The role of base pay needs to be ‘redefined in a changing workplace’, according to new findings
There are a few factors for organisations to consider in getting their remuneration design right, according to Adam Hall, head of talent & rewards at Willis Towers Watson.
Hall said that merit increases in base pay are currently “not effectively driving performance”, employers are missing opportunities to differentiate incentive payouts to top performers and inadequate technology is making complex pay decisions all the more challenging.
“Many employers are still falling short when it comes to fair pay and they are unprepared to meet growing expectations of pay transparency.”
Hall’s comments come as new research by Willis Towers Watson found that just over a third of Australian companies believe base pay programs are effective at driving higher individual performance among employees, while 25% strongly disagree with this statement.
Moreover, the Australian findings from The 2018 Getting Compensation Right Survey suggest that the role of base pay needs to be redefined in a changing workplace. It found that companies may be considering too many factors in making pay decisions.
Hall said that a “cautious economy”, key talent risks and cost pressure are three critical elements impacting Australian remuneration strategies.
Additionally, the activities of the Hayne Royal Commission are already being felt in the way companies look at risk, culture and remuneration.
“All these external influences on a rapidly-evolving work ecosystem need to be addressed so that companies can attract and retain top people.”
The research also found that decisions around pay are becoming more complex, and many Australian employers say their base pay and short-term incentive programs are falling short of expectations. Not surprisingly, changes to these and other related programs are on the horizon.
The survey showed that three-quarters (76%) of Australian organisations said limited budgets are a major challenge in designing an effective pay-for-performance program.
Future-focused factors are becoming more important to employers with concerns rising over market competitiveness and the need to possess skills critical to future business success.
Gender pay equality is also high on the agenda, as organisations should pay all employees fairly, relative to the market and each other, with gender pay gaps meriting special attention, according to Hall.
Almost half of Australian companies say it’s a key factor now in making base pay decisions (46%) and 44% say it will grow in importance in the next three years.
Organisations also need to improve the differentiation of their short-term incentives.
“Companies are missing opportunities to increase the incentive differentiation for top performers,” said Hall.
“When actual funding for incentive differs from target funding, incentive payouts are compressed at the top end.”
Even though 75% of companies have formal processes in place to prevent bias or inconsistency in hiring and pay decisions, many employers are still falling short when it comes to fair pay.
Figures released by the Workplace Gender Equality Agency in February found Australia’s gender pay gap is 15.3% based on full-time average weekly earnings.
Hall added that many employers are unprepared to meet the growing expectations of pay transparency.
“The task of increasing transparency becomes more challenging as pay decisions grow in complexity,” said Hall.
“Employers need to get their house in order and clearly explain the mix of factors influencing pay decisions, as well as the reasoning behind the results.”
Hall said that companies must be aware of the “increasing potential for legal or reputational costs” due to maintaining even unintentionally discriminatory pay policies and practices.
“All employers should conduct a thorough pay equity review to help them understand whether they have fair pay or gender gap issues, where gaps may exist and their underlying causes, and to make fair pay an integral element in their organisation’s remuneration programs.”