Compensation – a never ending organizational issue

REACHING the end of the interview, the Human Resource Officer asked a young Engineer fresh out of an exclusive school, “And what starting salary are you looking for?” The Engineer replied: “In the region of P100, 000 a month, depending on the benefits package.” The interviewer inquires, “Well, what would you say to a package of 35 days vacation leave and 35 days sick leave per year of service, unlimited hospitalization expenses, free dental benefits, retirement of 300% of your monthly salary per year of service, and a company car, registration, gas, and maintenance expenses company paid – a new Toyota Camry model?” The Engineer, wide eyed, mouth gaping, sits up straight & exclaimed: “Wow! Are you kidding?” And the interviewer replied: “Yeah, but you started it.”

The story could be an exaggeration but there are really some applicants who price themselves out of the job market by asking unrealistic starting salaries. On the other hand, there are also some companies who under price their pay rates that they fail to attract, retain and motivate highly qualified people. The story also demonstrates the uncertainties in salary level expectations both from the standpoint of the receiver and the giver.

The other aspect that one can learn from the story is that compensation encompasses not only the basic salary itself but its benefits package such as vacation and sick leaves, bonuses, profit sharing, medical and dental benefits, life insurance, etc. In short, it covers the range of incentives that you use to attract, reward and retain high performing employees.

Compensation is a highly emotive issue. It can motivate while it can also de-motivate employees. The salary increase given to somebody may be beyond one’s expectation and can make him happy until he learns a higher increase given to his colleague of the same rank and level of performance. As some industrial psychologists theorize, compensation satisfaction, like water and food, is temporary and not self-sustaining. I am hungry at this moment. I eat food & I am satisfied. I am thirsty. I drink water and my thirst for water is quaffed. But a few hours later, I crave for food and water again. Similarly, I am happy with the salary increase today but several months or a year later, I will be unhappy again.

But it is not my intention in this article to debate with industrial psychologist, Frederick Herzberg, the leading advocate that money is not a motivating factor. Suffice it to say that compensation is a multi-headed hydra that can work for or against a company if not properly administered.

To be sure, there are myriads of questions to be addressed. How shall I rate jobs in accordance with their importance in relation to other jobs? What kind of job evaluation system shall I use? If it is point system, what job factors shall I use? How many points shall I assign to each job factor and sub factor? How many job grades shall I assign? Shall I make a separate job classification for rank and file from supervisory and managerial? Shall I separate the technical/professional groups from the semi-skilled and skilled rank and filers? How shall I establish a salary structure?

Those are basic questions that perhaps can easily be addressed by compensation experts & consultants. Those bread & butter questions aim to achieve one major purpose of job evaluation – internal equity. You want to ensure that you are pricing jobs in accordance with their relative importance in the organization.

The more profound issues that you have to address are: Shall I use a competency-based job evaluation? To retain high flyers without promoting them to higher levels in rank, shall I apply broad-banding in my salary structure? What kind of salary philosophy or policy shall I adopt? What are my comparator companies? Should I adopt the mean or average salary line in the compensation survey? Or should I adopt above average salary line or third quartile policy in the compensation survey to satisfy the other major function of job evaluation which is to maintain external competitiveness? The bottom line question is, are you competitive in your industry or community for most of your positions?

The role of compensation in helping you create a motivated, contributing workforce is inestimable. Pay must relate to the accomplishments of the company’s strategic goals, vision and mission. It must not be tied to the employee’s individual accomplishments alone but should also relate to the company’s culture that clearly defines the values that it cherishes. There are some companies that assign weights of performance into two categories: one is productivity in achieving his agreed goals – say 60% weight; the other is aligning with the company’s cherished values – say, 40%.

One other issue that must be resolved is, would you like to stick to basic salary or the flexibility of variable pay? The latter set up minimizes the base salary but gives wider latitude for performance bonus or incentives. An entrepreneurial company with variable sales and net earnings, may be better off controlling the levels of base salaries. In good times, the company can tie peso incentives to sales achieved. In lean times, the company is not obliged to give salary increases which have flow-through effects on benefits cost.

Then, there is the so-called ‘cafeteria’ benefit plan. It is one way to customize your benefits to the needs of your individual employees. It allows them to choose among a variety of options to create a benefits plan that best meets their needs and those of their family. You budget for them an x amount of pesos for them to spend from a ‘cafeteria’ or ‘turo-turo,’ if you will, of benefits. For example, a young employee with no health problems might opt for a minimal medical plan and spend the excess for other benefits. An older employee with a family of five members might choose a more comprehensive health plan. An older employee in his 50’s might opt to invest the money allotted to him for a comfortable retirement plan.

In one company, to wean them away from the expensive percentage anniversary salary increase, we tried to negotiate for an absolute peso increase with a handsome pension plan or improved medical plan of their choice. The union did not bite it because the median length of service among the officers was 15 years and they had already accumulated enough of seniority pay. The higher basic pay, the higher would be the percentage increase. To them, it was the hard cold cash on pay day that attracted them.

Outrage over outsize executive pay

Perhaps the most perplexing issue is executive compensation. How high should it be? What should be the difference between a CEO’s pay & the lowest level of management? What should be the ideal gap between a CEO’s compensation and that of the lowest position in the hierarchy of jobs in the organization? In lean times, when there is need to cut manpower cost, shouldn’t executives also share in the cut?

I watched a movie some years ago entitled “The Company Men.” The story seems just plucked out from what is happening in the corporate world today. Men in gray flannel suits were depicted living in beautiful homes, riding in expensive cars, flying in corporate jets – enjoying all the trappings of power in opulent luxury. Then, suddenly, the economy crushed. The company lost big accounts. The first line manager was retrenched, then his boss, & later on, the Division Head. The first two were able to cope with their loss of jobs by finding manual work to be able to pay for their mortgaged homes & support their families. The Division Head could not just accept his fate. He pretended to go home late so his neighbors won’t know he lost his job. Finally, he took his own life. To rub it in, the CEO did not attend the funeral & did not suffer a pay cut despite sacrificing three good executives & hundreds of employees.

The contrast is jarring. When the economic crisis began in 2009, thousands of Americans lost their jobs while executives continue to enjoy excessive executive compensation and lavish perks. Like that CEO in the movie, executives remain tone-deaf to the tragedy of those who lost their jobs. The rule on retrenchment seems not to apply to the powerful CEOs.

A few years back, Business Week and other publications in the U.S. show that compensation of big company CEOs was more than 400 times the pay for average workers, up from 42-1 in 1980. Says Business Week, if the minimum wage had gone up at the same rate, it would have been $22 an hour instead of $5.15. Consider an $8 to $9million a year CEO – that’s roughly $2,500 per hour! No wonder for banking and financial institutions given bail out by the government with CEO’s receiving highly indecent pay, President Obama exclaimed: “It’s shameless.” Vice-President Biden was even more strident: “I’d like to throw these guys in the brig.”

So, how high should a CEO’s pay be? Wharton professor Donaldson says: “I don’t know what the magic number is, but if it gets too high, it has an adverse impact on the ability of the person to lead.” Morale falls as employees resent being asked to make sacrifices not shared by their bosses.

If the U.S. has no yardstick in determining the gap between the CEO and the first level management and the rank and file, with more reason we don’t have ours. Perhaps, the 80-1 ratio between a CEO and a rank and file employee is reasonable but 1,000% gap could be atrociously high. Several variables, of course, have to be factored in: the industry, rate of return, high achievement of performance target, reputation and stature of the executive in the business community, etc.

Public outrage over soaring CEO and senior executives’ pay in the U.S. can also happen in the Philippines. Local CEOs, living in exclusive enclaves in Makati or Alabang, with ten or more expensive cars, owning upscale private resort or vacation houses in nearby provinces is not uncommon. Of course, the counter argument is, if sports and entertainment people earn a lot why can’t business executives whose efforts contribute to the country’s GDP? Good point.

Again, the question haunts the board rooms and compensation experts – how high should executive compensation be? Sometimes, the-re is the apparent “disconnect” between what executives seem to feel they deserve and what the public perceives their pay should be. Choosing comparator companies in compensation surveys can sometimes be deceiving and self-serving. I know of one company that chose comparator companies outside of its industry just to jack up the salary regression line of surveyed positions to reinforce its argument that its executives are underpaid. It was a case of not comparing apples to apples.

Assuming that increase in pay was well deserved because it jibes with the high performance of the company, in lean times, when the company is losing, are executives willing to decrease their pay? It’s natural for executives to resist any push to return to prior levels of pay. Maybe, we could take a cue from what some equity companies in the U. S. do – provide a “clawback” provision that requires executives to return part of their pay if the company does poorly in subsequent years.

Compensation is indeed a tricky issue that challenges HR professionals as Compensation administrators or in-house consultants. There seems to be no magic formula that would satisfy all people in the organization, from the highest to the lowest level position. Addressing the problem would depend on a lot of variables: the industry, bottom line performance, culture and compensation philosophy, competition, and the macro-economic environment that a company is operating.

(Noli is Chairman of Change Management International, a management consultancy firm; currently, Vice-President of ECOP; professional lecturer on Human Resource Management and Labor Relations and member of the Tripartite Industrial Peace Council (TIPC), and member of the Tripartite Executive Committee (TEC) and Commissioner of Tripartite Voluntary Arbitration Advisory Council (TVAAC). He is co-author of the book, “Personnel Management in the 21st Century and author of the book, “Human Resource Management – From the Practitioner’s Point of View.” His email address is: nolipayos@ gmail.com)