Congruence between compensation philosophy and generic strategy is key to staying competitive

From poor morale to low employee retention rates, the negative ripples of underpaid employees can be widespread and difficult to reverse

Notwithstanding the greatness of the organisation’s culture or the exciting variety in its benefits package, the probability of an employee performing per expectations at remuneration below market is extremely low. Performance-based compensation which pays for success is a way of avoiding increases in fixed pay which arise from factors which are unrelated to success. A compensation philosophy and strategy which is in sync with the generic operating strategy are musts. If a company is unable to match the market, it must exit the business. Simple as that

The probability of a strategy, plan, goal, objective, dream, action, initiative or other endeavour yielding a positive outcome is directly proportional to the degree of heart and soul you put behind it and to the extent that you back it with the appropriate resources. Ned Miller, the American singer and songwriter summed it up aptly, when he sang, “Do What You Do Do Well Boy – Do What You Do Do Well – Give Your Love and All of Your Heart – And Do What You Do Do Well”.

A half-hearted approach is rarely effective. When a project is of significant size, meticulous preparation invariably accompanies it in organising for success. It is presumed that the project proponents/champions would have done all the groundwork in assessing the economic viability of the project and establishing the generic strategy which would be employed. In ‘Porter’ terms, the generic strategy would be one of ‘cost leadership’ i.e. no frills but high utility, ‘differentiation’ i.e. creating uniquely desirable products and services or ‘focus’ i.e. offering a specialised product or service in a niche market and/or variants of them. 

Deciding on the generic strategy, quantifying and costing the resources required and evaluating the risks are key areas of project planning. Despite all such careful planning, it is baffling to find leaders and managers stinting on paying market competitive remuneration, rates or rents for the requisite factors of production, these being land, equipment, labour, entrepreneurship and capital, even after having catered for them in the feasibilities. Oft are the times when a well-crafted strategy and/or plan of action failed to fire simply because the intentions, planning and rhetoric were not backed by the right actions and/or resources. This ‘penny-wise, pound-foolish approach’ of leaders and managers have caused many an initiative to be ‘dead’ at birth. 

The value they thought they were saving from budget through their short-sighted opportunistic approach in not paying market rates, particularly for labour, was more than overtaken by the cost of reworks, extra supervision and other corrective actions which arose by not employing the right skills in the first instance. You will be amazed to know that this is more the norm than the exception in corporate Sri Lanka. Goals, objectives, and dreams will not materialise unless their pursuance is backed by the right resources. If you still fail to achieve, at least you will know that your failure was not because you were reluctant to put money where your mouth is. Never leave room to die wondering!

Underpaid employees underperform

Labour, sadly, is the factor of production, which managers always trifle with when the chips are down or when avariciousness comes to play. An organisation which pays sub-market remuneration as a part of their operating tactics will not remain competitive in the medium to long term. While under paying staff may give temporary relief in the short-term in specific circumstances it will never be effective, nor sustainable, in the long run. Shortchanging employee remuneration may cost the company more than just dollars, eventually. From poor morale to low employee retention rates, the negative ripples of underpaid employees can be widespread and difficult to reverse. Underpaid employees underperform and their in-built frustrations, arising from a lack of recognition and a sense of belonging, will engender toxicity in the organisation. The productivity of such disengaged employees will be low. 

Further, low morale will contribute to absenteeism, illness, and other mental health issues. In today’s highly connected world where communication is immediate and discontent spreads at the press of a button, constant employee bad mouthing can cause irreparable stakeholder damage and lead to an organisation’s downfall. Therefore, while factors such as respectful treatment and trust remain important, compensation will always remain a critical job satisfaction factor, especially among the younger employees whose hierarchy of needs, today, are vastly different from their peers of 50 years ago. 

On the odd occasion where you are ‘temporarily’ lucky to employ the right skills at below market rates, the arrangement will not endure because, in keeping with human behaviour, the incumbent will be lured by an organisation which is willing to pay a market rate. This is common sense and is in keeping with the principles of demand and supply. In such instances, the progress made, and the tacit knowledge accumulated by the departing employee will be lost in the blinking of an eye. It should be noted that candidates willing to accept below market remuneration are, often, those who may have been rejected by other employers for poor performance, lack of ideal competencies and skills for the role or for interpersonal issue which may not be visible at an interview. 

Hiring the wrong fit for a particular role will inevitably result in rapid turnover and as fate often does, the need to replace the person will always arise at an inconvenient time. The bottom line is that paying sub-market remuneration is not a sustainable strategy. If an organisation cannot afford to pay market related rates and rents, then it must not be in that business.

A lack of congruence between the chosen generic strategy and resource deployment is a basic mistake made by managers when formulating and executing strategy. For example, an organisation pursuing a ‘cost leadership’ strategy must use factors of production which give a ‘value for money’ outcome. One cannot find a competitive price point for a ‘Toyota’ if the design of its features and the make-up of its components are the equivalent of a ‘Rolls-Royce’. A hotel following a low-price room strategy via a limited services model will not be able to price competitively if it must absorb the capital and operating costs of multiple ballrooms and banqueting facilities. Similar principles apply to aligning employee skills and competencies to the generic strategy which the organisation is pursuing. Consequently, it is crucial that the organisation’s compensation strategy must be aligned with its generic business strategy, being one of cost leadership, differentiation or focus or a rational combination of these. Statistics confirm that pure-bred strategies usually produce better yields than mixed strategies which are usually fraught with execution complexities.

Dog eat dog

 In the current fiercely competitive, ‘dog eat dog’ landscape of business, an astutely structured compensation package is a powerful tool to retaining a loyal workforce and attracting and motivating top talent. As stated earlier, it is essential that compensation is aligned to the organisation’s generic strategy, goals, and objectives. The compensation philosophy and strategy must recognise the market dynamics and must be the natural magnet which attracts the relevant competencies and skills to the subject organisation. A compensation philosophy is a formal statement of the company’s approach to compensation. It is akin to the company’s operating credo but specifically relating to pay and benefits and it reflects, and represents, the company’s core values. 

The company’s compensation strategy is how the compensation philosophy is converted into action. Every part of the strategy must be aligned with the core principles outlined in the compensation philosophy. The compensation philosophy is the guiderail in formulating the compensation strategy. The hallmarks of an effective compensation strategy are compliance with the law, consistency with the formal/informal industry standards, fairness, transparency, and regular review. These are in addition to catering to the operational and motivational needs of the employees. The primary aim is to position the organisation as the employer of choice. 

Compensation must never be viewed as just another expense but must be considered as a long-term investment which preserves and enhances the competitiveness of the organisation.

The following are key aspects/issues which must be considered in conceptualising, designing, and implementing a compensation strategy.

• Align the pay strategy to business strategy. If such alignment is proving to be difficult because of the inherent reluctance of owners, top leadership, and management to change deeply entrenched beliefs and practices which are inconsistent with current employee needs, then there is a fundamental problem. Long-established companies are notorious for stubbornly continuing with a pay strategy which, though successful in the past, is out of place in the current environment. Continuing with such status quo is a sure recipe for disaster. 
• Showcase the organisation’s employee value proposition via market positioning. The positioning in the market is, primarily, governed by the organisation’s generic strategy, the goals and objectives arising from them and the price points of the products and services. The three foundational options in market positioning are, * ‘Lead-the-market,’ where remuneration is set in the 80th and 90th percentiles of the market. This is an aggressive and expensive strategy in presenting the organisation as the employer of choice, * ‘Lag-the-market,’ where remuneration is set in the lowest quartile of the market. In this strategy, it is hard to attract and retain talent. This strategy is suitable when the supply of the relevant skills and competencies exceeds demand, the skilling gestation periods are short and where operations are processing driven, and * ‘Meet-the-market,’ where the organisation pays the market rate. Here, the employees are paid fairly. However, there still exists the possibility of losing talented employees to competitors who are willing to pay more. Progressive organisations adopting this approach, usually, combine very lucrative ‘pay for performance’ schemes with fixed remuneration in attracting and retaining employees. Organisations in this category also attract and retain employees through value-adding features such as training and development, career development, health benefits, private pension schemes, share options and other perquisites. 
• In establishing external equity, obtain a thorough understanding of the job market as it relates to the organisation’s operations. Identify what the other companies in the subject industry are paying their employees. Use surveys, comparator studies and reports in ascertaining the going rates for different jobs. A widely used practice is to do formal surveys once in three years and to do desk-top adjustments in the interim. Use the gathered information in establishing remuneration bands with maximum, minimum and median points. These help in setting competitive salary ranges which attract the right talent without overspending. There is nothing called an overload of information when it comes to formulating compensation. 
• In establishing internal equity, determine the worth of all roles in the organisation through a job evaluation methodology. Be transparent in communicating the ‘pros’ and ‘cons’ of the methodology to all employees. Create ‘job-worth’ bands. Broadcast the logic used in determining how much you pay for different jobs within your company. Be open with the policies which regulate base salaries, incentives, allowances, perquisites, long-term incentives, promotions, career development et cetera. Ensure that the determined pay ranges are fair and reflect the importance of the various roles in achieving the organisation’s goals and objectives. A matrix of internal ‘roles worth’ is a powerful guide in a diversified group where the ability to transfer leaders, managers, and experts to companies within the group is important.
• Always support a philosophy of ‘Equal pay for equal work’. Job Evaluation is a great leveller in enabling such equality when it consistently applies objective criteria in determining the relative worth of every role. Since job evaluation methods such as Hay, Mercer and Patterson do just that when valuing the various roles, they avoid many racial and gender biases. This invariably leads to a decrease in pay inequities. By using a disciplined, logical methodology all the roles in the organisation from the Chief Executive Officer to the Clerk are categorised into ‘Similarly Situated Employee Groupings’ (SSEGs). 
• Ensure compliance with laws, regulations, statutes, and similar edicts. Follow rules on minimum pay, working hours et cetera. Do not ‘slave drive’. Follow the principle of equal pay for equal work. Do not undermine your internal discipline and order by resorting to tax evading remuneration practices. Be judicious in using non-compete clauses and other restrictive measures. Be transparent both internally and externally.
• Establish a system of performance management. Performance management must be woven into compensation fabric in increasing employee productivity in delivering the organisation’s goals and objectives. The blending of the taste of performance into the juice of compensation is the elixir which can spur individuals and/or teams to go the extra mile. Surveys indicate that performance-based compensation attracts candidates who believe in their abilities and continuously challenge themselves in upping their capabilities and capacities. Shareholders also widely support pay-for-performance because it provides employees and themselves a ‘win-win’ situation or ‘lose-lose’ situation. Performance management is the fount of merit-based increments, incentives, promotions, and talent pools. A transparent and uncomplicated performance management system enhances management credibility which inspires employees to work with commitment and diligence and perform beyond expectations.
• Develop a benefits package. Think beyond just the direct remuneration. Embellish the direct remuneration with benefits like flexible working hours, training and development, health insurance, retirement plans and loan schemes. These extras make a significant difference in attracting and keeping employees happy, healthy and wealthy. It is all about offering a well-rounded package. What motivates one person may not motivate another, so it is best to have a range of benefits. Progressive companies offer employees a ‘kiosk’ of benefits where employees can choose their package within a specified ‘cost to company’ and in keeping with other important minimum guidelines. Other elements which contribute to the allure of a company’s employee value proposition are its purpose, values, mission, opportunities for career growth and a culture of autonomy and creativity. 
• Communicate and implement the strategy. While each company has its own operating culture, the most effective, and productive, course of action is to be as transparent as possible re compensation and benefits. When an organisation is not transparent about its remuneration policy, employees tend to see ghosts in everything they experience. This may lead to speculation and discontent. Talk openly with the employees about how the compensation system works. Explain why the company has chosen a particular strategy and how it benefits both the company and them. When rolling out changes, articulate the logic and consider doing it in stages to make the transition smoother and allow for feedback at each step.
• Monitor, evaluate and adjust. A regular review of the compensation strategy is necessary. Is the strategy effective in – ‘Keeping the employees motivated in delivering their outputs,’ and- ‘Attracting and keeping talent’? The compensation strategy is not a one-off plan of action. It is a living document which must be ‘reborn’ regularly in making the organisation competitive, attractive, exciting, and appealing to job seekers. The applying philosophy and strategy must be regularly reviewed against market comparatives and must be adjusted, as necessary, while ensuring alignment with its generic operating strategy. 

Notwithstanding the greatness of the organisation’s culture or the exciting variety in its benefits package, the probability of an employee performing per expectations at remuneration below market is extremely low. Performance-based compensation which pays for success is a way of avoiding increases in fixed pay which arise from factors which are unrelated to success. A compensation philosophy and strategy which is in sync with the generic operating strategy are musts. If a company is unable to match the market, it must exit the business. Simple as that!

(The writer is currently a Leadership Coach, Mentor and Consultant and boasts over 50+ years of experience in very senior positions in the corporate World – local and overseas. www.ronniepeiris.com.)