COMPENSATION SYSTEMS

L1 - 27/02/2024
The role of the remuneration and compensation system in the company. Compensation as a strategic
weapon to achieve business objectives and align employees and company (1st part)

[email protected] / [email protected]

Introduction to compensation systems

“[The right] people are our best asset!”
The best and brightest; the most talented ones. The ones with the right potential, courage and drive to become
future leaders.

Introduction to people management

It is not people but……how you empower, develop (and reward) them!!!…So they grow, thrive, prosper and
become the best, that is, the future leaders.

The new context

● And the challenges are enormous indeed!!!
○ “The Chief Human Resources Officer (CHRO) is a critical leader in any organization. In 2023, the
role of the CHRO will be even more important, as businesses face several challenges, including
the war for talent, the need to embrace digital transformation, and the demands of a changing
workforce.” - McKinsey (2023)
● According to research by McKinsey, CHROs will need to focus on three key areas:
1. Attracting and retaining top talent (GLOBAL WAR FOR TALENT): new and innovative ways to
attract and retain top talent –i.e., data analytics to identify high-potential candidates, creating a
more flexible work environment, or offering competitive benefits packages.
2. Embracing digital transformation –DIGITAL SKILLS.
3. Building a culture of inclusion and belonging where all employees feel valued and respected,
regardless of their background or beliefs. Emotional, non-monetary compensation.

What’s the point and role of remuneration in attracting and retaining talent?
Jack Welch’s philosophy, vision and goal
● “Ten years from now, we want magazines to write about GE as a place where people have the freedom
to be creative, a place that brings out the best in everybody. An open, fair place where people have a
sense that what they do matters, and where that sense of accomplishment is rewarded in the
pocketbook and the soul. That will be our report card.”
● ‘A PLAYERS’ - (individuals with vision, leadership, energy, and courage)
○ “We’re an A-plus company. We want only A players. We can get anyone we want. Shame on any
of you who aren’t facing into your less-than-the-best. Take care of your best. Reward them.
Promote them. Pay them well. Give them a lot of [stock] options and don’t spend all that time
trying to work plans to get Cs to be Bs. Move them on out early. It’s a contribution.”
Money (salary and compensation) matters!!
● “Money can’t buy loyalty. It just rents it for a while” - Gary Burnison, CEO of Korn Ferry

Compensation does go beyond transactional leadership (do ut des)

● The transactional leadership style is described as a “favor-for-favor” or a “give and take” social
interchange where managers rely on rewards or punishments in exchange for desirable or undesirable
performances.
○ Exchange of time and effort and as a result money.
○ This strategy doesn’t last in the long run.
● How important is money (salary) for you in a job offer?
○
● Compensation effect Intrinsic and extrinsic motivation

The ONE motivator

● HIGHER PURPOSE → beyond the salary or compensation
● company who wants to improve our lives, improve the world = those corporations are able to attract the
talent.

Compensation concept and overall scope

● Compensation is a systematic approach to providing monetary value to employees in exchange for
work performed. It is the reward that the employees receive in return for the work performed
● Compensation is relevant to recruitment and selection, training and development, performance
appraisal, incentives, industrial and employee relations, and promotion.
● Compensation includes monetary payments like bonuses, profit sharing, overtime pay, recognition
rewards and sales commission, etc., as well as non­monetary perks like a company-paid car,
company-paid housing and stock opportunities and so on.

Equity in compensation
● But the concept of equity plays a crucial role in remunerating any work or task because…
○ People work efficiently only when they are paid according to their worth or feel satisfied with
the remunerations.
● EQUITY → Far beyong giving employees options, restricted stock, and performance shares

Equity is NOT equality

● Equity differs from equality in a subtle but important way:
○ Equality assumes that all people should be treated the same.
○ Equity takes into consideration a person’s unique circumstances, adjusting treatment
accordingly so that the end result is equal.
● Equity:
○ Compensation equity refers to the fair and just distribution of wages and benefits among
employees in an organization.
 ○ This is a crucial aspect of human resource management that ensures that employees feel
valued and appreciated, and that their contributions to the organization are recognized and
rewarded.

Equity, fairness and salary normalization

● Organizations can establish a transparent and equitable compensation structure by considering factors
such as job responsibilities, skills, experience, and market rates.
● The benefits are twofold: employees feel valued and motivated, while organizations attract and retain
top talent, driving success and growth.
● Benefits of Fair and Equitable Compensations:

Does the old-fashioned “carrot or stick” model still work?

Self-motivation: feeling good

● “ ...a new dialogue that embraces the key concept that motivation is less
about employees doing great work and more about employees feeling great
about their work. The better employees feel about their work, the more motivated they remain over
time. When we step away from the traditional carrot or stick to motivate employees, we can engage
in a new and meaningful dialogue about the work instead.” - Lai Lisa, Harvard Business Review
● So, the new rule of the game:
○ Focusing only on compensation or only on cultural factors won’t stem the tide of attrition.
Business leaders must pay constant attention to both.

Case: compensation’, talent’ and equity’s dilemma

● You have interviewed a prospective new employee who could be a key member of your team.
○ The new person’s required salary would compromise the integrity of your salary structure,
because it is 20% higher than your most senior performer who has been with the company for
over 10 years.
○ Finances are tight, yet you believe this person could make a significant impact on future
profits.
○ If you paid the required salary for the new person, it would eliminate bonuses for all your staff
that you feel they’ve earned this year.
○ You’ve been searching for an individual with this skill level for three months.

L2 - 5/03/2024
Compensation as a strategic weapon to achieve business objectives and align employees and company
(2nd part). How to build a compensation-based competitive advantage
Rethinking the WHY behind the WHAT
● A total rewards package can include fixed pay, variable pay, annual cash bonus, and long-term wealth
creation through various incentives.
○ money is just one element
● It also covers benefits like health and retirement, non-cash compensation like transportation or
educational stipends, and non-financial rewards like training, flexibility programs, and leave.

Navigating the new post-COVID decade: the context

● Organizations must demonstrate that they have structured their rewards fairly by transparently
communicating the link among business performance, individual performance, and rewards.

The point
● Can compensation be really strategic?
○ YES, it can.

The strategic pay of compensation

● In addition to being the single greatest operating cost for many organizations, compensation has been
advocated by many as a tool for enhancing organizational performance and sustained
competitiveness.
● Indeed, the mismanagement of strategic compensation systems may induce undesirable employee
behaviors –i.e., demotivation, disengagement, or missing talent.
● How to make compensation your competitive advantage
○ …Because compensation is indeed a competitive advantage—it’s how we attract and retain
people to keep culture, achieve goals, and drive results.
● But how to start?
1. Compensation philosophy
● Every company needs a compensation philosophy—the principles and values that
define the way you invest your budget.
○ To understand and specify why the approach to compensation is a certain way.
○ It has to be related to the culture and values of the company.
○ It is a result of the culture. It determines the philosophy.
● It’s not always your benefits that set you apart. It’s the story and the principles behind
why you chose them.
○ the story you tell the staff on how they are paid.
● EXAMPLE: the case of Carta
○ At Carta, they democratized equity ownership.
■ Change: establish a new approach to equity refreshes.
■ Goal: reward employees who stay with Carta for the long haul with
increased ownership. (retention and motivation)
○ Further benefits: Regular liquidity to employees through their private exchange,
Carta X, to make sure they actually tangibly benefit from the shares they own.
These decisions were guided entirely by Carta’s values.
● Bottom Line:
○ Align benefits with strategy (and values!).
○ Decide your (compensation) philosophy up front. That’s your North Star.
○ Then use it to drive your decisions around compensation.
● Case: Ricardo Semler and Semco S.A.
 ○ Analyze the firm’s new compensation system and its impact on the corporate
strategy
2. Compensation systems
● Compensation strategy involves standardizing a philosophy, benchmarking, forecasting,
scenario modeling, leveling, rewards planning, internal communications, and more.
● The challenge (or problem): one company might end up using as many as seven
different systems to handle all of those different aspects… But few of them can support a
company with live data that’s applicable in real-time scenarios.
● People in HR leadership positions end up making their own spreadsheets and calling
peers to supplement data from external providers.
● Bottom line:
○ Find systems and reliable data sources that work for you and for your employees,
as early as you can.
3. Compensation challenges - Connected to the business
● Your approach to compensation should be really closely connected to the challenges that
are specific to your company:
○ Where are you in your growth?
○ What are your hiring goals?
■ Being thoughtful about those problems will help you allocate the right
resources to solve them.
● Bottom line: continuously evolving and adapting to the context
○ Compensation isn’t just a program you set once and never revisit. It’s an ongoing
conversation. It shifts with the market. With demands from a new generation of
talent.
○ It also changes as your organization changes. In a few years, you might be
doubling the size of your team and sorting out how equity plans impact your cap
table.

But it is NOT only the strategy but the CULTURE

● But it is not enough to just have a compensation strategy — you need one that is aligned with your
organizational culture.
● This is how you can ensure that your employees feel valued, motivated, and satisfied.
● Encourage them to behave and perform in a way that will help the organization achieve its goals.

So the necessary alignment: culture, strategy and compensation

● Align with the business and HR strategies.
● Attract and retain the talent your organization needs.
● Reflects what top management expects from employees in terms of behaviors, performance, and results.

How to create a winning rewards philosophy and strategy (1)

1. Enable business strategy and performance. Organizations should be clear about what outcomes they
want to incentivize. These outcomes will determine what rewards elements they prioritize.
2. Have a clear employee value proposition with differentiated rewards to attract talent and drive
performance.
 3. Focus on rewarding clear over-performers while developing others instead of trying to differentiate the
broad middle.
4. Decide how rewards will contribute to your overall employee value proposition in the talent marketplace.
a. Example: A “premium package” organization may offer top-tier compensation and benefits
across the board, while others may focus on over-delivering only in areas that link to their
strategy or purpose.
5. Promote equity and fairness through transparency. Ensure equitable design of total rewards for all
populations, and check this regularly through pay equity analysis.
a. Example: Ensure benefits support all populations (e.g., LGBTQ+ parental leave), and conduct
focus groups with diverse employees to ensure these benefits meet their needs.

Steps to create a strategic compensation strategy

1. Ask for employee input
2. Benchmark against competitors
3. Allocate budget
4. Plan for rewards
5. Determine pay grades
6. Confirm compliance
7. Communicate about total compensation

Case: negotiating the annual salary increase

● The head of a manufacturing firm was preparing to initiate talks with the leadership of the employees’
union. The biggest issue on the table was a wage increase. The union was asking for a 4% increase,
while management wanted to raise salaries by only 1%.
● The executive considered the situation. During past negotiations, weeks were lost as each side jockeyed
for position, feigned willingness to walk away, and eventually compromised on an unsurprising outcome.
In this case, a deal at 2.5%, the midpoint of the two parties’ opening positions, seemed likely to be
agreeable to both sides. This time things would be different, he resolved. He’d save everyone hassle
and delay by making concessions early.
● What do you think it eventually happened?
● Against the mediator’s advice, he opened discussions by announcing that he was prepared to make a
final offer: 3 percent, the most he could have offered.
● The union’s leadership was pleased by this offer—yet they did not accept it. If the firm could offer so
much at the outset, they reasoned, perhaps they had set their sights too low.

Wrap up
● Strategic compensation is a way to ensure transparent and fair remuneration for all your employees. It
helps you attract and retain top talent, and increase employee engagement and satisfaction.
● To create a strategic compensation strategy you’ll need to assess your current situation and ask for your
employees’ feedback. Don’t forget about things like market analysis, pay grades, and legal compliance.

L3 - 07/03/2024

Evolution and trends in remuneration and compensation policies. Recap on the key aspects to take into
account to design a remuneration and compensation policy

Brief case discussion:

● As a new talented hire joins, a veteran leaves or quits
○ John was almost depressed. He couldn’t understand it. Due to the increasing war for talent, he
was ferociously competing to attract the best professionals… at any cost or price possible. “This
is the not-so-good side of the war for talent,” he constantly stated. But, for his entire surprise,
every time he hired a new talented guy, one or more senior talented professionals of the firm he
led quit. How so? That’s was John’s unsolved dilemma. “All my guys are fairly treated and paid
here. I just pay above average Why do they suddenly quit?” “Do you want to know the
response?,” one of his closets advisors said. “Just look at the figures. Numbers do not lie. You
know, in any war there are wins, defeats and innocent victims.”
● What was going on? What was the real problem? And how should John face it?
○ To attract new talent, employers often offer new hires higher wages than existing employees.
How do existing employees (and especially top performers) react to these higher-paid new hires? And how can
organizations mitigate the associated risks?
● The point: unless employers adjust existing employees’ wages soon after making a new hire, employees
tend to resign — and that top performers tend to resign faster than others.
● Employers should be aware of the impact hiring higher-paid external talent can have on their teams.
● Conduct regular pay equity analyses to ensure that any disparities are fully explainable.
● Takeaway: Equity matters and pays!!!!

Case:
● The manager of a company had an urgent need to fix a volatile workplace environment.
○ He discovered that some of his employees, mostly of the Millennial generation, were openly
sharing confidential details of their individual compensation plans with one another. And as
much as he was dismayed by the breach of employer/employee confidentiality, he found himself
struggling with a much larger issue – individual employees were confronting him, crying foul and
demanding an explanation for the variances in compensation structures among others sharing
similar titles. And, it wasn’t just the lower-paid employees who were complaining – it was also
those with premium-level compensation packages sticking up for their counterparts.
● If you were this guy, how would you proceed to solve the situation? This guy was looking for the desired
equity in introducing those variances but…

Brief case discussion:

1. Schedule a department-wide meeting with everyone on the team to let them know he was aware of the
sharing of information, and then proceed to explain the many complex variables and considerations that
go into structuring individual compensation packages.
2. Rework the way offers are created and presented to prospective employees so that each understands
the logic and rationale behind the offer. The purpose of this approach is to minimize, or even avoid
contentious confrontations on compensation packages going forward.

● Bottom line: value of becoming more transparent to build trust among employees and their customers.
Equity in compensation = transparency + trust
● Takeaway: Equity –if wrongly managed- can be a double-edged sword
● Truly human leadership

Quick recap so far: THE alignment

And the ultimate, underlying principles

It’s not about the salary or the position but the whole compensation package.
Throughout the hiring process
● What’s negotiable?
○ Salary / Moving stipend / Signing Bonus → consider more than this to create an attractive
package
○ Time to make a decision
○ Leave time (vacation, personal time)
○ Healthcare benefits (flexibility can vary)
○ Start date
○ Learning and development
○ Working remotely
○ Eligibility for promotion or review
○ Equity shares
○ Tuition/Certification reimbursement
Negotiate not a number or figure but the whole compensation package

New trends in compensation: personalized benefits

● Employers are recognizing the diverse needs and preferences of their workforce and are adapting their
benefits offerings accordingly.
● In 2024, companies are expected to develop more tailored benefits packages that cater to employees’
individual circumstances.
● CUSTOMIZATION: By providing customized benefits, employers demonstrate their commitment to
employee well-being and work-life balance.

New trends in compensation: flexible work

● Flexible work arrangements imply a more flexible approach to work.
● Allow employees to have greater control over when and where they work. This involves remote work
policies, flexible scheduling, or even compressed workweeks.
● By offering flexibility, employers empower their employees to achieve better work-life integration,
leading to increased job satisfaction and productivity.
● Allow employees to have greater control over how, when and where they work: work ownership

The bottom line: (MORE) customization

● To attract talent, you must offer them a plus.

New trends in compensation: employee engagement

● Such a plus in action: employee wellness programs to promote physical and mental well-being by
offering incentives for healthy behaviors, access to wellness facilities, or opportunities for mindfulness
activities.
● Care for and take care of the employee’s full life and persona –mental, physical, emotional, and even
spiritual development.
● The bottom line: (monetary) appreciation
○ From people’s health to business wealth

New trends in compensation: financial wellness

● Financial wellness programs to face and overcome the impact of financial stress:
● Resources and benefits to help employees manage their financial health –i.e., assistance in managing
debt, financial planning services, or even employer contributions to student loan repayments.
● By supporting employees’ financial well-being, companies contribute to a more engaged, loyal and
focused workforce.

New trends in compensation: development

● Learning and development opportunities, mentorship programs, and tuition assistance are becoming
more prevalent in compensation packages.
○ Example: fund a MBA or EMBA program for a talented employee.
● Bottom line: nurturing a culture of continuous learning and career advancement.
● ‍Fostering a growth mindset among leaders and employees—for example, by providing training and
internal advancement opportunities—is a cornerstone of effective organizations.
 ● It’s a non-monetary salary that pays off.

● Fostering a culture of continuous learning and career advancement feeds and improves the business.

Wrap up
● A much more personalized and comprehensive compensation.
● A tailor-made compensation package to every single individual.‍

Further on new trends in compensation

1. Pay for skills and competencies
○ Move from paying for jobs and titles to paying for skills and competencies.
○ Reward employees based on the value they create and the capabilities they demonstrate, rather
than on their seniority or position.
○ To implement this strategy, you need to:
■ Define the skills and competencies that are critical for your organization.
■ Assess your employees’ current and potential levels.
■ Design pay structures and incentives that reflect their contributions.
2. Variable and flexible pay (a preliminary glimpse)
○ Based on performance, results, or other criteria.
○ Variable pay can include bonuses, commissions, profit sharing, stock options, or other forms of
contingent rewards.
○ Flexible pay can include cafeteria plans, salary sacrifice schemes, or other forms of employee
choice in pay and benefits.
3. 3. Total rewards and recognition
○ This perspective considers all non-monetary elements:
■ Create a holistic and differentiated employee experience.
■ Enhance employee satisfaction and loyalty.
■ To implement this strategy, solicit employee input and feedback
○ Adopting a total rewards approach is necessary if you must adhere to the EU Pay Transparency
Directive.
○
4. Data-driven and transparent compensation
○ Data-driven compensation can help you benchmark your pay and benefits against the market.
○ Identify pay gaps and disparities.
○ Optimize your compensation budget and return on investment.
○ Help you communicate and justify your compensation philosophy and policies.
5. Social and environment responsibility
○ Align your compensation practices with your corporate social responsibility (CSR) goals and
values.
 ○ Reward employees for their positive impact on society and the environment:
■ You enhance your reputation -brand image.
■ Attract and retain socially conscious employees.
■ Contribute to sustainable development.
6. CSR starts and often ends with your employees.
○ Forget about measuring or linking your employee compensation to some ESG marks.
■ Instead, consider that how you pay your employees is a reflection of your ESG -
specifically, “S” and “G”. Cumulatively, employees represent 50-70% of any society, and
employers control how this 50-70% of society are treated and paid.

L4 - 12/03/2024
Executive Management and CEO Compensation Issues. Remuneration to Directors

Case discussion:
● The Weir Group: Reforming the Executive Pay (A)
● “The board had a collective duty to promote the long-term success of the company for its shareholders
while being mindful as well of its responsibilities to customers, employees, and other stakeholders.”
● U.K. Corporate Governance Code set out “standards of good practice in relation to board leadership and
effectiveness, remuneration, accountability and relations with shareholders.”
● Four compensation standards:
○ Base salary
○ Benefits and pension
○ Annual bonus
○ A long-term incentive plan (LTIP)
● Volatile context: Weir’s end markets were heavily dependent on commodities prices, which were both
volatile and cyclical, and that the three-year targets set by the board to evaluate management’s
performance were disconnected from the dynamics of the business and from the effort put forth by
management.
● Danger: losing talent
● “Executives were not receiving any reward for steering the company through tough times and the
schemes underway were not going to pay out either.”
● The revised package included restricted stock awards—that is, stock grants without performance
conditions.
● CEO’s pay ultimate challenge and goal: aligning performance to long-term value creation for the
corporation.
● But again…
○ How long is long-term?
● Goal: Find an optimal path among board, executives, and investors.

In-groups activity: a fair CEO Pay

● How should boards of directors set the compensation levels for the CEO and the top management
team?
● What elements or variables should they take into account?

Overall directors’ and CEO’s compensation framework

 ● Directors’ remuneration refers to how directors of a company are compensated by a company for their
services usually fees, salary, use of company property or other benefits.
● The packages are first approved by shareholders and the board of directors.
● A number of regulations and best practices together help ensure FAIR reward for directors’ contribution
while protecting the company’s assets and interests.

But WHY to accurately remunerate directors

● The process of directors’ remuneration came about because of shareholder concerns that directors
were rewarding themselves large salaries despite showing poor profits or revenue.

Directors’ remuneration preliminary guidelines

● Shareholders agree to or reject fees paid to directors in general. This amount is the upper limit that can
be paid to the board of directors.
● The board of directors, in turn, will determine how those fee payments are split up among the directors,
including the general director of the company.
● Directors’ remuneration is part of the directors’ employment contract signed with the company. The
board of directors then has direct control over that remuneration agreement.
● Shareholders may sue the directors
○ If they pay excessive amounts that exceed the agreed payment, or
○ If they pay themselves a disproportionately large amount of profits instead of distributing it to the
stockholders as dividends.

Who sets the CEO pay

Bottom line: The larger the company as measured by revenue, the greater the role the board plays in setting
compensation.
Board’s role in determining CEO pay
● When determining CEO compensation the board should take into account a variety of factors, including:
○ Overall organizational performance in meeting board expectations.
○ The challenges and risks faced by the CEO.
○ A comparison of the CEO’s compensation with their peers.
○ The risk or volatility of the position.
○ The CEO’s tenure with the organization.
○ The implications of the loss of the CEO in the event that inadequate compensation causes the
CEO to seek employment elsewhere.

Results, reputation and fairness

● While financial incentives are relevant to motivating CEOs, both CEOs and investors view a CEO’s
intrinsic motivation and personal reputation as most important.
● Fairness matters –CEOs believe it is fair to be recognized for a job well done.

Preliminary phase: CEO evaluation

● The purpose of the CEO evaluation is to set specific direction on board expectations for CEO and overall
organizational performance.
● It is to ensure a consistent focus by the CEO.
● CEO engagement
○ Boards should carry out their CEO compensation assessment by involving the CEO as a trusted
partner in the process.
○ The CEO should be engaged in the process early-on to ensure that she agrees with the
compensation committee’s work plan.

Bottom line: how is DEFINITELY CEO pay set

● The standard objective function is firm value minus CEO pay, so…
○ The only downside of high CEO pay is to directly reduce shareholder value.
○ However, it may also demotivate employees or harm the firm’s customer reputation.
CEO pay eventual Challenges

The RISK factor in CEO remuneration

● CEOs tend to be risk-averse because they are strongly attached to the outcome of their actions in terms
of salary, reputation and personal ties.
● In order to increase executives’ willingness to take risks, alternative pay strategies –i.e., stock options or
normal stock– have been explored.
● Alignment
○ By attaching firm performance to compensation, shareholders are able to pay CEOs in
accordance with the value they bring to the company.

CEO Pay structure by region

CEO pay in detail

Final debate
● What is a fair CEO and directors compensation? Enough is enough but, how much is enough (or too
much)?
● Ethics matters…

Final reflections
● “Placing legal or moral obligations on companies to restrict executive pay is problematic. However, this
does not mean that companies are absolved of their moral responsibilities in relation to high pay.
Executives must accept ethical restrictions on the rights that they have to retain excessive income.”
○ - Alexander Pepper, London School of Economics
● And by the way: world’s highest-paid CEOs
Company CEO Year CEO pay
Blackstone Inc. Stephen Schwarzman 2022 $253,122,146
Alphabet Inc. Sundar Pichai 2022 $225,985,145
Hertz Global Holdings, Stephen Scherr 2022 $182,136,137
Inc.
Peloton Interactive, Barry Mccarthy 2022 $168,073,420
Inc.
Palo Alto Networks Nikesh Arora 2023 $151,425,203
Inc.
Live Nation Michael Rapino 2022 $139,005,565
Entertainment, Inc.
Sarepta Therapeutics, Douglas Ingram 2022 $124,938,694
Inc.
Pinterest, Inc. Bill Ready 2022 $122,651,735
CS Disco, Inc. Kiwi Camara 2022 $109,531,440
Workday, Inc. Aneel Bhusri 2023 $102,685,309
Apple Inc. Tim Cook 2022 $99,420,097
Sentinelone, Inc. Tomer Weingarten 2022 $95,395,534
Luminar Technologies, Austin Russell 2022 $93,915,469
Inc.
Docusign, Inc. Allan Thygesen 2023 $85,035,380
Kkr & Co. Inc. Joseph Bae 2022 $79,999,836
Zoom Video Eric Yuan 2023 $75,959,683
Communications, Inc.
American Peter Zaffino 2022 $75,314,199
International Group,
Inc.
Progyny, Inc. Peter Anevski 2022 $68,580,072
Bowlero Corp. Thomas Shannon 2022 $67,566,882
Broadcom Inc. Hock Tan 2022 $60,606,971

L5 - 21/03/2024

Positioning of the salary structure in the remuneration market. Again, how to be competitive in the
compensation strategy

Brief case discussion:

● A merger –and multiple doubts
● Employees of SVS Pharmaceuticals were very worried. With the news that the company was going to
merge with Vindhya Pharma, all of them were worried about what would happen to their jobs, and the
other benefits as a result of the merger. There were all kinds of rumors regarding layoffs and reduction in
pay and benefits. Vindhya Pharma was a leading firm with operations spread across Asia and Europe.
SVS Pharmaceuticals had a strong hold in marketing and distribution in India, and so it was considered
to be a merger of equals. Amid all the confusion, the employees received a message that the CEO
would like to address them regarding the merger...
● How should the CEO or the CHRO proceed during the meeting? What should they say to the
employees?

Brief case discussion:

● Higher salaries, worse results

● The northern division of Gautam Appliances met every month to analyze its targets and the actual sales.
Shravan Kumar, a jovial and friendly manager who was respected by all the sales personnel, headed the
meeting. His suggestions and other contributions during the meetings always helped sales personnel
exceed their targets. He also gave a patient listening to employee problems and suggestions. During
one such review meeting, one of the sales executives, Pavan Kumar, raised the issue of the uniform
compensation system being implemented by the management. To Pavan Kumar’s surprise, the new
 system was demotivating the high performers. Employees’ salaries were higher now but the outcomes
were not the desired ones. Indeed, one top-tier employee was leaving…
● What was really going on and how to fix it?

Brief case discussion:

● A too rigid compensation system
● In a speech to the employees, the chairman of Praveen Metals said that to survive in the dynamic
market, they must be able to switch gears and perform differently in response to change. According to
him, traditional job titles and descriptions indicated a restricted set of work duties. Paying employees
according to these structured duties led to rigidity during times of change...
● How would you restructure or revisit employees’ compensation to meet the target?

How to align pay structure with the market

● The ONE truth
○ In today’s hyper-competitive business world, attracting and retaining top talent is crucial for an
organization’s success.
○ This has led to a growing need for companies to align their pay strategies with the market to
remain competitive.
○ Bottom line: Organizations that fail to offer competitive compensation packages risk losing their
top-performing employees to their peers.

Data and more data to inform the compensation strategy

● Market data is essential to competitively compensate employees for their experience and skills.
● Have access to accurate and up-to-date market data.
● Understanding current market trends and industry standards can help organizations make informed
decisions on base pay, bonus targets, and equity grants.
● It’s essential to ensure that your company has access to market-based pay data to make informed
decisions about compensation packages.

Preliminary advices –for dummies

1. Conduct a market analysis. Collect data on salaries and benefits offered by other companies in your
industry.
2. Use a benchmarking tool to compare your company’s pay data to data from other companies in your
industry.
3. Use a pay grade structure to assign different salaries to different jobs and ensure that all of your
employees are being paid fairly for their work.

Step #1. Define a clear, competitive pay structure

● A pay structure consists of defining pay grades and salary ranges.
● Pay grades are groups of equivalent jobs organized into levels of compensation and importance, or they
can be levels of pay for a specific job.
● A salary range specifies the minimum and maximum amount of pay an employer can pay for employees
within a pay grade.
How to implement the pay structure
● Employers can set each pay level within a pay structure according to internal and external factors, such
as performance, experience, skill, time at the company and market data.

Benefits of using a pay scale

● Control their spending: Know how much the firm spends on salaries and makes it easier to budget for
new employees.
● Provide fair compensation: Help companies provide pay equity, where jobs of equal value receive similar
compensation.
● Motivate employees because employees know there is a clear path for progression and an increased
salary.
● Decrease raise bias: The firm can offer raises to employees in a more fair, honest, unbiased way.
● A fair system seen and perceived as such by employees and candidates alike

Advantages

Beyond the data: lead vs meet vs lag the market

● There are three main compensation strategies:
○ Leading the market is when you pay employees more than the market rate.
○ Lagging the market is when you pay below it.
○ Meeting the market is when you pay your employees the going market rate.
● Advantages and disadvantages of a lead-the-market compensation strategy
○ Question for debate:
■ Are you willing to invest more in and pay your employees higher than the market? Pros
and cons
● Compete in recruiting. Establish yourself as the “employer of choice” within your market.
● Improve retention. Salary range lets your employees know that they won’t find a better salary elsewhere.
● Increase morale. It will make them feel like your company truly values them.
● Boost productivity. Employees are more motivated.

Bottom line:
● A lead-the-market compensation strategy comes with the expectation that employees are performing at
the best of their abilities.

Disadvantages:
● Puts pressure on staff to perform at a high level.
● Vulnerable to market volatility. Any unforeseen event can reduce your cash flow and put you in a bad
position financially.
● Need to closely monitor performance. Because of the monetary risk, you have to closely monitor
employee and monetary performance.

How to know if a lead-the-market strategy is right for your firm

 ● Scenario #1. You’re in a competitive, cutting-edge industry
○ If you operate in a cutting-edge industry that requires the brightest talent, you have to set the bar
high.
○ In order to keep up with innovation from your competition, you have to pay your employees
above the market rate. Otherwise, your competitors will successfully recruit the top performers
and you won’t be able to stay afloat.
○ WAR for talent
● Scenario #2. You want to attract the most experienced and qualified employees
○ Even if you’re not in the most fast-paced, cutting-edge industry, if you want to land the most
experienced and qualified employees out there, you will want to consider a lead-the-market
strategy.
■ But… consider the whole compensation package far beyond the salary.
● Scenario #3. You’re a large organization with financial resources
○ Larger organizations have stability and more wiggle room when it comes to finances, and can
choose a lead-the-market strategy with less risk than smaller companies.
● Scenario #4. You’re a profitable organization
○ If you are a highly profitable organization, no matter the size of your company, you may consider
a lead-the-market compensation strategy.
○ However, be extremely cautious and make sure that you
understand the risk you’re taking if you don’t have the
financial stability of a larger organization.
● You can use a combination of all compensation strategies to
remain competitive in recruiting but reduce some of the risks that
come with a lead-the-market strategy.
● Remaining flexible is important; you can shift between strategies
depending on the circumstance.
● You can adjust your compensation strategy to lead the market.

L7

Salary review and adjustment processes

Brief case:

Case: The high cost of low pay!

● Employee: I make $65K a year and I work hard. I believe I deserve a raise at $75K.
● Boss: Why do you feel this way?
● Employee: Based on the average salaries for this job title in the market, my years of experience, and my
performance, I believe a salary increase is reasonable.
● Boss: So sorry, we can’t afford to pay that much.

The employee felt frustrated and undervalued and quit five months later. The Job stays vacant for 3 months.
Team’s morale drops. Business losses add up to $60K.
Finally, the boss approves the new job posting at $75K and spends an additional $30K in recruiting and training
costs.

Case: A tempting salary increase –or not

As John’s performance has been great this year (“I have surpassed the targets and made it indeed!,” he says) so
has his performance review. Now he is to have the salary review meeting and expects to receive a 5% salary
increase, far above average. Surprisingly, he is offered a 8% increase –if he commits to the corporation for at
least five years. John knows what a tempting contract he has been proposed but is also aware that the
corporation is going through tough times and has an uncertain future. In fact, the firm has been recently
rumored to be bought... “What if we are bought in the following months and eventually get fired, proposed a
quite lower salary, or even the business closes down?,” he wonders. “It sounds a bit weird to be proposed an 8%
increase.”
If you were John, how would you proceed to make sure that your situation at the corporation will be good for
you whatever the circumstances. Would you ask for any specific contractual clauses to secure your position or
your future?

It’s talent, not the salary review, stupid!!:

● Attracting and retaining top talent is a critical priority for organizations.

● And when it comes to retaining your best employees, offering competitive salaries is one of the most
important factors to consider.
● However, it’s not just about offering a good salary, but also about ensuring that the salary review process
is conducted effectively.

Two different but intimately interrelated processes:

● Performance review.
● Salary review.

Clarifying concepts:

● A performance review, also known as a performance appraisal, is a meeting held with an employee to:
1. Discuss their performance and future development
within the company.
2. Determine whether goals have been met and to discuss
the future potential growth of an employee.
● A salary review goes a little deeper and is used to determine whether the pay an employee receives is
an accurate reflection of how they perform.
● A performance review focuses on an employee’s achievements and how they execute their tasks.
● A salary review focuses on whether this performance correlates with what they earn.

So, again, performance...and EQUITY (FAIRNESS). The better the performance review, the more chances to get
a salary increase → Meet the target (goals).

Factors determining the salary review: what the review covers:

● A review of roles and responsibilities.

● A performance assessment.
● Goal progression, achievements and expectations.
● A discussion on areas for improvement.
● The creation of new goals and achievements.

Annual and six-month reviews:

● Most companies choose to hold an annual salary review for employees, but many also conduct regular
six-month reviews.
● A six-month review offers a valuable preemptive opportunity to discuss an employee’s performance and
salary expectations.
● The main purpose of a six-month salary review is to clarify job requirements, monitor progress towards
goals, and identify any potential areas for improvement

The point of and business case for the six-month reviews:

● Is the employee performing as expected? Does their salary reflect their level of productivity and
contribution to overall business?
● In other words, it is an opportunity for employees to reflect on their performance and make any
necessary adjustments so that they are in line to achieve the goals of their annual performance review.
● Above all, the six-month review is also an opportunity to evaluate the performance of new employees.

The two faces of the same coin: performance and salary review:
 ● When you hire a new employee it is important to be clear about what this first review will entail.
● But ask yourself a question ( just to clarify expectations): Will it be a salary review with a potential pay
increase upon satisfactory completion of targets? Or will it be a less formal meeting to evaluate their
performance so far at the company?
● Make sure expectations are clearly communicated during the onboarding process to avoid
disappointment.

Why should HR leaders give importance to salary reviews?:

● It offers your employees the chance to receive compensation that matches their work performance.
● A salary review provides you with an opportunity to discuss an employee’s strengths and weaknesses in
line with the expectations of their role.
● Reviews can help you retain high-performing employees and engage those that are not performing as
expected - improve employee engagement, motivation, productivity and performance.

The point: salary review are part of employee’s development:

As performance reviews’ goals are improvement and learning, so should salary reviews’ goals,not just a simple
salary increase, stagnation, or decrease.

How to implement an effective salary review:

1. Be clear on your objectives and set clear top-down goals. This will help you manage expectations.
2. Undertake a regular salary analysis (competitive salary).
3. Make sure your method for calculating salaries aligns with your company’s mission, values and goals.
4. Define a salary review letter template to follow up your pay reviews.
5. Involve your employees at each stage of the process –this shows that you value and appreciate their
work.
6. Be consistent. Establish a salary review cycle for each employee and stick to it -implement it in your
continuous performance strategy.

Again, salary reviews are part of the performance reviews and strategy.

How to make it – Ideal salary review process step by step.

So, be it annually or not, be fair and transparent early on:

1. Define the Criteria for Salary Reviews:

● Define clear, objective, FAIR criteria to evaluate employees’ performance and salary.
● The criteria should be measurable and aligned with your company’s goals and objectives.
➢ Common criteria include job performance, skills development, teamwork, and leadership
abilities.

Preliminary steps: corporate alignment and budget constraints

● Check affordability – how much budget is available to increase salaries.

● Agree the scope – what we want to achieve (goals) and why helps align employees to strategy.
● Benchmark the roles – provides comfort that roles are like- for-like, more or less complex.
● Compare the market – understand salaries for role, experience and sector to guide decisions.
● Assess performance – confirm performance outcomes and ratings to allocate budget.

2. Establish a fair and transparent pay structure:

● Establish a fair and transparent pay structure. A clear and consistent compensation policy will help to
ensure that all employees receive fair pay based on their performance and experience.
● This can be achieved by conducting regular market research to benchmark salaries against other
organizations in your industry.
3. Develop a communication plan: openness and transparency:

● Communicate the salary review process and its outcomes to your employees clearly.
● A communication plan should include the process timeline, evaluation criteria, and the rationale behind
the final salary decisions.
● This will help employees understand how their performance was evaluated.

4. Conduct reviews regularly, not only annually:

● This will allow you to evaluate employees’ performance over a reasonable period and ensure that your
compensation policy remains competitive in the job market.
● Additionally, regular reviews will help employees understand their career growth prospects within the
company.

Pros of a salary review:

1. Reward your high performers

2. Increase staff retention
3. Ease talent attraction
4. Attract staff from your competition
5. Higher employee engagement
6. Perceived fairness
7. Provide a living wage
8. Support legislative compliance -e.g. minimum wage
9. Fewer hardship requests
10. Ensure you don’t overpay market rates for similar roles

Cons of a salary review:

1. Cost or affordability
2. High performers may make unrealistic demands
3. May identify some people and roles who are underpaid
4. Assessments of performance may be unfair or biased
5. Poor communication can do more harm than good
6. More salary may not mean more employee engagement
7. Headcount may need to be reduced to afford pay rises
8. It may reduce variations in pay based on experience and
qualifications

A (fair) salary to make a living:

Employees generally expect pay rises in line with or in excess of inflation to stay with an employer. If not, they
face declining living standards and quality of life.

Wrap up:

Just reward fairly and align rewards and high performance.

Do not let salary be your best employee’s demotivating factor.

Salary review meeting: agenda, tips, and advice:

● Salary review conversations can be really great and a win-win for both the employee and the company.
At the same time, they can also be the worst conversation you can have with an employee or your
manager.
● Employees want to know that they’re not only appreciated but that they’re valued by their manager and
company. The same goes for managers; they want to be able to pay their team competitively (or at the
very least fairly) in an effort to retain talented employees.
 ● While feelings shouldn’t be a major factor in these conversations, it’s easy for them to seep in, be it
excitement, pride, frustration, you name it

The role of the manager:

1. Understand that this is an emotionally charged conversation.

2. Set yourself up for success with consistent feedback during 1:1s
3. Understand your company policies and procedures
4. Do your homework. Review all of your past meeting notes, performance reviews, and goals.

Further tips on the context:

● A looming salary review conversation = a distracted and potentially nervous employee! Minimize the
time your team member feels this way and schedule it earlier in the day. Close to or right before lunch is
ideal – it gives your employee (and you!) the chance to get take a breather afterward.
● Pick a room that is soundproof and offers privacy.
● Make sure to schedule a follow up – especially if there were any questions left unanswered. Emotional
follow up.

L8

Further on salary adjustments. Salary fixing in incorporations and promotions.

A quick recap on the previous sessions:

● Remuneration policy reflects an organization’s culture.

● It’s a calling card for your company.
● Given current labour shortages, it also determines who wants to join or stay with your company.

How to make the adjustment:

Step 1: Determine the extent of the pay adjustment.

If the pay adjustment is an increase, you may have predetermined schedules for increases based on
percentage, company growth, or other factors. If you don’t have those schedules,

● Communicate with leadership.

● Study relevant historical pay increases.
● Obtain market data.

Step 2: Communicate with relevant leadership and supervisors.

● It’s extremely important that supervisors are aware of the nature of the pay adjustment, the amount, and
the reason.
● This is particularly the case if the pay adjustment is a decrease, since the employee may become upset
upon learning of the decrease

Step 3: Check for inequalities and legal compliance issues.

● To avoid legal challenges and be fair, pay adjustments must be in compliance with relevant laws.

Step 4: Communicate the change to the employee.

● Regardless of whether the pay adjustment is an increase or a decrease, have a communication plan in
place.
● For example, if the company is about to decrease pay for multiple employees, all employees should be
notified at the same time.
If you’re communicating a decrease, be sure to bring any necessary paperwork.

Step 5: Adjust payroll, including deductions.

● Make the change either manually or in your payroll software.

● If you have payroll software, it will be as easy as entering the new amount. However, if you’re doing it
manually, you’ll have to recalculate gross pay, deductions and contributions, and net pay.

Be it an increase or a decrease, look for transparency and EQUITY:

The first step was to make all salaries transparent.

Job interview: the recruiter’s perspective:

1. They have to like you.

2. They have to think you deserve it.
3. They have to justify it internally.
4. They have to find flexibility.

Job interview: the candidate’s perspective:

1. Help them understand why you deserve it.

2. Make it clear they can get you.
3. Understand their constraints.
4. Be prepared for tough questions.
5. Focus on the questioner’s intent, not on the question.
6. Focus on the value of the entire deal: responsibilities, location, travel, flexibility, growth and promotion...

How to handle employee requests for promotions or pay raises?

1. Prepare a policy

● Clear and consistent policy on how promotions and pay raises are determined and communicated.
● Criteria, process, frequency, and budget for these decisions, and be aligned with the organization’s
goals and values.
● Transparency and fairness.

2. Listen and acknowledge

● Listen attentively and respectfully, and acknowledge their contribution and aspirations.
● Ask them to provide specific examples of their achievements, skills, and goals.
● This will help you understand their perspective and motivation, and also prepare you for the next step.

3. Evaluate and respond

● Evaluate their request based on the policy, the data, and the feedback from their manager and peers
(360).
● Consider the market trends, the internal equity, and the organizational capacity.
● Respond to the employee with a clear and honest answer.
● Explain the rationale behind your decision.

4. Negotiate and agree.

● If the employee accepts your decision, you should thank them for their professionalism and commitment,
and finalize the details of the promotion or pay raise.
● If the employee disagrees or challenges your decision, you should remain calm and respectful, and try to
negotiate a mutually acceptable solution.
● You may offer alternative options, such as additional benefits, training, or recognition, or agree on a
timeline or a plan for revisiting the request in the future
5. Monitor and review.

● Monitor and review the outcomes of the promotion or pay raise decisions, and their impact on the
employee's performance, engagement, and satisfaction.
● Check in with the employee regularly, and provide ongoing feedback and support.
● Evaluate the effectiveness of your process, and make adjustments if needed, to ensure that they are fair
and aligned with the organization’s goals and values.