Compensation & Benefits – The text-book solution is not always right !

The text-book solution is not always right

Today’s post comes from my friend Tom Raftery, founder and Director of It’s all about People, a Human Capital consultancy based in Dubai. In this article, he shares some thought-provoking views based on his real-life experience. The “best practice”, widely accepted, default approach to compensation-related issues is not always the best one to apply for the business.

Read on to discover some examples of how he sometimes drove his organisation to go against the text-book, ready-made approach and obtained great results. So here it is :

“In nearly 20 years experience of living and working in the Middle East what is quite clear to me from working with and recruiting HR & C&B managers is that they seem to focus on text-book solutions.  While this may be correct it is not always the right way of dealing with the problem or situation, particularly from a business point of view.

I have personally dealt with a number of situations where I have gone against ‘text book’ recommendations as they are not commercially viable or appropriate to the needs of the business. C&B practitioners need to provide compensation solutions that will drive and support the required levels of behaviour as well as meeting business needs.

This may be difficult and at times you may believe that it conflicts with the ‘ideal’ solution.  Ultimately, you will have to way up the financial considerations with the impact this will have on employee morale and performance. 

I can share some examples with you:

1 – Developing incentive schemes to cover up for low base salary level.

The text-books discourage using incentive schemes to cover up for low salary levels, because when the bonus is not achieved you are still left with the low salary levels. In one business I worked in the base salary levels were 10-30% below the market and employee turnover was creeping up towards 15%, but management did not want to increase fixed costs, as the business wanted to grow and to continue to be profitable. 

What I implemented was a bonus scheme for production staff that increased the bonus potential from one to three months.  This was a section bonus linked to targets which if achieved would result in cost savings and improved profitability.

Within two years the factory became one of the best performing factories in the group, as costs were reduced by over 25%.  The average bonus increased from 0.8 months to 2 months with some sections getting the maximum of 3 months bonus.  So while our base pay was below the market our total compensation was above it.

This worked for a few years but I was conscious that with time the level of performance improvement would be less each year, to the point where the targets would not be achieved and the incentive levels declined, leaving the low base salary levels exposed. While base levels increased over the years they were still below the market, but the company was in a more stable financial position to consider increasing base salary levels.

It was not a text-book answer but it’s helped the company achieve its profit and growth targets, the employees were rewarded for their performance and it allowed the company time to address its low base salary levels.

2 – Salary Structures and bringing employees in line with the market

In designing salary structures the text-book says that you should have a salary range of 20% around the midpoint with 15% between the midpoints, with obviously smaller salary ranges for low grades and high ranges for more senior grades. 

In China we were implementing new salary ranges and the HR manager was very keen to implement standard salary ranges as outlined in the text books. From her calculations this would cost in the region of $3 million to get employees into the minimum of the salary range, based on a ‘text-book’ salary range. This was double the salary increase budget for that year.

I advised her that this would not be commercially viable and when she approached the local management they confirmed that they could not afford it.  I recommended that we adjusted the salary ranges so that we captured more employees within the range, reducing the number and cost to bringing employees up to the minimum of the range. 

We would adjust the ranges over a few years as more employees moved within the range, while grandfathering those above the range.  This reduced the cost by over a half and we are nearly at the point where the salary ranges are generally in line with what the text-book suggests.  This was also accepted by management.

3 – Increasing base salaries when there is an increase in employee turnover

It’s often the common response by HR people to recommend an increase in base salaries to deal with surges in employee turnover.  While this may be the right approach in many cases you need to investigate further before acting.

A few years ago, in my last position, the HR manager identified the need to increase salaries in one department due to high turnover of forklift drivers (we lost 25% in 3 months) as they were getting better salaries from companies setting up in the same area.

We knew that to increase salaries in this department would result in other departments and employees requesting larger than average salary increases to stay in line.  Also by increasing salaries more in one department or with one skill area, will result is upsetting the internal relativity of salaries.

The approach was to provide a scarce skill allowance for all forklift drivers to bring them in line with the market.  As this was separate to the base salary it did not impact internal base pay relativity and after a year we were able to roll this into base pay (instead of giving a salary increase) when turnover declined. A simple solution that you may not find in the text book.

In conclusion, knowing what the text books say is important but dealing with C&B problems means that you have to take a commercial view and implement a solution that will reward the right sort of behaviour from employees while keeping control over costs and contributing to business performance. 

Management gets frustrated with HR because they are not commercially savvy and this is often evident in the area of C&B where solutions, while ‘correct’ are not sustainable from a cost point of view. Hence HR needs to be creative in providing C&B solutions that will reward employee performance and achieve business performance without greatly increasing costs. This is a difficult balance to achieve, but it’s possible and your credibility will improve in the eyes of both employees and management.”

About the author : After 6 years in a VP HR for a multinational, Tom has set up  It’s all about People a Human Capital Consultancy based in Dubai.  Tom has over 30 year international HR experience in senior line and consulting roles including over 18 years experience of living and working in the Middle East.  He is passionate about how people can add real value to a business and helps HR to leverage this performance for individual and business success.


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