”).

Job matching

Job matching between the survey positions and your internal roles need to follow certain universal principles, no matter which survey you are participating to.

Match based on role not based on who is holding the job. The employee and how he/she performs is not what the survey is about, the survey is about comparing how much different employees in different organisations are earning for the same role.

Match based on job content not job title. For example, Vice-President is a quite common title in banking, while in manufacturing this title is usually reserved to the real top levels of the organisation.

Match if your internal role is at least 70 or 80% similar to the survey job – and don’t match if one of your internal roles is a true mix (eg 50/50 or 60/40) of 2 survey jobs. How do you determine that ?

If you have updated job descriptions, use them as the basis for the matching, and if you don’t or have some questions or doubts, work with the business to ensure you are matching properly. This takes care of the job content side of the matching.

For the level part of the matching, most of the time when you participate to multiple surveys, you don’t use the provider’s grading methodology, for example Hay points or Mercer IPE class. You will have to make some assumptions to compare your internal grading system to that of the provider before you start the actual matching as this will help you narrow the choices for the matching at the next step.

Sometimes the provider also have corespondance tables between their grading methodology and those of the main providers, and these tables will be really helpful.

One thing you need to be aware of is the “grading outliers” in your own company. Sometimes you have people who are in the “wrong” grade, either too high or too low. You need to make sure that when you submit their data, you match to the true survey grade of the job that they actually hold, not the one that their internal grade suggests.

Job matching is essential in compensation surveys as it allows you to make sure that you are comparing apples to apples, and that the results you will receive are relevant for your organisation. Use your common sense and feedback from the business and, when in doubt, don’t submit the data of that specific employee.

 

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4 habits to simplify participating to compensation surveys

May 10, 2012 By Leave a Comment
Salary Surveys - simplify participation

This week’s instalment of my monthly theme includes a few habits that I developed to make my life easier when comes the time to participate to compensation surveys.

Right now in the UAE, you must be thinking about collecting the data and preparing it to submit to the various providers that you have selected as relevant for your organisation.

My advice is to prepare a master data file which you will use as the basis for the submission to most surveys. It is a file which contains most relevant info requested by the survey providers, in any order relevant to YOU (because it is a working file not a submission file).

The file should list all your current employees irrespective of whether their job is surveyed or not : it is easy to create a big file with all. Then you use whichever data is requested by provider A, B or C, as needed. This saves you time as you don’t need to reinvent the information for every survey that you participate to, especially if employee 1 is part of surveys A and C but employee 2 is in surveys A and B only because his job is not part of the survey from provider C.

Here are 4 habits you should develop to simplify your compensation data submission process :

1 – Collect and annualise bonus information.

A lot of survey providers ask for 2 types of data related to annual incentives payouts : the actuals and the annualised payouts. Why ? Because the actuals give a view of the real average / median etc payments and costs for the participating organisations, while the annualised information allows to make an assumption of what the costs would be for a full year.

In order to annualise the bonus or incentive information, it is simple : check the hire date of your employees. For all the new joiners (and the leavers if you provide their compensation information as well), divide the actual bonus payment by the number of days or months they were in the company and then multiply it by 365 or 12 to get the annualised payment.

While you’re at it, you may as well create the amounts of on-target and maximum incentive payout if your company sets them. for example your organisation may pay 3 months basic pay at target and 4 as maximum. Well, create columns for each and calculate it for each employee in your organisation. A lot of surveys require this information so it’s good to have it ready.

2 – Identify employees that were promoted or changed job vs last year.

If they are part of the target population for the survey, it means you will need to pay special attention to the job matching. You can’t simply copy the job matching you did for them last year, because it is not valid any longer. By creating a column with P for promotion or CJ for changed job, you will be able to later on filter them all and check the job matching for them one by one.

You will reduce your risk of error in the submission process and will ensure that you later receive survey results that are relevant for their current position. In the case of promotions, it means your employee will not appear “paid too high” by mistake, because their pay will be aligned with the proper level of job form the survey.

3 – Gather financial and other data in advance

Go to your colleagues and gather information that is most often required to participate in the surveys such as :

  • Company revenue and net income.
  • Unit revenue and net income. This is more difficult to get in many cases… so if you ask for it in advance you ensure that your survey submission will not be delayed because of information that you had delays in collecting.
  • Number of direct and indirect reports (how many people work directly for this employee, and how many in total in his/her department through the managers reporting to him/her).
  • Number of children eligible to education allowance or airfares
  • etc

This kind of information is often not so readily available and may require that you rely on colleagues from other departments, or running special reports to collect the information. This is especially true in the case of conglomerates or companies with international operations. So factor that in by collecting this kind of information early enough.

A useful tip can be to go through your submission file from the previous year and identify which information was most difficult or lengthy for you to collect – and get started now. Surveys do not usually vary by much from year to year so there is a very good chance that it will be requested again this year.

4 – Highlight new joiners and leavers

These employees will usually have prorated information regarding their bonus, annual leave, benefits and the like. Some providers will ask for actuals only, others for annualised information, some others yet will require both sets of data. Having these employees readily identified will ensure that avoid submitting information in the format not required for the survey by enabling you to perform a quick check for them at the end of your data submission effort.
When you annualise bonus information, identify “special” employees such as new joiners, leavers and employees that were promoted or changed jobs, and gather difficult-to-find information in advance, you make your life easier for preparing your submission to the compensation surveys, and the whole process becomes a bit less dreadful as you seriously reduce the risk of errors and develop a systematic approach to your process.

Which tips have you developed for preparing the survey files ? Please share them in the comments section that we can all benefit from your experience too…

 

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What is the difference between a bonus and an incentive ?

May 8, 2012 By 2 Comments
Incentive or bonus ?

A quick post today, on the difference between a bonus and an incentive. We often use these two terms without making a true distinction, but in truth, they are slightly different.

Both of them cover elements of compensation that go above and beyond the normal, recurring income of the employee (base pay or basic + allowances). But they differ as follows :

A bonus is a payment which is backward-looking and usually discretionary or at least not expected from the employee(s). A decision is made to pay it to one, a group or all employees, based on criteria decided by management to reward past achievements, such as reaching a specific profit or some important milestones for the organisation, or in a totally discretionary manner.

So it is generally decided after the fact. A bonus is usually paid in cash, or sometimes in cash-equivalent such as stock options or other forms of equity. A bonus is non-guaranteed and usually on-the-spot (ie just after the actleading to its payment).

An incentive is a plan which is forward-looking. Payment is tied to the achievement of specific objectives that have been pre-determined and communicated to the employees that are on the plan. The purpose of the incentive scheme is to influence behaviour to reach the objectives by providing an incentive to work towards the goals.

An incentive can be paid in cash or in non-monetary award, for example some gifts or travel (especially for sales). The incentive plan is not discretionary : if the upfront, agreed objectives are reached, the payment or award is made.

I have written in the past about the importance of using the right words in compensation communication. Different industries and different companies will use the same word in different ways and that’s OK, but it is important that within your organisation, all your official communication, especially in writing, be consistent in using your term of choice, whether you chose to use “bonus” or “incentive”.

 

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GCC pensions special – April 2012

May 6, 2012 By 2 Comments
Map of GCC countries - through Wikipedia

In the past few weeks, there has been a flurry of articles on the topic of pensions in the GCC. I have selected for you the most informative of these articles so you can get a helicopter view.

GCC general

UAE Nationals

  • FNC recommends pension changes with payment for Nationals who resign from government once they reach 20 years of service, with no minimum age restriction set at 50 years. Current laws sets a minimum age of 50 years old to receive the pension. The article contains other details regarding the financial balance required for sustainability of the pension fund.
  • This article, like the first one, also describes discussions between the government, concerned about the financial aspects, and the FNC, who wants to highlight “the humane side of things”.

UAE expats

Oman

Kuwait

Bahrain

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