John Day, CEO of Smartequity, explains how a well-designed employee remuneration strategy firmly anchored in business objectives helps organisations attract, retain and motivate employees
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John Day, CEO of Smartequity, explains how a well-designed employee remuneration strategy firmly anchored in business objectives helps organisations attract, retain and motivate employees
How employees are remunerated affects how they think, work and behave. If employee behaviour and actions are to align with the objectives of directors and shareholders, it follows that remuneration – particularly short- and long-term reward structures – also aligns with business objectives.
Demonstrating the value of the employee
As the notion of the ‘employee’ transforms to ‘stakeholder’ and ‘major business asset’, it is essential organisations establish a set of company values that are not only belief-oriented but also acknowledge the value of high-performing people.
Remuneration planning is one of the most efficient and effective means of not only communicating company values to employees but also obtaining their inherent acceptance by encouraging the employee to maximise her or his value.
1. Agree on realistic performance targets with employees and provide meaningful incentives to achieve those targets.
2. Enable employees to share directly in the benefits generated by achieving targets.
3. Empower employees by allowing remuneration to be taken in a form that helps them more easily satisfy immediate financial needs, and achieve financial and lifestyle goals sooner.
Moving away from fixed pay
The traditional view of remuneration is set to shift over the next 10 years as effective remuneration planning becomes less about paying employees and more about rewarding employees and developing their sense of connection with the company.
The trend towards performance-based pay
A 2014 major WorldatWork study 1 revealed that 85% of companies were setting base remuneration levels at the market median, noting that “the market isn’t compelling employers to accelerate wage growth in any significant way”. In contrast, ‘pay for performance’ was thriving, with 72% of respondents indicating they had a rating system with performance scores tied to pay increases, and 82% of organisations using bonuses to deliver performance-based pay.
Furthermore, it was shown that an employee’s understanding of the remuneration strategy tended to be higher when there was greater differentiation in pay increases between average and top performers.
Today, this trend continues and is accelerating, with more companies keeping fixed pay at a minimum. This provides companies with opportunities to differentiate using performance-based incentives.
Using incentives to attract, retain and motivate
Implementing the right mix of performance-based incentives will help companies stand out in attracting, retaining and motivating key talent. Short-term incentives influence behaviour to achieve certain specific immediate organisational requirements. Bonuses tend to be the most frequently used pay variable.
Long-term incentives aim to imbue an employee with a vested interest in maximising the organisation’s long-term value. An employee equity plan is an effective way to achieve this, as employee and shareholder interests become aligned. When shares in a company represent a significant asset for the employee, they begin to treat the company like their own – an excellent motivator.
Regardless of the ultimate remuneration mix, it is essential that the remuneration structure is consistent with management values and overtly supports the achievement of business objectives.
Source: 12014, Compensation Programs and Practices, WorldatWork 2014
John Day is founder and CEO of Smartequity, and a widely recognised expert remuneration consultant. Smartequity is the employee share plan administration provider in the Smartgroup network of companies, an ASXlisted corporation recognised for innovation and exceptional customer service.
