In this article, Tom Marks shows how vital it is to take into account the behavioural aspects of organisational life as well as direct employee cost – but this does not necessarily have to be complex. The information to carry this out already rests with the organisation–if we ask the right questions of this information.

Many organisations spend vast amounts of time and resources attempting to effectively manage their reward systems and in doing so fail to understand the true nature of their reward landscape. Theoretically no reward system should be overly complex; however, this is often the perception because organisations do not know how they can maximise the data they already possess to understand and manage the key relationship of employee cost and performance.

The underlying value of any organisation is in its productivity – be it making widgets, providing a service or constructing a tower – and this value in its simplest form is calculated based on the relationship between all costs relative to output. In an economy where the currency of competitive advantage is knowledge, and this knowledge is located in people’s heads, then this intellectual capital is a major component of cost. And further, employee costs do not relate simply to pounds, shillings and pence. This relationship is not just about understanding the effects of extrinsic reward on employee performance. It is also a question of motivation. However, before HR and managers tackle the very complex issues of employee motivation, they need firstly to get to grips with asking the right questions of the employee cost data they have.

Human Capital Investment (HCI) and Human Capital Management (HCM)

When it comes to understanding the value of an organisation’s HCI, it would be foolish not to be fully informed of the ‘cost’ versus ‘value’ relationship between an employee and the organisation. The Department for Trade and Industry has set up the ‘Accounting for People’ Task Force with the aim of defining the metrics by which organisations should measure and report on the quality and effectiveness of their Human Capital practices. The Task Force has recently published its report and set out what it recommends to be the way forward for any organisation to understand better the true value of its people practices¹. Effective and transparent reward management practices which can be accounted for and reported upon are very much part of the Task Force’s HCM recommendations.

But how can the value of your reward practices be effectively measured? How can you gain a better grasp of what really matters to your cost base? We believe that far more can be gained from asking different questions of the data that organisations already have available such as:

• Does the overall grade structure support business objectives?
• How well does the organisation’s pay line match the market?
• To what extent do employees lie outside the pay ranges?
• Is there a full understanding of pay bill expenditure?
• Are employee costs related to employee value?
• Equal pay vs. equal value issues?
• Internal relativity and external comparability?

By gaining greater insight into the reward landscape organisations can start to piece together elements of their employee costs. Reward management today is no easy task and organisations must have the ability, through computer-assisted compensation systems, to ensure reward practices are not merely in line with the organisation’s strategic objectives but that they also effectively contribute through HCI to an organisation’s overall productivity and value.

RewardManager™

ER Consultants’ compensation analysis and management software, RewardManager™ is used to help interrogate reward data to better understand the relationship between employee costs and their true value to the organisation. The software is custom designed to meet the needs of each client and we use it to help provide solutions to complex Human Capital issues – for example, tackling key HR priorities such as external market testing and internal relativity checking; and determining employee value.

Market testing and internal relativities (Equal Pay Audit)

Traditional reward in the form of base pay is still a key component in an organisation’s recruitment and retention armoury. However, as has always been the case, there are other factors which influence an employee’s motivation and overall performance. The key issue is to make sure that, when attempting to attract prospective employees, an organisation knows where to pitch the starting salary and the total reward package. To do this a view of the market position needs to be considered.

Using Key Factor Profiling, a tried and tested method to establish ‘matches’ between internal and external roles, we can utilize RewardManager’s™ impressive functionality to determine the relative market position of roles. Figure 1 shows how the market median (the blue line)is currently above the mid point (middle dotted line) of the pay structure for the organisation. With the organisation setting its mid points at a market median position this indicates that the majority of employees are being paid below the market median.

Figure 1

Understanding your employees’ position relative to the external market and internal market is paramount to an organisation’s ability to attract, reward and retain high calibre employees. In addition to base pay, organisations are increasingly using total reward as a recruitment and retention tool. The concept of understanding the total value of one’s ‘package’ is not new but many organisations have been slow to adopt annual rewards statements as a way of showing the employee the true worth of their salary, benefits and pension. This has become increasingly important for those organisations, especially in the public sector, that are maintaining final salary pension schemes, which in some cases more than offset potentially lower base pay. Increasingly, a key element of the reward package is variable pay for attaining above average or exceptional performance. RewardManager™ has the ability to determine an individual’s annual pay award based on performance by specifying the amount of any increase against a set of predetermined factors, with the system ably working out what the percentage increase will be, dependent on the rating system, and working on budgeting and cost assumptions.

Figure 2 below shows RewardManager™ calculating a performance matrix based on defined overall target percentage increase and annual performance rating (perf 1–5) for each individual whether they are below (bel)
or above the market median. 

Figure 2

Analysis of data should always be balanced against behavioural elements such as relative levels of morale, feelings of positive psychological contract, and implied positive organisation citizenship behaviour. Although employees say money is not their primary motivator – something we do not disagree with – money is certainly at the top of an employee’s grievances when they feel they are not being treated fairly.²

The extent to which these feelings of unfairness are exacerbated depends on the
perceptions of the relative differences between an individual’s current salary and
package, what the individual feels they could attain in the marketplace and internal comparisons with peers.

Of course, what an individual thinks they can attain in terms of package and suitability to the role is a matter of perception, as no two jobs, nor any two individual’s experiences, skills and competencies are identical. However, if an organisation’s pay structure is way-off the market position, or if individuals with similar skills are being paid widely different salaries for undertaking the same job content then there is a problem. The financial cost of not knowing is unjustifiable, as organisations have seen to their peril, especially in cases where these variances are exacerbated on the basis of gender, race or ethnicity. Although we use RewardManager™bespoke with each client, its reporting function allows for quick but sophisticated reporting, so undertaking an Equal Pay Audit – in line with the Equal Opportunities Commission guidelines – requires nothing more than the base data and the press of a button.³

Employee Value Analysis

Understanding the relationship between employee cost and performance is, as described above, one of the key challenges facing management and HCM. From the pink pages of the FT through to AGMs there is a relentless trail of misunderstanding and conflict of interest between what executives should and are being paid relative to company performance. This is an area where external shareholders, remuneration committees, CEOs and employees don’t necessarily see eye-to-eye.

At ER Consultants we use a combination of experience and expertise, RewardManager™ and our proprietary Job Evaluation method Decision Band™Method (DBM). We use DBM to determine the relative value of the roles through the analysis of key tasks and accountabilities following one-to-one interviews. Decision Band™ Method is based on the premise that it is an employee’s level of decision making that is critical to his or her value to the organisation. DBM provides us with a mechanism for determining the relative internal value of a role based on its level of decision making, advice giving and supervision. We take hard employee remuneration client data which would include all aspects of the reward landscape including base salary, variable salary including bonus elements, deferred share and stock options and benefits. We import this data into RewardManager™ and using the system’s organisation structure builder we analyse the respective costs of each executive relative to their position within, and thus their value to, the organisation. Finally, we look at levels within the organisation as determined by DBM and analyse these against the relative costs of the actual positions within the organisation’s structure.

Using RewardManager™ to help you

RewardManager™ is custom built to each client engagement and provides the depth of analysis that delivers enhanced levels of understanding to any reward project. Understanding how the people issues effect and relate to an organisation’s overall cost to productivity ratio is vitally important to ascertaining the true value of employees and HCM practices. Focusing attention on the analysis of employee data through computer software solutions serves two purposes. Firstly it provides a level of understanding that is currently not universally experienced nor appreciated within organisations; and secondly it provides the means to start to build a set of metrics which may be used to meet HCM requirements as recommended by the DTI’s ‘Accounting for People’ Task Force.

¹ Accounting for People. Report of the Task Force on Human Capital Management. Presented to the Secretary of State for Trade & Industry, October 2003
² Britain’s World of Work – Myths and Realities’ Economic & Social Research Council, 2003
³ Equal Pay Review Kit. Equal Opportunities Commission, 2002

For further information, please contact Chris Legge:
T 44(0) 1223 31594
E chris.legge@erconsultants.co.uk