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Placing value on valued employees: building an effective remuneration strategy

07 November 2017

A well-designed employee remuneration strategy firmly anchored in business objectives helps organisations attract, retain and motivate employees, says John Day, CEO Smartequity Pty Ltd.

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 to 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.

Moving away from fixed pay

The traditional view of remuneration planning is set to shift over the next ten 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 emphasis of the next decade will be on customised, organisation-specific, remuneration programs that on one hand, build support for changing and evolving business strategies; and on the other, are sensitive to each employee’s unique personal needs and goals.

The trend towards performance-based pay

A 2014 major Worldatwork study1 revealed 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 have 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 organisation's 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 an opportunity 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 maximizing 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.

Steps to motivating employees through remuneration

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 to achieve financial and lifestyle goals sooner. Regardless of the ultimate remuneration mix, it is essential the remuneration structure is consistent with management values and overtly supports the achievement of business objectives.

John Day is founder and CEO of Smartequity, and is widely recognised as an expert remuneration consultant. Smartequity is the employee share plan administration provider in the Smartgroup network of companies, an ASX-listed corporation recognised for innovation and exceptional customer service.

1. 2014, Compensation Programs and Practices, WorldatWork 2014.