Compensation Management

Anthony York discusses the current trends in compensation management.

Concern about economic turmoil seems likely to continue well into 2012, yet the focus for reward professionals is moving away from cost control.

The key compensation management issues facing organisations this year were identified in the first annual UK Compensation Trends Survey. The research, carried out by Curo Compensation and HR recruitment specialist, Digby Morgan, combined information on both current practice and future plans to build a full picture of the UK landscape.

Future plans

Businesses are certainly planning for the future, and appear to be considering what changes are required as we move slowly into economic recovery. As a more widespread investment in bonus payments and salary reviews (in particular) returns to the market, companies are focussing on how to best leverage this investment.

Top of the wish list is greater alignment of compensation and reward with business plans. More than 70 per cent of survey respondents are focussing on this. This is closely linked to the need to accurately align employee reward with business unit performance – again nearly 70 per cent of individuals expect to look at this. Encouragingly, only around one-third of employers are planning to reduce compensation costs this year. This may have been significantly higher had the survey run earlier in this economic cycle.

There is acceptance that to achieve true alignment of performance and reward, changes in the way rewards are structured will need to take place over 2012. The most widespread change identified was a need for greater alignment of salary and bonus awards with individual and business unit performance. More than 40 per cent of the firms surveyed intended to increase the differential in pay awards between top performers and the rest of the organisation.

Effective communication

Of course, investment can only drive performance if employees are actively engaged. Effective communication is critical to this. Arguably, this should have been a focus over the past years, where the only mitigation for a lack of investment in compensation programmes will have been successful and timely communication. Yet compensation is widely identified as not sufficiently engaging for employees. Survey respondents were right to highlight this as one of the biggest risks facing them in 2012, with nearly two-thirds flagging the issue. Linked to this, poor employee and line manager understanding or appreciation of reward constitute the remainder of the top three risks identified by survey respondents, with 55 per cent and 38 per cent respectively.

As with all employee engagement issues, line managers will be key to any successful solution. However, the results suggest that many line managers are poorly equipped in this regard. This will be as a result of a combination of factors. Poor direct communication can result in minimal understanding of the underlying reward philosophy. Difficulty in accessing and processing information, to facilitate informed reward decisions can further disengage. If HR teams have to focus on technical delivery, rather than employee and line engagement, this will only exacerbate the problem.

Existing processes

With this in mind, it is sensible to take a look at the information provided on existing pay review processes. The survey showed a range of review dates across the year. There are significant activity peaks in both January and April, reflecting calendar and (UK) tax year pay cycles respectively. A further peak in October is likely to be linked to the increased cycle for the UK national minimum wage.

More interesting is the length of time it currently takes to complete a review cycle. While the annual pay review is a critical process, with the right information to hand it should be relatively simple to make individual decisions. Yet the majority of respondents indicated that the process took around three months to complete. A sizeable minority told us that their process took significantly longer – more than six months in some cases.

This is a clear illustration of the complexity of some existing arrangements. Whether this length of time is spent on behind-the-scenes data/process management or on the decisions themselves, it is unlikely to be the most efficient (and therefore value generating) approach for many of the respondents.

A primary reason for the length of the pay review is often the technology, which many companies use to support compensation review processes. A striking 55.6 per cent of respondents use spreadsheets to run their annual compensation review process. While this is clearly considered normal, it is certainly interesting to think that many firms are managing some of their largest spends and most sensitive data using nothing other than Excel. It is worth considering if such an unsecured, labour-intensive process would be acceptable elsewhere in business.

Such a heavy reliance on Excel can pose practical problems. Although it offers a reasonable amount of flexibility, each process iteration requires a high level of manual configuration. The lack of integrated workflow will also mean a huge potential for error and omission, as the inevitable manual aggregation and disaggregation of data takes place. Distribution and consolidation of spreadsheets throughout an organisation often lacks an adequate level of data security – a particular issue given the sensitivity of the information.

So what of the alternatives? Given high cost, limited flexibility and long implementation timelines, it is perhaps unsurprising that less than 10 per cent of employers surveyed chose to use an enterprise resource planning (ERP) solution. What is surprising, given this investment, is the minimal improvement in flexibility and process. Around 80 per cent of spreadsheet users expressed concerns about the technology or processes applied in their salary review cycle. This only reduced to 68 per cent for users of an ERP solution.

Complex ambitions

While the current technology supporting the review processes is often sub-optimal, it has little impact on the ambition of those questioned. As expected, all of the survey participants had some sort of managed salary review process. Around 74 per cent also ran a similar bonus decision process. A lesser number facilitated Long Term Incentive Plan or Total Compensation decisions; although still more than a quarter in both cases.

This widespread implementation of multiple processes gives a small insight into the issues facing HR and reward practitioners. It would appear that in most cases, multiple complex decision making processes are undertaken, and usually take three to six months to complete. The technology utilised is not sufficiently robust, and cannot support processes to the level required by users.

Therefore, it is likely that a lot of highly competent practitioners spend a large proportion of the year frustrated by data and process management. They will, therefore, have little time available to actively engage line managers and employees, and subsequently maximise the impact of their work on increasing engagement and productivity. Line managers themselves can also suffer similar frustrations, further reducing the overall impact of any process.

Changes for success

Some or all of this might sound very familiar. However, more difficult is identifying what to do about it. Given any or all the professional pressures above, it would surely be easiest to focus on the elements of compensation management processes that need improvement. In short, if a process isn’t broken, don’t fix it.

However, to take this approach is to miss out on a real opportunity. The overall aim of any compensation process is to achieve value for the employer. To do this most effectively, the whole process should be regularly reviewed to ensure that stakeholder, line management and HR time is effectively focussed on making the right decisions and then engaging the recipients – the employees.

Completing such a review (and, of course, the implementation of any changes identified) can be onerous. However, in most cases it won’t be a long wait for a pay-off on this investment of time and money. By going back to first principles and looking at all contributing elements and systems, it is possible to create a series of virtuous circles leading to increased employee engagement.

Start with the system and technical process. It is rare that systems and processes are fully optimised for either front-end (line management) or back-end (HR) users. So consider the amount of time it takes to load and manage data prior to a compensation review process, or the management of data and workflow during the process. Think about the line-manager experience. How easy is it for them to access the information they need during the review process? How long does it take a typical line manager to understand the system and make the right compensation decisions?

By improving processes and systems, time is created for all stakeholders in any given review process. It is this time which can become a critical differentiator. HR can use this to design and implement better policies and global communications. This, in turn, leads to better budgetary compliance and process understanding. Line managers benefit directly. They will also be more engaged in a process which takes less time, is easier to understand and directly assists them in making the right pay decisions.

Vitally, employees will perceive a benefit. More time in HR to focus on policy and communication will ensure that the right decisions are made. Better communications will ensure that they understand how, when and why decisions about are being made. The engagement of line managers will improve the messages (both explicit and implicit) to their teams, further improving engagement.

A real opportunity

So while challenging, the survey results clearly demonstrate that a window of opportunity exists. Corporate focus will remain on “value” for some time and this will lead to a temptation to spend as much as possible of the (inevitably scarce) budget directly on employees. However, it is only by simultaneously improving the quality of communication, delivery and system controls, as well as technology, data and process management that the maximum return on any investment can be realised.

By focussing on the way compensation processes are managed and implemented, HR can operate within budget limits, while ensuring fairness and equity within and across businesses. Done well, this should result in talent retention and engagement and, of course, a subsequent improvement in business results.

Anthony York is Director of Only People and Senior Consultant to Curo Compensation