The Role of Dynamic Compensation in today’s world of change

How PAY can be one of the most effective tools available today for motivating an organization during a time of change.

Preface

As we have noted, continuing global changes has impacted tremendously most organizations everywhere . They have to deal with these forces of change through very narrow, specific strategic initiatives such as quality, team , reengineering, outsourcing. Unfortunately when organizations are faced to rethink their people’s pay strategy, they frequently continue taking a somewhat reactionary approach – overlooking the fact there exist a connection at the end of the line between overall structure, strategy and any other business processes to the rewards given to their people.

For the past 50 years, Hay Management Consultants has been helping organizations develop compensation strategies. Their point-based pay system , known as the Hay Guide Chart Profile Methodology has set the standard for compensation programs around the world and still continue to be acknowledged as the basic platform to start with. Yet, with the many global changes - common to most organization, from rapidly expanding technology, fiercer global competition, higher customer expectations, decreasing product sales cycle time , to changing personnel requirements, companies often still misunderstood compensation as a mere expense and cost of doing business and think narrowly in the scope of financial result and specific tasks only. In working with many organizations and in their ongoing research into compensation strategies, two issues became clear for Hay :

  1. You can not talk about organizational change without talking about their people and people interaction and its contribution in the processes.
  2. You can not talk about people processes without considering appropriate compensation for their contribution.
Yet, in the rush to change and counteract global change, many organization have overlooked or mishandled the understanding of the role of pay and its impact on their people.

The Changing World

There are at least six major changes that are common to almost every organization. They are :

  1. Rapidly Expanding Technology.
    Technology exploded, it revolutionarize, they become faster, more accurate, without boundaries.
  2. Global Competition.
    There are no more geographic market boundaries . It became one reshaped world market with complex interdependency relationships.
  3. Higher Customer Expectation.
    Customers became much aware and spoiled of their rights and needs, they can benchmark more easily by comparing , they demand more service, faster response, higher quality and individualized attention.
  4. Ever Decreasing Cycle Times.
    We live more and more in a real-time world than ever before. While we still struggle with ever increasing speed at which change buffets us, we have come to adept that speed. To survive and compete in today environment , organization must move through shorter product and sales cycle time.
  5. Increased need for competencies and capabilities.
    With increased competition, a good product or service alone does not ensure continuing success. They must be backed by tangible resources skills and knowledge , and intangible attributes such as supporting behaviors of the employees, teamwork, flexibility, motivation etc. These will set the delivery of the product apart from the others.
  6. People.
    With increased emphasis of technology, quality and service, we are quickly faced with the challenge of moving away from a purely mechanized workforce to a intellectualized one. We no longer need people which act like robots in doing their tasks, but rather to make their own intelligent decisions, use good judgment and assume more responsibility for individual and team performance. Each person must add measurable value to the organization. This means willingly acquiring new knowledge, new skills, new competencies and new behaviors. Unfortunately, their greater diversity combined with global freedom created among it less loyalty in the workplace attitudes. Thus a new work culture has emerged.
The Organizational Melting Pot.

In simple language , culture means : "How We Do Things Here". Before any new compensation programs is designed, there must be a clear understanding of the organization, its current values, its structure, its people as well as its goals and vision for the future, how work is organized, how people behave, interact and behave in the organization, what values and forces shape the organization vision, mission and strategic goals

Culture in this context is thus far more than the warm and fuzzy attitudinal concepts popularized in the 1970. It is not merely a fashion statement either to typecast different organizations. What we are describing is a organizational concept that encompassed how work is done, how people are selected, developed, managed and rewarded. Market dynamics force an organization to adopt certain work cultures if it is to become a high performing market leader. Unfortunately to shift culture is not limited to a specific industry or organization. As organizations scramble to keep up with ever-continuing changes, factly many are still touchy when it comes to talking about their culture. It should be noted however that new culture won’t make a poor strategy effective. What a appropriate culture can do is provide critical support to the organization, one that supports the strategy by aligning behaviors, processes and methods with the desired outcomes. It is not just achieving results, but also the method through which they can be achieved, critical to short and long term success.

So what does all talk about evolving work cultures have to do with the subject of compensation ? Everything. In today’s rapidly changing world, compensation must assume the critical role not only of rewarding and motivating individuals, but also of moving the organization forward. Pay strategies must be aligned with the culture in order to successfully support and drive its employees to achieve its strategic business goals. Since culture, methods, people, goals are all different in time , each require different reward approaches. One style no longer fits all nowadays.

The basics of Pay Strategies

Whether the emphasis is in team or individuals, functional, skill, time-based , incentive-based or others, it is clear that pay strategy, like business strategies they support are changing dramatically.
Unfortunately the variety of pay programs has rendered the one-size-fits-all solutions obsolete and created a high degree of confusion.
Much of that confusion can be eliminated however, if the organization’s managers and leaders understand five basic tenets of dynamic compensation. These are :

  1. Pay is first and foremost a people issue. It is about motivating them. It is about reshaping and refocusing their behaviors and accepting new values.
  2. Pay is a major organizational communication tool. It is perhaps the most direct way that an organization has of communicating with its employees.
  3. No single pay strategy is right for everyone. Different organizations as well as different employee groups in the same organization may require different strategies
  4. Pay must support - not lead- the organization’s vision, values and business strategies
  5. Pay must be aligned with the organization’s work culture.
Aligning Pay - mixing the elements.

Four work cultures and its link to compensations has been so far defined by Hay . They are :

The Functional Culture , they are the oldest , traditional and perhaps less dynamic. They emphasize in the individual and the purpose is to ensure the reliable delivery of a product or service through the technology a company possesses or manages. To minimize mistakes, tasks were normally broken down into their lowest and simplest forms. Individuals performing them focus on these narrowly defined functions and thus require also narrowly defined albeit deep set of skills. Increase in job skills and experience is therefore the value-add. Most organizations still continue to nurture these kind of functional elements that are critical to their successes.

The Process Culture. As its name implies, in the process culture, the importance begins to shift from the individual’s job and efforts toward the processes of groups and teams. This movement is caused by a shift of business strategies from internal to external. Organization and employees are not only concerned with internal performance but due to external market and competition expansions, they have to re-consider new powerful external forces – quality and customers. They discover that the most effective way to continually improve quality and customer satisfaction is through processes carried out by teams who bring the organization closer to the customer and thus create customer friendliness and rapid response to their needs. The focus for compensation in general is team contribution to the system, not individual results. While individual skills are naturally still important, there emerge a need to begin developing team skills and relationships, as well as team loyalty to customer. Thus a compensation balance must be worked out between the individual and team competencies.

The Time-based Culture . If "the customer is always right" is the motto of the process organization, then "do it faster - do it better" is the mantra of time-based organizations. The overriding strategy is – “at the right time with the right people” – to create, develop, build, market new products and services, while reengineering existing costs out of existing products and services with decreasing the cycle time. These organizations want to be leaders in the market and be the first in creating breakthroughs. Compensation in time-based organizations must support these business strategies. It has to combine rewarding highly skilled individuals and specialties with creativity, projects, results, efficiency and effectiveness. As a results of this wide range of goals, dynamics and values, a complex and flexible compensation strategy is often required

The Network Culture . Network organizations emphasis on alliances and ventures. They care little about internal equity. Because each individual is paid for what he or she brings on the table for one particular project, much more attention is paid to competing market rates and individually established value. Indeed pay in a network organization is somewhat bipolar. The “stars” – the real talents – are paid huge salaries – maybe totally on commission, or given equity in the enterprise, while the “extras” are paid scale. Because employer/employee relations in the network content is mostly contract based, rewards also follow its duration and scope. Level of compensation tends to be negotiated, especially at executive levels with a large proportion delivered in some form of variable pay that is tied to the success of the venture or project. Perhaps the best example of effective network compensation strategies can be found in the movie industry. The producers who bring the film projects together typically receive a big fee or salary as well as a major “slice of the cake” and may retain the right to the product and its long term distribution. The stars are paid a negotiated rate based on their role and stature plus royalties or residuals based upon the financial success of the film. The supporting casts are paid accordingly, the trades people are paid at industry scale for the duration of the project.

Pay and the Role of HR

It should come as no surprise that nowadays many HR had basically become a second-class citizen in the organization. HR was caught in the middle, facilitators of senior management on one hand - the advocates of employees on the other and at the end HR were just “servicing” the company making sure the vehicle followed the roadmap. When organization changed, old paradigms normally went out the window very quickly. But when new programs were created, HR processes are frequently overlooked and left alone until everything else is in place. HR is viewed as a ancillary bureaucratic function of a highly bureaucratic department . Adding to the problem is that traditional human resource paradigms are frequently major barriers to the development of new innovative directions.

Like dynamic compensation, the HR processes must also be consistent with the culture they support , it has to be integrated with the compensation strategy. If the organization is really serious about creating a new, more dynamic culture that makes a positive impact with its business, it needs to begin shifting the focus and role of the HR function long before any new pay programs is created and implemented. The narrow defined HR functions must give way to a continuous series of processes that address how people entered the organization, how they evolve within the organization, how their performance can be maximized and how finally they exit. HR processes must shift from highly centralized administrative unit and become fully integrated into the broader and more strategic business operations.

The 9 Self-help Principles

What follows is a checklist to help creating a successful compensation program.

  1. Align your compensation with your organization culture, values and strategic goals. Many new programs failure can be tracked to a lack of total alignment.
  2. Link your compensation to other changes. Compensation must support and reinforce other change initiatives and be fully integrated with them. Pay today is far more than only security or status
  3. Time your compensation program to best support your other change initiatives. Like in business, sport and leisure timing is everything. Pay is a powerful motivator, it is an excellent vehicle for reinforcing new values and behaviors But it can not drive or lead the change process.
  4. Integrate pay with other people processes. Alone, compensation can not provide the support that the people need. It must be developed as part of a integral system that includes how work is designed, how people are selected, developed and their performance is managed.
  5. Democratize the pay process. Integrate the line, the department , the team level when it comes to communicate the goals, the issues, the policies, the responsibilities, the results. Don’t use authority of pay as your power.
  6. Demystify compensation. Be transparent about its policies, the rules, the goals, the results, the penalties so everyone knows about their rights and responsibilities.
  7. Measure results. There is no use tying pay with performance if you can not measure performance and competency results objectively.
  8. Refine, refine and refine. Call it continuous watching and reviews, fine tuning and improvement of details.
  9. Be selective. Don’t take to hearth everything you hear or read about compensation. Don’t follow the latest trends . There are no miracle cures, be selective . Explore all available options and then decide what is best for your organization, your culture and the changes you are going through.
References :

1. The Hay Group 1996. People, Performance and Pay. The Free Press. NY. USA.
2. Charles Handy, The Age of Un-Reason. Harvard Business School Press, 1990.
3. Bruce N Pfau & Steven E.Gross , Innovative Reward and Recognition Strategies in TQM. Conference Board Meeting ,1993.

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