strategic compensation and reward

STRATEGIC COMPENSATION & REWARDS

PREPARED BY:ANNU (030)

POOJA RANA (075)

Scope of the Presentation

Strategic compensation: Introduction Compensation design and its drivers Challenges & Issues to Strategic compensation Principles to Strategic Compensation Strategically oriented compensation systems

Strategic Compensation: Introduction

Strategic compensation is a fast-emerging phenomenon. Involves compensation practices being aligned with the achievement of

the organisation s strategic business objectives. Strategic compensation is the type of compensation scheme implemented

to improve the motivation of your people to perform better. It must also have the potential of strengthening your image as a good

employer. Paying competitive salaries is in accordance with sound employee

recruitment, employee engagement and employee retention practices. You are making it a truly strategic compensation.

The strategic perspective involves thinking about how pay can assist in achieving organization success.

Compensation Goals and Strategy

Basic Goals of a Compensation System Attract Employees Retain Employees Motivate Employees Compliance with Pay Laws Administrative Simplicity Cost Effective Drive focus & effort to exceed performance objectives Internal and external equity

There are four (4) key questions which must be addressed: 

How much should we pay? (What is the SIZE of the economic pie?) In what form should we pay it? (How should the pie be SLICED?) When should it be provided? (When and how do we serve the pie?) How do we make adjustments? (When should we change the pie recipe?)

Following steps need to be followed in compensation system design:

I. Work DesignII. Job EvaluationIII. Job BenchmarksIV. Labor Market DefinitionV. Market ResearchVI. Compensation DeterminationVII. Job/Pay Structure DesignVIII. Compensation Review PolicyIX. Internal Equity Review

Compensation & Benefits Strategy Design Drivers

o Compliance Related (Legal)o Strategy & Market Drivers e.g. Target markets, General strategy,

Competitive Positioning, Business model & complexity, M&A.o Operations Drivers e.g. Performance benchmarking, Operations

Excellence Programs, Process Innovation projects.o Technology Drivers e.g. New product/ service offerings, Integrating

technologies, Technology alliances.o Structure & Processes Drivers e.g. Organization & Cost structure,

Process re-design, creation of new divisions, departments, functionso Workforce Drivers e.g. Demographics & Diversity, Talent attraction, motivation, retention & engagement, Culture.

Human Resource Strategies

Strategies affecting

compensati-on

decision making

Societal

Corporate

Business

Functional

Governmental

Decisions

Organizational

Management Decisions

Function Level

Decisions

C&R Strategy: Challenges & Complexities

Limited Talent, especially in emerging economies or for “Hot Skills” Managing workforce diversity and aligning C&R to employee needs Increased flexibility in C&R programs e.g. Expatriates with “Split pay

requirements, flexible benefits programs, etc. Ever present threat of downsizing How to distribute scarce compensation & benefits $ Having a “Credible” performance management system that support

“Performance Based Pay” concepts Balancing the issue of: Linking Rewards to Performance vs. Building a

Team Culture Competitive position & the contribution required from the workforce.

Principles behind C&R Strategy

Always link back to strategy & business objectives Able to drive & align performance Establish a philosophy, policy guidelines & target objectives Evaluate costs in relation to value / impact expected NOT to “What others

do or generic benchmark numbers” Manage “PIE” - Perceptions, Implementation & Expectations Evaluate effectiveness against expected outcomes Keep it simple & flexible (Control fixed costs; consider adaptability across

countries & time periods) Decide on level of consistency required especially if you have “Hot Skills”. Base it on “Relevant Data” = Market Data + Business Value Data

STRATEGICALLY ORIENTED COMPENSATION SYSTEMS

Skill Based Pay Broadbanding Team Based Pay Variable Compensation

Skill Based Pay

Focuses on individual, not the job

With skill based pay, employees are able to increase their compensation as they acquire a broader range of skills

Although there are variations in how skill based pay is implemented, employees typically start out at a base rate and increase their compensation as they master a sequence of skill blocks

Typically employees take several years to master the content of all skill blocks

Difficult aspect involved in the administration of skill based pay involves the determination of the amount of pay that should be assigned to skill blocks

Market survey data are often used to establish the range and average values for skill blocks

Advantages Costs of higher wage rates are offset by higher

productivity and increased quality Employees’ heightened motivation for training Greater task variety Employee induced pressures on companies to provide

training Increase in employees’ self esteem Increase in compensation with expansion of skill sets

and not on the basis of seniority

Broadbanding

Broadbanding involves a reduction in number of salary bands

Large number of pay grades are consolidated into a few broadbands

Implemented in large, hierarchical organizations to flatten their organizations and remove levels of management

For example, an organization that had 8 levels of management could eliminate 4 levels, widen the salary ranges of remaining 4 levels and simply slot each manager into one of those ranges

With broadbanding, a manager can easily encourage his/her employees to broaden their skills and abilities

In order for employees to advance in pay and responsibilities, they have to further develop their specialized skills

So, it leads to skill acquisition and development

Employees’ salaries can be raised without a promotion

Team Based Pay

Team based pay involves specifying a goal and then allocating to all team members a reward for its accomplishment

Rewards can be cash as bonus, trips or time off from work

These rewards are provided to all members equally

Overcomes the problem of measuring individual contributions

Facilitate cooperation among team members

Variable Compensation

This type of compensation as by its name is variable. It means that one gets compensation as per the work done. If one does a remarkable job then he or she deserves a higher compensation package than one whose work is of poor quality.

Case Studyon

Novartis

Performance-based compensation policy is designed to:• Align the objectives of associates with the interests of

the shareholders• Incentivize associates to create sustainable value for

Novartis and its shareholders• Support a diverse and performance-oriented culture that

allows Novartis to reward people who perform well• Be competitive with world-class companies and industry

peers

Base Compensation

Each associate is given a fixed salary based on job characteristics, market competitiveness and the associate’s skills. Salary growth depends on the associate’s individual performance and level compared to the benchmark.

Variable Compensation

Short-Term Incentive PlansAwards under the short-term incentive plans are made each year based on the associate's individual target incentive percentage, individual year-end performance rating as well as on the Group’s or business area's performance.

Novartis Equity Plan "Select"Each year, approximately 10 percent of all full-time-equivalent associates worldwide may be eligible for a grant under the Equity Plan “Select”. Grants can be taken in the form of restricted shares, tradable share options or a combination of both, with a vesting period of three years. In some jurisdictions Restricted Share Units (RSU) are granted rather than shares.

Long-Term Performance PlanThe Novartis Long-Term Performance Plan rewards key executives who have a significant impact on the long-term success of the Group by aligning the incentives of key executives to the performance of Novartis

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