HOW TO: MAXIMIZING COMPENSATION MANAGEMENT EFFECTIVENESS: What European organizations tell us
Given current business, talent and budget pressures, European organizations today are taking a closer look at their approach to compensation management. Senior management is pressing for higher returns not only on compensation, but also on the entire investment in human capital. The need for stronger governance is driving a variety of changes in the way compensation is managed, including how to:
- Create compensation programs that support the key performance drivers in the business
- Enable the functions, and the services they provide, to best support the needs of the business
- Encourage managers to be more engaged in the process and act as advocates for the compensation policies
- Make the best use of technology for building market insights, modeling costs and supporting managers
- Raise employee awareness and appreciation of the value of their compensation and the basis on which it is determined
Knowing how to pay people is becoming as important as knowing how much to pay them, but only 17 percent of companies believe that they are very effective at managing compensation.
This article considers the direction that compensation management is taking in European organizations and provides some insights into the goals and objectives of these businesses, as well as the value they see from investing in effective ways of managing compensation. These insights have been derived from research that Mercer has been conducting on the theme of compensation management since 2007.
Key trends in European businesses
The following section focuses on some of the key themes affecting compensation management in European organizations.
Governance of compensation decisions
Depending on the needs of the business, companies in Europe are either centralizing or decentralizing their compensation functions. For around 60 percent of companies, the move is toward a more centralized function. To date, compensation responsibilities have been devolved, leading some to observe that a variety of programs and practices in most companies are overcomplicated. Through centralization, these companies hope to establish greater control, remove duplicate programs and practices, and consolidate activities for greater efficiencies. But for companies moving in the opposite direction, decentralizing the compensation function Point of view Mercer 9 enables distinct and autonomous business units to make the best decisions regarding different talent capabilities and related issues. Regardless of the direction governance will take, what is apparent is that very few organizations (10 percent) are standing still.
Developing an aligned compensation strategy
Effective compensation management needs to be based on a well-articulated compensation strategy. By motivating employees to demonstrate behaviors and achieve outcomes that will support the business, companies can ensure that they are getting value for money. This initiative transforms compensation from being a cost to the organization to being an investment. Thus, principles for compensation that are based on business priorities provide a good framework through which compensation programs can be developed.
The vast majority of companies in Europe view aligning their compensation strategy with their business strategy as a critical means of dealing with talent supply and cost pressures in order to compete successfully.
Organizing the compensation function
The most common compensation model today relies on HR generalists to deliver compensation services. This is partly a reflection of legacy structures where compensation management is regarded as a part-time responsibility (typically because of its seasonal nature). However, we also note the fast-spreading evolution of partnership models in compensation delivery (as has evolved in wider HR management), with centers of excellence responsible for design and development, HR generalists acting as business partners to help delivery at local level, and the emergence of compensation service centers managing transactional work.
Lean internal compensation talent
The compensation function in Europe tends to be the leanest of the HR functions, despite the fact that compensation management is usually one of the top three demands on HR time. Depending on whether the organization is a parent or a subsidiary, the ratio of compensation staff to total employees ranges from 1:2,000 to 1:9,500.
Only 15 percent of European organizations believe that their compensation functions are very well resourced. The compensation function, on average, is staffed with fewer people than recruitment, payroll or employee relations and has half as many staff as administration, learning and development, and generalist functions.
Buying specialist compensation capability
While mature functions within HR, such as pensions administration, recruitment, occupational health, training and payroll, tend to rely heavily on third-party support, emerging functions such as compensation management tend to be sourced in-house, with only a small percentage of European companies using third parties for elements of compensation delivery – typically, transactional work.
The current emphasis on compensation management transformation is the move away from analytical and transactional work toward more strategic activities and closer business partnerships. As the availability of competent third-party providers increases, we expect to see more companies considering co-sourced or outsourced services to support them in this transition.
Targeted positioning for better attraction
Our research finds that companies expect to source an increasing percentage of their critical talent through the external labor market in the future.
As their talent strategies shift from the traditional “building” of internal workforce capabilities to the “buying” of necessary talent, companies are finding that their compensation strategy and program design are becoming even more critical to workforce management. In particular, while the majority of European companies currently position their compensation to the market median, many anticipate more aggressive pay positioning in the future to help them compete for talent.
Segmenting the workforce for better retention
Segmentation is the process of clustering employees and rewarding them under different principles, usually based on the strategic value they contribute to the company, than those used for the majority of employees.
Segmentation can be internal, that is, used to differentiate the roles and to reward the needs of different groups of employees, such as sales positions. It can also be external, that is, used to differentiate the value placed on employees’ skills by the organization as compared to the wider market, such as those of high-potential employees. Typically, organizations will identify one or two employee segments. Our research indicates that organizations are considering more extensive use of segmentation, both for differentiating the needs of different populations and the need for business to differentiate these groups of employees from the market.
Really paying for performance
Despite a great deal of talk about “pay for performance,” the actual shift toward increased performance-related pay (cash and long-term incentives) is probably smaller than expected. The chart on page 11 shows the actual average shift toward these performance-related elements across Europe over the last four years. At executive levels, there is a reasonable increase in the value of these elements as a percentage of base salary and, to a lesser degree, as a proportion of total remuneration. However, beneath the executive levels, these shifts are marginal.
Building management talent
Managers play a fundamental role in managing compensation, both in the way they recommend and communicate compensation decisions to their employees. However, only 31 percent of organizations consider their managers as making compensation decisions that are aligned to the business strategy (managers typically report a reluctance to address poor performance and, therefore, a disinclination to truly differentiate performance through pay and bonus awards). This disconnect between company messages about pay for performance and manager behaviors is resulting in employee skepticism about the company’s compensation system and a preference to rely on the grapevine for the insights they seek. Effective compensation management lies in the development of managers as effective decision makers and communicators of compensation, who clearly convey expectations and act on their decisions.
Engaging employees
Our research indicates that across Europe there is a strong correlation between employee understanding of compensation and their appreciation of its value. This link extends to job satisfaction and ultimately to commitment to the company. While companies recognize that employees’ attitudes toward rewards are poor, we still see little genuine investment in addressing the problem.
Implementing greater technological sophistication
Spreadsheets are still the predominant compensation planning and management tool. Approximately half of the companies we surveyed reported using spreadsheets for both analytical and modeling activities, such as market pricing and pay-scale work, and for collecting merit and salary increase recommendations from managers. Despite the investments that organizations make in HR technology, it would appear that the compensation function is not a significant beneficiary.
We raise concerns about the efficiency and risks associated with spreadsheets, particularly the investment necessary to build and rebuild these structures each year, the potential for human error and the loss of control that occurs by distributing these workbooks throughout the organization. We also note that there is a general level of dissatisfaction with the technologies currently used – only 15 percent believe that they have optimum use of technology in compensation management. Organizations are looking to increase effectiveness, efficiency and the credibility of the process through enhanced technology, particularly by targeting and distributing compensation budgets to the most worthy areas in the business.
Source: http://www.mercer.com
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