No more secrecy: let’s talk openly about our compensation principles.
Compensation time can bring out strange behaviours in many of us. I have often wondered – Why is compensation such an emotional topic? Why do so many of us have such varied perspectives on what we view as fair compensation? Why do some of us obsess about compensation more than others? And why are some of us more concerned about what others are making than our own compensation?
Misgivings about compensation abound in all organisations. Most companies don’t articulate their compensation principles clearly. And yet, compensation is an incredibly important tool to enable performance and alignment. So, unless we are able to talk openly about compensation and clearly explain our philosophy, it will lead to a lot of confusion and frustration.
So, my message this week is on why and how we need to be more transparent about our compensation philosophy.
Here are a few principles to remember and communicate about our compensation approach:
1. Compensation is one part of our total rewards system. There is a larger picture.
For us at Ndiema, compensation is a mix of fixed salary, PLVR (Performance Linked Variable Renumeration) and stock grants (for NLF members and above). The mix varies by seniority. Generally, the more senior one is, the higher is the ratio of PLVR to compensation (at senior levels, the ratio is between 25% to 35%).
While compensation is an important part of the value proposition, our rewards go far beyond that. This is something that we strongly believe in at Ndiema. We will always pay very competitively. However, we also strongly believe that our proposition is not only about compensation. It is equally about our values, our amazing culture, the huge opportunities we provide to our team members to grow, and the significant impact we enable our team members to own and drive.
2. Our variable compensation approach, that we call PLVR, is quite unique.
The PLVR index is based on delta improvement in EVA (Economic Valued Added). EVA is very tightly linked to value creation. While there is a lot of complexity behind determining EVA, the beauty is that it is one metric that links many variables together. And there is no limit to EVA earned (while we do restrict payouts in a given year). So, it encourages a high degree of ownership and entrepreneurialism. There is also a collective component of PLVR that enables us to foster more teamwork. All in all, while no approach is perfect, our PLVR approach is quite distinctive and is very aligned with value being created.
3. We focus on total compensation.
Many times, people will only look at the fixed component of their salary and see what fixed raises they have received. When you look at compensation, you need to look at fixed + PLVR + stock grants. In terms of PLVR, you should consider the average index over a number of years. So, think about total compensation from all these angles.
4. We analyse benchmarks for key roles to ensure that our compensation is fair and competitive.
Our HR team gets a reputed external firm to benchmark our numbers with a similar basket of companies. We also get a lot of data from search firms. This information is used to determine the range of compensation for a role. We, however, recognise that no benchmark is perfect. And so, while we look at benchmarks directionally, we use our judgment as well (assessing criticality of the role, performance track record of the individual and future potential).
5. Compensation is not a one year thing – the trajectory is also important.
We need to take a longer term view. Many people focus only on their in-year compensation. Like with everything else in life, there could be some ups and downs. The P&L of the business and business conditions do impact salary budgets. So, it is important to look at compensation over a period of time. In some years, compensation will be great. In some years, it may not be that great. But, over time, if you perform well, things will average out and your compensation will be very competitive.
6. We differentiate on the basis of performance and individual potential.
We analyse performance ratings and data from our talent management (TTM) process. All of this is put together to create a composite view for each individual. We try to not lump individuals together, but instead look at each individual separately to determine their compensation. We do reward people disproportionately for superior performance.
7. The grass will always appear greener on the other side.
We must recognise that there will always be some employers who will pay better than we do. At the same time, there are many employers that we pay much better than. What we need to do is to ensure that our compensation is competitive and fair and aligned with value creation. We will never be the right company for everyone. We will try our best to be the right employer for the right person. And this is why we need to talk much more about our approach.
Things have a way of getting around. If you won’t share the information properly, someone else may. Or at the very least, there will always be some conjecture floating around. So, be more transparent and help people get the information they need – and get it accurately. It may involve some difficult conversations, but it is much better than keeping people guessing.
As managers, you need to play a critical role. The first question to ask yourself, is honestly, how comfortable are you about talking about compensation? And if you’re not, then why is that so? What’s holding you back? Is it that you don’t know all the details? That you’re not the one taking the calls, so you don’t see why you should be leading the conversation to start with? Or are you not comfortable with the philosophy itself?
Jill Havely and Sandra Prestine, in their article, Opening the ‘Black Box’ – Communicating Compensation to Employees, point out that their research, like most others, shows that managers are the most effective source of guidance and information for employees. “Person-to-person, day-to-day interactions have the most influence on how employees feel about the work environment, the value they create for the organisation, and pay and growth opportunities. Managers play a key role in these interactions, and have a significant impact on employee engagement and retention.” So, managers need to communicate effectively. They must be trained on how to have these conversations. They must also have access to the data that they need.
Here are some pointers that Amy Gallo shares in her Harvard Business Review article, How to Discuss Pay With Your Employees, on how to make these discussions fruitful:
1. Talk early and often
Don’t let this come as a surprise at the end of the year. At the start, lay out expectations and what the bonus basis achieving that could be. There is no substitute to providing adequate information.
2. Do performance evaluations separately
While compensation should be linked to performance, discuss the two separately. If you club them, you run the risk of the focus being entirely on compensation and not on the performance or development discussions.
3. Involve others, if possible
When more people make the call, you’re likely to have more checks in place and avoid any biases.
4. Prepare for the conversation
Spend time on this. Thing about how you will best represent the stand you take. Ask yourself what possible questions could come up. And how you could best respond to them. Get the data that you need to have a meaningful conversation.
5. Communicate their value
This is an opportunity to tell your team members how valued they are. Use it. Inspire them to raise their personal bar. In general, the perception by employees on whether they feel they are being paid fairly is an important driver of satisfaction and retention.
6. Provide context
More often that not, people are upset because they don’t have enough information on the decision that has been taken. Talk to them about the larger picture. Share facts. Explain the decision, even if you aren’t the one who took it. This is tricky, but you must, given that you represent the company in this conversation. Don’t engage in discussions about other people’s pay. There is always the chance that it could slip into that. Watch out for it.
7. Be ready for a reaction
These are loaded conversations. People can get upset. Hear them out. Explain the situation as best you can. And if you feel someone has been treated unfairly, then take it up. But don’t avoid getting into the details.
So, do reflect on these principles. Think about how you will handle both your own conversation on compensation and the conversations with your team members. This may be awkward at the start, but these are arguably among the most important discussions that you will have.
Remember that compensation is not HR’s responsibility alone. This is a very fundamental shift in approach that we need to drive. HR doesn’t own the compensation philosophy. They can’t. It has to be owned and co-created by the leadership team. This is very much an overall business decision, drawing from our strategy and approach as a company. It needs to be treated as such. This means that shaping and communicating it also must be the responsibility of every senior team member.
As always, if you have suggestions or feedback, I would love to hear from you.