One of the odd things about pay is that you know there’s something wrong when people start getting excited about it. The aim of the reward manager is to conduct his or her business engendering as little fuss or emotion as possible.
If your people start punching the air with glee when you give them their pay review letter, you’ve probably paid them too much: if they decline into despondency, you’ve been too mean. A po face is often what you want.
Unfortunately, in recent years, the noise around pay in general, and top people’s pay in particular has become pretty deafening. Every journalist and politician has an opinion and the pressure is building for something to be done.
Particular bug-bears include; the increasing ratio between top pay and everybody else’s, the perceived obsession with following the market, and the apparent tendency to pay huge bonuses regardless of performance.
If you believe everything you see in the media, you would be forgiven for thinking that Remuneration Committees are stuffed full of incompetents who lack independence and look after their own, spreading largesse regardless of merit.
We think it’s high time we got dispassionate, so we’ve prepared some hints and tips for reward managers who aspire to boredom.
- Be philosophical: unless you pay everybody the same you need to have some basis for paying them differently. This may be down to the job people do, where they do it, how well they do it or some other factor, but what you pay for should be relevant to your business and not necessarily the same as your peers.
- Use the market wisely: your philosophy may include an approach to market peer groups and market positioning appropriate to your organisation, but market data is just a statistical distillation of a range of numbers: there is no such thing as a market rate. Roles at the top of organisations are unique and market data should be used as a guide, not a rule book.
- Be SMART: one of the legitimate complaints about senior management pay is that bonuses appear to be paid regardless of the performance of the business. Make sure targets are challenging enough: fully acceptable performance should be the norm, not the mark of mediocrity. Performance measures should go beyond a simple count of the numbers and focus on sustainable performance – what this looks like will vary from business to business and needs a clear definition. It will also need to be carefully communicated not only to participants, who need to understand what’s expected of them, but also to other key stakeholders (such as shareholders) who need to be reassured that the organisation is getting value for money.
- Don’t be an isolationist: before the global financial crisis senior management pay was sometimes managed as a completely separate exercise to the pay of the rest. There should be a common philosophy running through the reward policies affecting all employees. Harmonise pay review budgets and think about ratios between median pay and top pay, not least because it’s not beyond the bounds of probability that ratio disclosure will be a subject for future regulation for listed companies (echoing the trend in the USA) and ratio caps might be considered for UK public sector organisations.
- Manage your stakeholders: yes, shareholders are vitally important, but their interests need to be aligned with other stakeholders – employees, the community, suppliers and other business partners, the media and government all need to be kept on side. In the long-term recognising this will benefit shareholders too.
This is all common sense and in our experience, in spite of commentary to the contrary, remuneration committees are more sophisticated about managing reward than ever before and, with the possible exception of incentive design, best practice is common practice. But even where things are done well, we seem to be losing the moral argument because the good work being done isn’t recognised and its business case isn’t being clearly made
We look forward to seeing reward managers and remuneration committees head back into an era of calm and serenity as soon as possible.