Learning by Example: How Managers Can Maximise Compensation and Reward Programs

March 30, 202112:38 pm494 views
Learning by Example: How Managers Can Maximise Compensation and Reward Programs
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Example #1 IKEA 

IKEA seeks to equalise wages, benefits, and experience for its part- and full-time workers in Japan. Previously, local regulations required part- and full-time workers to have different compensation and benefits structures, but this presented challenges to IKEA’s operations as the company relies on a large share of part-time workers. In response, IKEA engaged Japan’s government to improve the legal status and rights of part-time staff, leading to landmark legislation that enabled equal benefits for all Japanese workers. As a result of making the changes consistent with the new law, IKEA significantly reduced turnover and received recognition as the Employer of Choice. 

Example #2 Unilever 

Unilever explicitly made fairness and transparency key components of its global compensation strategies. The company developed a ‘Framework for Fair Compensation in 2015 in an effort to make pay transparent, fair, consistent, and explainable, based on a robust process of auditing, benchmarking, and setting performance targets. Two years after the framework was enacted, a global audit against the framework discovered that 7,252 employees in 37 different countries were paid below the living wage. The company immediately responded, slashing this number to 611 employees in 16 countries by the end of 2018. 

Example #3 GrantTree 

Some organisations take transparency and openness further through a process that focuses on collaboration. A UK-based financial service company GrantTree enabled its employees to set their own salaries through an iterative, collaborative process. Employees must make a case for their proposed salary, gathering information on the market rate for similar roles and positions, their performance and growth, and what GrantTree can afford to pay. Colleagues then review the proposal, ask questions, and provide feedback to decide the salary level. While it might be expected that people would choose the highest possible compensation, at least GrantTree workers have chosen to voluntarily reduce their salaries after their responsibilities changed. 

Example #4 Amazon 

Amazon reinvented its compensation system in the mid-2000s, embracing simplicity, along with flexibility, to allow the company to scale. What Amazon did differently is that the company positioned itself to pay at above-market compensation, but did so exclusively through equity, paying below-market salaries and no cash bonuses. The company also granted RSUs (Restricted Stock Unit) exclusively for the equity layer, which is allocated periodically to those who perform well. Amazon also required longer-than-usual vesting, as well as applied the system to all employees, creating alignment up and down the organisations. The initiatives created by Amazon successfully make the company prosper up until today. 

See also: Compensation Analytics: 7 Areas for HR to Focus

Challenging questions managers must answers 

While each company has unique reward and compensation programs that differ from others, creating and implementing the best reward plan is onerous. Business leaders and managers must tackle a broad range of the following challenging questions. 

  • What sources do most employers use to benchmark compensation? 
  • How frequently should a company be formally reviewing compensation? 
  • What’s the future outlook for compensation and rewards, thus employers can stay ahead of the competition? 
  • How do the rising costs of benefits play into compensation and reward decisions? 
  • How and based on what factors should employers evaluate compensation data? 
  • What might be the top priorities in certain circumstances should compensation be based on? Etc. 

When managers overlook one or more critical questions, they risk developing a plan that delivers mediocre results once it is implemented. For example, there might be a profitless profit-sharing plan, a no-go goal-sharing plan, or a missing appraisal system. 

What’s important in setting compensation and reward system?

Good compensation and reward system always begins with an organisation’s strategic goals. If compensation is misaligned with the company’s purpose, trouble ensues. Learning from the examples mentioned above, each organisation provides a different method of compensating and rewarding its employees with the same goal – retain and encourage employee loyalty. This difference is what brought success to each company. Hence, the first and foremost importance when setting compensation and reward is aligning it with the company’s goal. Experts suggest the following questions to help align your compensation to your organisation’s goals: 

  • How is your business strategy reflected in the compensation/reward program? 
  • Are you using the right metrics for the current circumstances? 
  • When is it time to make adjustments to the existing program design? 
  • When does it make sense to deviate from the norm and tailor a solution? 

Revisiting current compensation plans, creating necessary changes when needed, is how businesses drive the maximum result, even in an unprecedented time like in the Great Recession 2008 or COVID-19 crisis. 

See also: Compensations & Benefits Employees will Receive in 2021

Creating compensation and reward programs that work 

According to SHRM, designing and implementing a total compensation and reward strategy requires a large-scale approach that drives organisational change. Top executive and management buy-in are critical for the success of a total rewards strategy. Your project team should be made up of decision-makers as well as front-line employees to ensure that your approach is well-rounded and fits the needs of everyone on board. If you operate in a union environment, it is important to understand that collective bargaining might affect the implementation of your strategy. Developing a total compensation and reward strategy is a four-step process consisting of:

1- Assessment

A project team assesses your current benefits and compensation system and determines the effectiveness of those systems in helping your company reach its goals. Activities that take place during the assessment phase of the process include surveying employees on their opinions and beliefs regarding their pay, benefits and opportunities for growth and development as well as examining your current policies and practices. The most important outcome of the assessment phase is the project team assessment report, which includes your recommendations for the new total rewards system. The assessment report should include suggested solutions to questions such as:

  • Who should be eligible for the rewards?
  • What kinds of behaviours or values are to be rewarded?
  • What type of rewards will work best?
  • How will the company fund this?
2- Design

The senior management team identifies and analyses various reward strategies to determine what would work best in the workplace. It decides what will be rewarded and what rewards will be offered to employees for those achievements. In a total rewards strategy, pay rewards for achievement of goals will not be the only consideration. HR strategists will also determine additional benefits or personal development opportunities that employees will receive as a result of meeting the established company objectives.

3- Execution 

The HR department implements a new rewards system. It circulates materials that communicate the new strategy to employees. Training also commences so that managers and decision-makers are able to effectively measure the achievement and employees are able to understand what they need to obtain to receive the rewards.

4- Evaluation

The effectiveness of the new plan must be measured and the results communicated to company decision-makers. Based on this, modifications can be proposed to the strategy for future implementation.

Read also: HR Knowledge: Understanding Stakeholders Compensation Systems