Many companies with international operations are reluctant to purchase compensation surveys covering their multiple countries, on account of the cost.  To them it’s like having to survey multiple USAs, no matter the headcount involved.  As discussed in an earlier post, Shock and Awe, the cost of these international surveys can be prohibitive.

For example, if the US-based Acme Manufacturing Company has operations in Germany, India and Argentina, survey costs for these three countries would be 2-3 times the cost of comparable US surveys.  As most compensation experts recommend using multiple sources to better gauge market trends, the cost factor very quickly becomes an eye opener.  The more countries you operate in – well, you get the point.

Hence the hesitation.

However, is putting off a competitive pay analysis a good business decision?   What is gained by keeping ignorant of whether your compensation packages are competitive or not?  Of course, by happenstance you may be lucky and are already providing compliant and competitive rewards.  More likely though, the odds favor that you’re either overpaying or underpaying your employees.

Long term Impact of the Status Quo

Let’s look at the scenarios that can be playing out while you remain unaware.

Over Payments:

• Where local compensation costs are higher than the competitive market, without a corresponding ROI in productivity or performance (more pay is not a 1:1 correlation).  You are wasting money.

• Most employees will not recognize that they’re being paid above average, so any presumed positive perception is only an illusion.

If you’re overpaying, but don’t realize it because you haven’t obtained credible survey data, you will likely presume that everything is okay.  In other words, you’ll think that your pay is on par with the market, when in fact you are paying at above market rates.  How much money (the differential) will you be needlessly paying out on account of this presumption?  Chances are, the cost of finding out – of potentially identifying a key problem – would be a small fraction of the money being misspent.  Is this an efficient use of your reward dollars?  I don’t think so.

Underpayments:

• Employees feel that they are not being compensated fairly

• Your ability to attract the right caliber of employee for your operations will be weakened by low compensation rates

• Employee engagement, productivity, morale, attendance etc. will be less than what they should be, feeding off negative employee perceptions

If you’re underpaying, but don’t realize it because you failed to obtain credible survey data, you may also blindly consider that everything is okay.  After all, anyone who leaves does so for more money, right?  But doesn’t everyone?  So you may not learn much through staff defections.  Have you considered the annualized cost of losing just one experienced staff member?  And should you lose more?

Choosing instead a course of hesitation and delay will not rectify any festering issues; they don’t go away or fix themselves.  Instead, your inaction will worsen the situation and make eventual corrections more painful.

Cost of doing business

Do you remember that ad line, “you can pay me now, or pay me a lot more later”?

While squirming to avoid costs the company might try to obtain free data off the internet.  Good luck there.  Pundits will tell you that the value of free data, even if available is usually less than what you paid for it.

Instead, ask yourself if you would spend a dollar today to save three tomorrow?  That’s the question you must answer, to gauge the economic value of knowing the competitive position of your international employees.

Your financial folks might see it another way.  They might see only a finite dollar amount being spent, against a “maybe” savings estimate.  They will ask you for guarantees you cannot give.  It’s not like buying a machine that will increase productivity, lower production costs, raise profit margins and lower the cost of sales – all measurable.

Would you pay to learn how competitive are your services and product lines?

To make informed and effective business decisions, management requires knowledge of present circumstances, the challenges being faced, the import of the status quo and the implications of change.   When dealing with the single greatest cost to your organization, employee pay, it would be well worth your effort to spend what is necessary to give senior management the proper ammunition for decisions that could drive the business forward.

Yes, it would be well worth the cost.

In our last post we introduced you to Step # 2 of the Seven Step Compensation Diet – the need to lay out in your mind the general theme of how you plan to reward your employees.  Without such a governing plan or broad strategy individual manager actions will continue to push your reward costs upward at a rate greater than anticipated or desired.

At the same time, if you don’t know where you’re going (i.e., the Yellow Brick Road), any path will take you there, and odds are you’ll end up right back where you started.  So you had better set up some signposts along the way.

Step # 3: Prepare Compensation Guidelines

By “guidelines” we mean a series of written policies, procedures and how-to instructions that guide your management in dealing with compensation / reward issues.  These compensation policies, programs and procedures should reflect and support the strategies you developed in Step #2 – The Strategy.   Commit them to writing and distribute widely to managers and employees.  Have everyone get the word and don’t let ignorance become an excuse.

This primer should be the policy and procedural instructions your managers will rely on when called on to make spending decisions.  Educating your managers on the tactical application of your company’s pay programs is a critical step; one that will help modify actions and decisions in a way that will support and encourage the enduring change your organization needs.

As you would anticipate, left to their own devises Managers tend to fill an information vacuum (no guidelines) with precedent-setting decisions that will increase costs, foster inequitable treatment and over time alienate segments of the population.  Guidelines (or rules, if you’re strict) serve to rein in these ineffectual leaders by establishing parameters to their freedom of action and limits to their authority.

While aberrant behavior by rogue managers will cost you in terms of money, morale, and productivity,  giving managers policies and procedures to operate by will save you money, as well as time and trouble.

A suggested Table of Contents might look like this:

• Compensation philosophy (Role of compensation function, pay for performance, compensation strategy [as available])
• Brief description for each of your direct and indirect pay programs
• Step-by-step instructions to process every type of pay change
• Approval process for every type of pay change
• Hiring, promotion and pay adjustment procedures
• Administrative issues (pay dates, overtime, new positions, job evaluation, etc.)

You should create a greater visibility for the inevitable exceptions-to-the-rule by establishing a one-up approval process.  Such a technique will highlight remarkable performance through transparency of reward.  If you include templates and sample forms you can help ensure consistency of message while assisting managers to administer the reward programs.

When you shine a little light into those darkened, special interest corners the employees will notice – and applaud.

Having a rulebook-of-sorts will also help provide standards and structure to your reward programs, which in turn will foster greater employee engagement.  As you begin to improve how reward programs are designed, implemented and now communicated you will inevitably:

• Reduce your overall labor costs
• Increase effectiveness of money spent
• Increase ROI of reward dollars
• Improve morale, engagement and productivity

Final note: Make sure that all managers receive a copy of the compensation guidelines, and then periodically update and use them.  Refer to them constantly and let employees see that they are to be followed.

Let no dust gather on these pages.

Over the years the Human Resources Department has transitioned through any number of “latest thinking” management concepts and corresponding “buzz phrases” – from “matrix management” to “broadbanding” to “onboarding” and “headwinds”.  Each new approach seemed the brainchild of management consultants seeking to encourage what they called creative thinking and the latest strategies to improve the human factor.

Lately though a persistent theme has settled in that HR should become a “Business Partner” of the organization, in order to be taken seriously by senior management and enhance the value-added contribution of its programs.  This encouragement suggests that HR is not currently a player on the Senior Executive team – but needs to be.

So what exactly is an HR business partner?  Several key criteria have been tagged as descriptors:

• Diagnose business needs
• Develop management’s capability to address HR issues
• Provide advice and a point of view
• The primary focus is driving the business forward
• To educate, motivate and influence others

Does the above describe the HR function at your company?  Is HR considered a business partner?

Your Father’s Personnel Department

Today most would chuckle at memories of the “old” Personnel department, whose primary responsibilities seem to have been tasks like recruiting, record keeping, arranging the blood drives, the safety shoe program and running the annual picnic / Christmas party.  The head of Personnel was rarely considered a “player” at management meetings.  Some in management claimed that the department was only a necessary evil.

That Personnel was viewed as the department focused on the interests of the employees.  Its management was staffed by employee relations generalists, was sensitized by the needs of employees and left the running of the business to the “businessmen”.  Personnel dealt with people.

Today, companies expect more.   Leadership expects less transactional administration and more strategic thinking.  Being labeled a “people person” is now considered a negative, a source of humor among recruiters.

What are the signs that HR is a true business partner at your company?

• Direct report to the President / CEO and listed as a member of the Senior Team
• Able to speak with credibility and respect at the management table
• Able to advance the value of HR to those holding negative biases
• Consulted by senior management on human factor issues
• Company decisions affecting employees are initiated by the head of HR

As a newly designated business partner-wannabe, Human Resources in many companies has transitioned away from the traditional role of caring for / representing the employees.  It has focused instead on utilizing the human capital to assist management in achieving objectives and driving business success.  However, the more successful HR has become as a business partner the greater the danger that employees will lose trust and confidence in HR, exactly because the focus has moved away from employees.

As HR has developed a new stratagem, some might say a new identity, what has been the cost to the original mission?  What part of itself has been lost while chasing the role of business partner?

Danger Signs

Have a care that you don’t lose the heart and soul of HR – its caring connection about employees.  Don’t start looking at them as merely numbers on a spreadsheet or boxes on an organization chart.  There are other departments who already do that very well.

Is the HR function served or harmed by leadership that is “counting the chairs” on their way up the hierarchy?  These are typically fast-trackers who are not HR-trained, but only temporary visitors to the department for a “broadening” of their management experience.  Why is that acceptable for the HR function, but wouldn’t be tolerated in IT, Finance, Marketing, Engineering or Manufacturing?  Is the head of any of these other functions anything less than a seasoned expert in that profession?

Why is HR viewed as different?  Why are other functions already presumed to be business partners?  Only HR is being challenged, remaining a newbie, on probation at best, at worst one step away from getting the coffee.

Lip service to the people department?  Even while sitting at the Senior Management table negative biases from the old days often remain:

• Remember the safety shoe program?  It’s hard to be taken seriously after so many years focusing on administration.  Does HR deal with important issues today?
• If the head of HR has only been appointed to gain experience toward their ultimate loftier goal, how serious can we take a temporary worker who is only passing through?
• HR is still perceived of as offering restrictive advice, what can’t be done; they remain the gatekeeper of corporate policies.  Being an advocate of policy doesn’t win friends.

From the employee’s perspective it is important to consider HR as the source and advocate of fair and equitable treatment, compliance with all regulations affecting employees, and their representative among senior management.

What if senior management doesn’t feel that way?  What if they want HR to become just another “business partner” concerned more about the bottom line – to the exclusion of the human factor?

Have a care that we get what we want – Business Partner – and then our employees choke on it as we lose our way.

In our last post we introduced you to the Seven Step Compensation Diet – to strengthen the internal value of company reward programs while dampening the upward spiral of your labor costs.

Our 1st step focused on the need to identify the organization’s reward challenges (what must be changed) before beginning the effort to establish corrective action plans.  Now that we have taken a look at ourselves in the mirror and acknowledged the current state of flab and flaws we need to move forward to the next stage and start developing practical solutions.  We have to start the diet.

Step #2: Develop a Compensation Strategy

Solutions rarely arrive by whimsy or happenstance, except in popular fiction. In the real world they are the result of planning and forward thinking.  The same applies when the need is to improve your reward programs.  You begin this process by laying out in your mind the general theme of how you plan to reward your employees.  Then you word-smith clear and precise statements that describe your beliefs, and around which you will design, administer and communicate your reward programs.

How important is an effective reward strategy?

• Helps guide and inspire the workforce

• Provides specific, motivating direction for connected actions

• Identifies the focal points for your programs

• Positively brands the company and helps recruit better employees

Whether you choose a formal or informal approach (back of an envelope to a formal document posted on the wall) you should map out in broad terms a vision of how the Company should reward employees.  There is no need to be fancy here, but your series of statements should mark your organization as an advocate of certain Human Resource principles (pay-for-performance, competitive salaries, focus on internal promotions vs. hire, etc.) – to be communicated frequently, be easily understood and viewed by your candidates and employees as credible (trusted).

How does this help?  Like using a Carb counter or a calorie guide, when setting out the guideposts of your reward philosophy you establish critical “do’s and don’ts” and openly communicate your principles.  The organization plants a stick in the ground.  Be careful though, as this is something for both you and your employees to point at – for standardization, consistent treatment and, of course, precedents going forward.

Many companies are reluctant to formalize a transparent strategy (worries over gaining management consensus, strategic effort and required commitment to results).  Others equivocate and muddy the message through generic wording, lack of specific design elements and the look and feel of everyone else.  That result comes across like a vague Mission Statement; broad, aspirational phrases like market leader, shareholder value, supplier of choice, leading edge technology, etc.  Such prose is immediately forgotten by everyone.

Anecdotal examples to illustrate the difference of broad vs. specific:

• We will be market driven; market competitiveness will be given priority over internal equity

• We believe it’s important to share the cost of benefits with employees

• We will provide employees with the opportunity to earn above average compensation for above average performance

• Our compensation and benefit programs will be designed to be competitive within our industry and revenue size

• We reward employees on a pay-for-performance basis; general adjustments are to be avoided

At this early stage of designing reward program transformation you should ensure that senior management is not only supportive of your strategies, but engaged in achieving the vision.  You will need this air cover for the tough decisions and passive resistance to come.  If you cannot count on active and public support, it would be best if you stop your dieting plans here.  You either walk the talk or you sit down.

And yet, you still ask, what if we go without?

• Your largest single company expense would be left without a guiding principle

• Without a governing theme reward costs will rise at a greater rate than planned or desired

• Inconsistent or possible contradictory messages will continue to create difficulties and expense

So, what’s it going to be?

It is an easy thing to lead an organization when the good times are rolling, but during a recession – when challenges assail you from every direction – not so much.   To succeed, to lead under these circumstances will require not only possessing a particular series of technical and behavioral skill sets but the ability to apply them as well.  Effective cost cutting has become a business priority, as well as the imperative to continuously create more efficiency in company operations.  You need to trim down as well as trim back, but in a managed fashion that will strengthen your organization for the future.

When it comes to Human Resources and the management of your payroll dollars, you need to cut the fat and tone the muscles; you need to go on a diet.

In your personal life the decision to begin a weight loss / trim down regimen typically means that you have recognized a problem with your current life style and have committed to 1) stop certain negative-reinforcing actions (eating the wrong foods) and 2) instill a sense of discipline to follow new positive-oriented behaviors (portion control and exercise) that would lead you to a healthier tomorrow.  In a similar vein companies facing a legacy of wasteful spending and misused employee rewards require the same discipline to curtail ruinous business practices and embrace the need for new thinking.

In order to rectify costly and damaging practices that have built up and ingrained themselves over time HR management will need to change the manner in which they reward employees and exercise more prudent behavior – as if the funds came from their own pocket, versus a bottomless well or the company’s money tree.

So how do you do this?  Where do you start?  I suggest that if you follow the Seven Step Compensation Diet you will develop a more effective and efficient HR organization, one that maximizes employee reward dollars while keeping a close eye on the company’s business objectives.

Today begins a series of Compensation Café posts that will describe each of the seven steps your organization should take to turn your pay practices around.

Step #1: Look Yourself in the Mirror

People begin a diet because they need to.   The damning evidence stares back at them in the morning mirror, forcing an acknowledgment that something must be done.

Management and HR professionals face a similar wake-up call as employee-related problems raise their troublesome heads and demand attention; payroll costs grown out of control, an increasing turnover of key talent, lower productivity or perhaps evidence of worsening employee morale.  Something is damaged or broken within the organization, economic and human factor pain is being felt and the need to address the issues has become critical.

Sad to say though, that it’s usually a crisis springing up out of nowhere – not timely self-appraisal – that forces action to replace historic lethargy.  Advance warning for the unwary is a luxury that cannot be counted upon.

The likely sources of this pressing concern are systemic practices rooted in outdated or ill-monitored policies that have out-lived whatever usefulness they might have once claimed.  So ask yourself:

• Do you have an HR / Compensation policy manual?
• When was it last updated?
• Do employees / Managers read it / use it?

Or perhaps it is simply that senior management is shouting at you?

Whatever the catalyst, at this early identification stage you will have a sense of likely problem areas (i.e., out-of-date procedures, lack of standards, policy gaps, poor documentation, training issues, etc.).  Analyze the likely causes (the actions likely feeding the problem) and consider what practices or policies the organization should modify or stop outright, and what activities or programs you need to start.  Then write them down.  Identify those policies or practices that may be causing harm and need to be reviewed, and then which new initiatives would alleviate the problem and strengthen your organization.  You will need to focus on these weak areas, as such components of your pay program become the baseline for your future efforts.  Do not lose sight of them.

Knowing you need to take action is a big step, but only the first.

Next up – Step #2: Develop a Compensation Strategy