HR Professional - Newsletter - hr nl 209

Variable pay - within the package or on top?

Variable pay needs to be leveraged off a lower base in order to influence behaviours across the whole organization. The market positioning of guaranteed pay is critical in achieving this.

 

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Defining ‘package structure'

The term ‘package structuring' was used for a number of years to signify the process of selecting employment benefits within a package on a salary sacrifice basis. The widespread acceptance of ‘the package approach' in recent years has however rendered that exercise less critical, and the term is used more frequently today by HR practitioners to denote the deliberate positioning of guaranteed pay below market worth.

 

Consider that you are employing a sales representative and wish to offer him half only of his market-related total remuneration as a retainer, the balance to be earned through the commission scheme. The market positioning of guaranteed pay in this example is said to be at 50% of full market worth.

 

The same concept is often used in relation to senior executive pay - the guaranteed package being positioned anywhere from 50% to 80 or 90% of full market worth. It is less frequently used in relation to support staff, but can indeed be used to good effect - as we will show.

 

Market practices

 

 

Because we run salary surveys, we are able to measure the average market positioning strategies of employees across the whole of the labour market, arriving at the following hand-drawn but accurately scaled chart of the modal practices in the SA market.

 

Exhibit 1: 

 

 

 

The significance of this chart lies mainly in the fact that it shows to what extent employees at different levels of responsibility are prepared to assume a measure of business risk, but in return for higher upside potential.

 

Individual employers adopt policies to the left and the right of these averages for good reason and to suit their management philosophy.

 

Using this principle to lever variable pay

 

The market positioning strategy is arguably most critical in the case of support staff for a particular reason, which we will explain as follows:

• If guaranteed pay is positioned at 100% of full market worth, performance bonuses can only be justified for exceeding expectations (not for merely meeting expectations). In the result, only 15 to 20% of employees will receive a bonus, and the maximum level of the bonus will be let us say 10% of guaranteed pay (based on the graphic). There is widespread dissatisfaction as to why some get bonuses and others do not.
• If however, pay is positioned at 92% of total market worth, 80 to 85% of employees will receive ‘bonuses'. The highest bonus will be 16%. Clearly, at the same cost to the company exactly, this second system is going to make a far greater impact in influencing behaviours.

The greater weight attributed to performance-based pay in the second case causes employees to pay far greater attention to their performance targets. The bonus scheme on this basis will be far more effective therefore in supporting, and may even drive, the performance management system.

 

Exhibit 2:

 

 

In overview

 

All employers today need to use the remuneration system to drive performance in our opinion. Their market positioning policy as applied at the support and worker level, giving the variable pay dispensation some basic leverage, may well determine ultimately how successful they will be in this quest.

 

(If you want to read more on this topic, go to Chapters 1.2, 3.1 and 3.7 in the library. )

 

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