As a data provider and as compensation consultants, clients often ask us for advice and guidance in formulating policies and processes for using market data to inform and manage their compensation program. The questions range from “What percentile of the data should I use?” to “How should I take inflation into account?”
The answer is to refer to your remuneration framework (aka compensation policy). Your framework should address the key issues you need to sort out, along with practical steps to move from market data to salary scale. Here are some tips.
Top Ten Features of a Well-Designed Remuneration Framework
Here are the top ten things that form a solid basis for a well-designed remuneration framework:
- Cost of Labor vs. Cost of Living. Salary setting is essentially an application of supply and demand to the labor market. While managers and employees like to think that inflation is important, data shows that there is little or no correlation between labor market increases and inflation. So stick to cost of labor, not cost of living for your policy.
- Credible Market Sources. You need market data to assess your competitive position. Use a professionally-conducted salary survey. Resist the temptation to rely on internal mechanisms such as the “call around” to your peers to see what they’re paying. Not only is this time consuming and fraught with pitfalls, in many countries, it’s illegal to share salary information. A neutral third-party survey provider will insulate you from these risks.
- Solid Job Classification. Despite reports to the contrary, job classification is alive and well, and good practice requires its use. Comparing jobs is not like comparing a can of peas. Each organization defines roles differently, so job comparisons are hard. This is true when comparing jobs internally in your organization, and externally in your market. Job classification is a systematic and objective way to determine which jobs are equivalent to which other ones, along with building a hierarchy of your organization. There are many good ways to apply job classification, but before you think about that, be sure you have a robust classification standard in place.
- Know Your Market. Organizations should define their ideal comparator group to include peer organizations within their sector, and across all sectors, with whom you compete for talent. Limiting your comparators to your own sector is unwise. In most developing countries, sectors are too small for meaningful sector cuts. And even when they are possible, comparing across different market strata is a fool’s exercise. Instead, focus on those employers in any sector, including the international public sector, that target the same strata as your organization. If you are a leader, you should compare to other leaders. And remember, your sector is not an island. Even if there is good sector data available, as you will find in more developed markets, it is useful to compare sector data to general market practices to understand the actual differences.
- Total Compensation Approach. There are many parts of total compensation, and there are wide variations within countries and from country to country. The only practical way to determine your market position is to use total compensation. If your total comp is right, then you can “unscramble the egg” into the components your company chooses to offer. If you look at things component by component, it will be almost impossible to achieve your desired target.
- Annual Updates. Labor markets are dynamic. In developing countries, where we do most of our work, the amount of change we see during the year is significant, so much so, that we update our survey data three times a year. Even in more stable, slow growth, developed economies, it’s helpful to look at the market at least once per year. Remember, markets are not static – there could be new competitors emerging in previously non-existent sectors, for example, which cause market disruption. Or a big company could open a new facility and try to poach all the key talent from the market. With access to current data, you are in a stronger position to know what’s happening and how best to react.
- Use Local Currency. With just a few exceptions around the world, such as distressed economies or countries where civil unrest is ongoing, staff compensation should be determined in local currency, without any hard links to foreign currency benchmarks (e.g., US dollars, Euros, British Pounds, etc.). If you don’t believe me, we should talk so I can convince you. And you should have a Special Measures Policy (see number 10 below).
- Go GLOCAL – Global Standards but Local Adaptation. Organizations often formulate policies on a global basis without enough consideration of local practices. The world is a messy place and compensation practices vary according to many factors, including local culture, level of economic development, historical practices, and a host of other reasons. Reserve some flexibility to address the market differences that exist which require wider pay spans and variable increase percentages between grades depending on the market. Pay curves are much steeper in developing markets than in more mature ones. If you acknowledge this, then your global standard formulaic approach won’t deliver the results you need. In these situations, trust your local experts – they usually know what’s common in their country.
- Ageing of Data. Survey data is always a snapshot in time, and always retrospective, not prospective. There are many approaches to age data forward to anticipate some market movement that is not already reflected in the survey. It’s a good practice to make these adjustments.
- Address Special Circumstances. We believe every employer should develop a policy outlining specifically what steps will be taken if an unforeseen or uncontrollable event occurs. Whether it’s economic (inflation, devaluation) or non-economic (natural disaster, civil unrest, ongoing conflict, etc.), your managers and employees want to know, when something bad happens externally, what their employer will do. It’s a real competitive advantage to have a policy in place for such circumstances, to provide clear, transparent information to all those affected, and enable your organization to act quickly and lead the market in responding to the crisis. Yet few employers have taken the time to develop a Special Measures Policy to do this. You probably have a crisis management plan in place for other functions, but I bet it doesn’t address these fundamental issues that become especially important to staff when a crisis occurs.
So there you have it – our top ten features to include in your compensation policy to help manage it in a market-driven, cost-effective and professional manner. It takes time and discipline to do this consistently, but don’t be afraid to try. Of course, professional assistance could increase the capacity of your organization to deliver and fill in any technical gaps you may be experiencing.
Birches Group specializes in the study of work – how work works. Our Community™ Platform includes job evaluation, labor market data, skills assessment and performance management. Through a combination of consulting, simple to use software and our focus on jobs as the core element for every employer, we assist organizations in optimizing their workforce design and ensuring their competitive goals are achieved.
We conduct multisector market surveys in 155 developing country markets, including all of Africa. In addition, we offer a specialized survey for international NGOs and those companies organizations involved in international development in approximately 85 countries.
Birches Group can assist clients through our consulting services in the areas of job evaluation, salary scale design, compensation policy development (including special measures), as well as support for skills development and performance management.
For more information, please contact us.