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Table of Contents
- Why Develop A Remuneration Strategy?
- Developing A Remuneration Strategy
- Strategic Remuneration
- Use of Short-Term Incentive Plans (STIPs) and Long-Term Incentive Plans (LTIPs)
- Using External Remuneration Consultants
Remuneration has attracted significant media attention because of its exponential growth since the early 1990s. It has been argued that much of this growth has been driven by significant increases in executive remuneration throughout the 1990s and 2000s. To this extent, the average wage has increased from just under $500 per week in 1990 to just below $1,200 per week in 2016. Therefore, the need to define and implement a remuneration strategy closely aligned to organisational strategic objectives has become more important than ever.
Figure 1 - The increase in the average salary per week in Australia from 1990 to 2016. Source: Australian Bureau of Statistics. Remuneration can be defined as the pay a person receives in exchange for the work that they perform for an organisation. This can be provided via a range of types, either as a direct financial benefit (i.e. base salary, commissions, bonuses or overtime pay) or as an indirect financial benefit (i.e. medical and health insurance, superannuation or childcare support). Remuneration is recognised as an important method for reinforcing corporate culture and promoting the right behaviours while also supporting the achievement of the organisation’s strategic objectives. But how do you develop and implement a successful remunerations strategy in your organisation?
Figure 2 - What are some examples remuneration? This blog seeks to explain why it is important to develop an effective remuneration strategy and how to design and implement a remuneration strategy across an organisation. It also outlines the importance of the Human Resources (HR) department and key governance structures such as the remuneration committee. Finally, the article concludes by discussing the importance of external remuneration consultants in the strategic remuneration process.
Why Develop a Remuneration Strategy?
Although employers and employees have differing motivations for developing a remuneration strategy, it is important to note that an effective remuneration strategy is designed to assist the organisation in achieving its strategic goals and objectives. Unfortunately, many organisations fail to consider their strategic objectives when developing their remuneration strategy. For example, a strategic goal for many organisations, especially in those industries where labour markets can be restricted, is to attract and retain high-quality employees. Therefore, designing a remuneration strategy that fails to pay above market rates won’t help the organisation achieve its strategic outcome. In addition to ensuring that a remuneration strategy is designed to achieve strategic objectives, other employer-driven reasons that a remuneration strategy is designed may include to:
- Attract and retain talented employees within the business
- Promote and reward the right behaviours within the business that drives a high performing organisational culture
- Ensure that remuneration is fair and equitable for employees across the organisation
- Motivate employees to increase their productivity and continually improve their performance and output
- Control employee remuneration costs across the business
- Comply with workplace laws and regulations.
Two of the above reasons, attracting and retaining talented employees and rewarding the right behaviours, are discussed in greater detail.
Attracting and Retaining Talented Employees
Many executives argue that attracting talent to their business is one of the key challenges to building a successful and profitable business. Developing an effective remuneration strategy, which is well articulated, can attract high calibre staff to a business. An organisational strategy to attract and retain high-quality talent by remunerating individuals with above market rates can also increase brand awareness in the marketplace. For example, should a prospective employee have a strong presence in the market they will also have the ability to improve the brand awareness of their new employer? This is especially the case in professional services such as legal, accounting and consulting services where a partner will be lured with higher remuneration than their current firm. A subsequent move driven by higher remuneration to the new firm will also lead to clients following the talent.
Rewarding the Right Behaviours
Establishing a remuneration strategy can also be important in promoting and rewarding those behaviours that the organisation sees as critical for success. Many corporate regulators are recognising the important role of culture within the organisation. For example, in a 2016 speech by the Australian Securities & Investments Commission Chairman, Greg Medcraft, noted that “It [culture] shapes and influences people’s attitudes and behaviours towards, for example, customers and compliance”. Using a remuneration strategy that rewards the right behaviours will help create a healthy corporate culture leading to ethical conduct and pleased customers. While remuneration strategies are a critical part of driving an organisation’s culture, there is much more to it. Remuneration is, however, a good starting point to establishing a strong company culture. It should be reiterated that the organisation’s remuneration strategy should be clearly linked to an organisational strategic objective. For example, it may be that the organisation’s strategic objective is to provide financial services in an ethical and compliant manner. In this case, an important component of the remuneration strategy is not only promoting the achievement of objectives but setting out expectations in how those goals are achieved. From an employee’s perspective, the development of a remuneration strategy can also be beneficial because:
- It should enable equitable treatment between the employee and their peers across the organisation
- It will allow the employee to assess their value to the organisation’s strategic objectives and compensate them accordingly
- It encourages management and employees to meet and complete performance reviews which should identify and improve employee performance and productivity.
The next section looks at how a remuneration strategy can be developed and implemented across an organisation.
Developing a Remuneration Strategy
For each organisation, depending on whether it is a large not-for-profit, a private or public company, it will be different. However, listed below are some types of structures, processes and systems that should be considered when designing and implementing a remuneration strategy.
Role of Human Resources
The HR team within any organisation has an important role to play in developing and implementing an effective remuneration strategy. It can be argued that setting a remuneration strategy is in fact one of the most important responsibilities of the HR team. In the context of developing and implementing a remuneration strategy, the HR team are expected to perform the following roles and responsibilities:
- Develop a remuneration strategy and supporting policies that are aligned to the organisation’s strategic objectives, support the organisation’s values by driving the right behaviours and improve productivity
- Implement the remuneration strategy by promoting and increasing awareness of the remuneration strategy across the business
- Benchmark the remuneration strategy against market peers to ensure that it remains fit for purpose and is fair, transparent and equitable for employees and the employer
- Deal with employee concerns around remuneration in a professional and confidential manner
- Provide relevant reporting to the organisation’s senior management, Remuneration Committee and Board.
A Remuneration Committee provides governance across the organisation’s remuneration strategy and other arrangements. It does this by assisting and advising the Board on matters relating to remuneration strategy including compensation, bonuses, incentives and the Chief Executive Officer’s remuneration. The Remuneration Committee’s key tasks include:
- Providing oversight over the organisation’s remuneration arrangements including the review and approval of key policies and procedures
- Ensuring that the organisation’s remuneration policies, practices and key performance indicators are well aligned to its strategic objectives and organisational values
- Ensuring that employee remuneration is aligned to market rates and where deviations are identified that they are fully explained.
A Remuneration Policy will set out the guiding principles for an organisation’s remuneration strategy. Generally, a Remuneration Policy will include the following information:
- The organisation’s agreed strategic and organisational objectives
- The objectives that the organisation wants to achieve via its remuneration strategy. For example, it may be that they wish to instil a strong risk culture through providing incentives for ethical and compliant conduct
- The guiding principles for setting remuneration across the organisation
- The roles and responsibilities of key parties including the Chief Human Resources Officer, the Chief Executive Officer, the Board and the Remuneration Committee.
The Remuneration Policy should be clearly articulated across the organisation to ensure that employees are fully aware of how remuneration is set and reviewed. For a remuneration strategy to be successful, it needs to be fair and transparent. An overarching Remuneration Policy may be supported by other types of sub-policies or procedures including a Performance and Salary Review Policy, Benefits Policy and an Employee Incentive Plan to provide further guidance to the organisation’s employees.
After establishing the key governance structure for remuneration, the Remuneration Committee and the HR department can get down to the business of designing and implementing a strategic remuneration framework across the business. There are a number of key steps that must be performed in implementing a strategic remuneration framework. The strategic phases include:
- Phase One: Development of strategic business objectives which are defined by the Chief Executive Officer and agreed by the organisation’s Board.
- Phase Two: Key human resource management objectives are defined by management. These objectives need to directly link to the organisation’s strategic objectives.
- Phase Three: Employee remuneration objectives are defined and agreed with relevant stakeholders including employee representatives.
Following these three strategic phases, the administrative stages of strategic remuneration are performed. These include:
- Phase Four: Job analysis is performed which requires the identification and description of jobs to ensure that the desired organisational structure is achieved. This will include tasks such as developing job descriptions, creating job titles and establishing performance standards for each of the identified roles.
- Phase Five: HR will evaluate jobs to determine the importance of the specific roles within the organisation and establish relativity between jobs. This will including going through a process of job ranking to understand where roles stand in the hierarchy of the organisation.
- Phase Six: Some organisations then may go through a process of establishing external equity by performing their own surveys and benchmarking against the labour market. The aim of this step is to ensure that employees are fairly remunerated for their services and work. The review of the market can sometimes be awarded to external consultants to ensure that there is an appropriate level of independence.
- Phase Seven: This stage generally requires a match between the internal and external value of the role taking into consideration the job evaluation worth and the labour market worth. This allows the HR function to establish accurate pay ranges for the required roles. Further, it provides an opportunity for HR to determine how an employee can move through the various pay ranges.
- Phase Eight: This stage is where the HR function will communicate the remuneration strategy and ensure that they monitor and review the strategy on an ongoing basis. It is important that HR credentials the remuneration strategy to employees to ensure they are comfortable with the organisation’s approach to remuneration. Any observations from the monitoring and review of the remuneration program are escalated to the Remuneration Committee and where appropriate the Remuneration Committee will make recommendations to the Board.
The diagram below demonstrates how a strategic remuneration framework can be implemented throughout an organisation.
Figure 3 - Strategic remuneration framework
Use of Short-Term Incentive Plans (STIP) and Long-Term Incentive Plans (LTIP)
Another important component of a remuneration strategy is the use of STIPs and LTIPs. STIPs are used to align performance with short-term performance indicators and are used to build a results-focused culture and to increase employee engagement. STIPs are usually paid in the form of a cash bonus to the employee on the achievement of the key metrics. In contrast, LTIPs are designed to improve employees' long-term performance by providing rewards that are not tied to immediate performance indicators such as the company share price. Unlike benefits paid under a STIP, compensation under an LTIP is generally paid in the form of stock options or retirement benefits.
Using External Remuneration Consultants
The use of external remuneration consultants is important in developing and implementing a successful remuneration strategy. Specifically, remuneration consultants can act as influencers by playing the role of educator and adviser to the Board and HR department. Further, organisations need to optimise the use of their external remuneration consultants by leveraging their market insights. An external consultant can be used in the following methods during the strategic remuneration process:
- Work with the Remuneration Committee and the HR team to formulate appropriate remuneration objectives that are aligned to the organisation’s strategic objectives.
- Perform an annual review of incentive plans to ensure alignment with the organisation’s strategic objectives.
- Facilitate the development of STIPs and LTIPs to ensure that remuneration is designed with the aim of achieving the organisation’s strategic objectives.
- Benchmark the market competitiveness of remuneration for key management positions by comparing and contrasting remuneration against peers.
- Provide assistance in job ranking within the organisation.
This blog has explained the key reasons organisations develop and implement a remuneration strategy. In an increasingly competitive environment, the organisation’s remuneration strategy can be used to not only attract and retain talent and drive a healthy corporate culture, but it should also be used to ultimately achieve the organisation’s strategic objectives.
- The organisation's strategic objectives must match the remuneration strategies.
- The HR team plays a key role in developing the remuneration strategy and articulating the strategy across the organisation.
- An effective remuneration strategy is designed to attract high calibre talent in the market, reward employees for demonstrating the right behaviours and motivate people to achieve the organisation's goals and objectives.
- Developing a remuneration strategy will often be different across organisations however, having a remuneration committee and a clearly articulated remuneration policy is important.
- The remuneration committee will provide governance across the organisation's remuneration setting and review process.
- The remuneration policy should set out the guiding principles of an organisation's remuneration strategy and be clearly articulated across the organisation.
- Organisations should use a mix of STIPs and LTIPs that are aligned to strategic objectives to ensure that employees' performance is optimised.
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