Radford Compensation 101

Chapter 1: How to Pay

Understanding the Players and the Game

 

 

Before we can get into the question of “how much” we should be paying, we must first understand how pay works within an organization. Beginning with the company’s business strategy, the big picture approach ultimately drives a rewards strategy that guides all pay decisions. In addition, HR and compensation analysts also have a key role to play in delivering essential tools and effective messaging to make it all happen.

Linking Rewards and Business Strategy

"HR just doesn't get it."
"HR just tells us what we can't do; they don't really help."

Do these critiques sound familiar?
Unfortunately, some employees see HR only as a bureaucratic necessity, a group enforcing rules and protecting the company's best interests instead of the employees. This is why it is critical for compensation professionals to position HR's role as a strategic ally who will balance the interests of employees and the firm by building relationships and understanding the goals that employees throughout the business are working towards.

But how do you build relationships that allow for strategic alignment?
The answer is simple; you need to talk to people. As an HR professional, you should be taking the first step in reaching out to business leaders and asking them questions to gain insight into their situation. Only when you understand their goals and business problems, will they see you as a valued business partner. For example, knowing whether the business is trying to win customers with low prices or creative solutions will help you understand key metrics to consider when it comes to planning incentives.

Linking rewards strategy with business strategy will encourage your program's acceptance across the business. Indeed, a common business strategy ensures overall alignment of all HR programs— from compensation to performance management, benefits to wellness initiatives and so on.

Business strategy and rewards strategy alignment

Figure A: Business strategy must be aligned with rewards strategy for your compensation plan to be successful.

 

Three Primary Principles
Compensation Professionals Need to Focus On

  1. Attraction
    People will be attracted to your company to fulfill their needs, whether those needs be intrinsic (like having a purpose) or extrinsic (like financial security). Ensuring that pay at your company supports those needs (and isn't a detractor), is a good place to start.
  2. Engagement
    Once onboarded, engagement becomes the focus. Your employees should feel confident that they are on solid ground with consistent and fair pay, so that they can focus on reaching their full potential within the organization.
  3. Retention
    Over time, rewards should support a sense of commitment and investment in the well-being of the organization. As the company evolves, so should the employee's experience, including the opportunity for meaningful rewards that reflect both parties' best interests.

3 Primary Principles

  1. Attraction
  2. Engagement
  3. Retention

The Role of a Compensation Professional

Compensation professionals need to be very versatile and have the ability to balance a variety of priorities. For most companies, compensation is a major investment in talent and a significant operating cost in both the short and long term. The fixed and variable nature of compensation creates both opportunity as well as risk. Here are five common roles that a compensation professional might see themselves playing:

The Fiduciary: Steward of payroll dollars and shares, ensure money in programs is effectively managed and used
 

The Enforcer: Ensures money is distributed in compliance with laws and regulations
 

The Partner: Refines programs for business needs and keeps management aware of challenges that can distract from regular operations

The Advocate: Supports employees with fairness and recognize that every person regardless of amount paid plays a vital role in the company's success

The Trainer: Helps to act, train and equip managers with the knowledge to explain pay programs
 

Compensation Philosophy Basics: Fairness & Competitiveness

For the majority of the workforce, two basic principles apply to attracting, engaging and retaining talent: pay must be perceived as fair, and it should be competitive with the market. Fair pay implies equity across the employee population (which really means fairness in pay differences), and competitiveness with the market simply recognizes an employee's external value to alternative employers. Both of these principles are worthy of in-depth study, but let's assume some basics:

Rewards are structured according to the value of the job to the organization, including key accountabilities, competencies and skills, and the relationships between jobs. The market is comprised of peer companies or competitors for talent within certain industries, locations or stages of business.

Companies typically create a pay philosophy that outlines a set of guiding principles and reward vehicles that create both internal and external alignment. For example, a mature company may focus heavily on internal job worth and highly competitive base salaries, while a start-up may emphasize at-risk pay (i.e., short- and long-term incentives) to drive revenue growth. Each company will design a pay philosophy that meets the needs of their own unique business profile; what is appropriate and competitive for one company will often differ from the needs of another company.

Question: Should all companies "lead the market" in pay?

Answer: Not necessarily. Pay is one component of the employee value proposition (EVP) within the overall rewards strategy. Pay positioning is dependent on the stage of the business, types of rewards available (e.g., base salary, bonus, equity, etc.), program affordability, internal job worth and alignment with a well-defined market for talent.

A Global and Dynamically Changing World

Figure B: Converting US dollars into another currency without factoring in the external environment is not an appropriate practice for determining pay in other countries!

In today's dynamic and constantly changing world, the need to have a global perspective is now the norm. Rewards strategies, compensation philosophies and related programs must take into account the macro economy and external environment.

Awareness of cultural norms and insights into what is happening around your company is incredibly important. Because pay is determined locally, simply mirroring the practices used in a company's home country is not appropriate practice for determining pay in other countries.

Legal and regulatory policies also come into play as part of the external environment. Changes in employment and tax laws can impact the cost of and employee preference for certain types of rewards. For example:

  • This is why there are practices such as car or housing allowances in some countries.
  • Alternatives to stock options exist in countries where tax burdens can actually accrue when an employee accepts an option grant.

These external environmental factors all need to be taken into consideration when developing a compensation plan.


Survey Scenario

A company ordered two geographic data cuts for the US, and then asked how to convert the survey totals from US Dollars to Indian Rupees. Is this appropriate for determining geographic differentials and pay rates in India? The answer is no, with two incorrect assumptions:

  1. The labor market in India is the same throughout the country.
  2. Certain rates of pay in the US can be converted with a currency exchange rate to represent the local market in India.

Neither assumption is accurate. The labor market is unique to each location based on local practices and laws, and it is always changing.

Radford surveys provide you with a lot of ways to look at the market data for your analysis and individual assessment. Reports include detailed salary, allowance, fixed compensation, incentives, total cash, long-term incentives and total direct compensation so you can consider the total amount of compensation an employee receives, not just their salary. But because pay is changing constantly, you don't need to use the results to the exact decimal point.

 


Chapter 1: How to Pay Summary

  • Know how your company makes money and positions itself so you can design a suitable pay program
  • Build relationships with line managers so that rewards strategy and business strategy can be aligned
  • Understand your role and responsibilities as a compensation professional
  • Economic and legal environments influence compensation decisions
  • Transplanted US practices will not work in other countries
  • Allowances are an example of country or culture-based pay

 

Go to Chapter 2

 

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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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