Section 1.2: Reward Elements

1. Section 1.2: Reward Elements

2. Do reward systems influence an organisation’s success? • The amount paid and the way it is packaged can motivate, energize and direct employees’ behaviour. • Plays an important part in attracting and retaining qualified, high-performance workers. • Payroll costs comprise a large percentage of total costs and as such decrease profits.

3. Key concepts • The “employee rewards proposition” • Key remuneration and benefit processes in the employee rewards proposition: • Pay reward equation • Fixed and variable compensation • Incentive pay and line of sight • Benefit selection and design

4. Employee rewards proposition… • Remuneration and benefits can on its own no longer secure an appropriate talent pool for a high performance organisation. • An organisation aspiring to high performance status has to brand itself as an attractive proposition to both existing and prospective employees. • In branding itself it has to create what is generally referred to as an “employee rewards proposition”.

5. PRODUCTIVITY RESPONSIBILITY Leadership & Development Opportunities B E H A V I O U R GROWTH REWARDS PROPOSITION H I G H P E R F O R M A N C E FINANCIAL EMPLOYEE Freedom Through Responsibility Competitive & Flexible N O N M O N E T A R Y Open Minded M O N E T A R Y Empowering & Transparent Organization Culture Remuneration & Benefits Enterprising Spirit Employer of Choice Delivered Effectively Strength from Diversity Training & Development Opportunities Career Management People & Strategic Leadership Coaching & Mentoring EMPLOYEE REWARDSPROPOSITION COURTESY OF BAT SA

6. Pay Reward Equation Monetary Incentivisation Benefit Selection and Design Non Monetary Recognition R&B Communication & Training Decision Governance Infrastructure Selection Infrastructure Efficiency FROM BAT SA Remuneration Architecture Map MACROPROCESSES KRA’S Remuneration that is: R & B INTELLIGENCE INTERNAL STAKEHOLDERMANAGEMENT EXTERNAL STAKEHOLDER MANAGEMENT Competitive & Flexible Empowering & Transparent Effective Delivery

7. Pay Reward EquationKey Issues and Principles… Key Issues Key Principles • Line Managers with adequate remuneration information and appropriate decision support are best placed to make fair decisions with regards to the salaries of their staff. • In order to make this happen you however need: • - For certain tools to be in place and operational; • - For certain key role players to assume responsibility for certain decisions; • - For certain measures to be in place in order to monitor whether the desired outcomes are being achieved • Illustrated in model form, you need… • You cannot pay everyone the same salary, you therefore have to find a fair basis for differentiating the salaries of employees.

8. Pay Reward EquationMacro Model Actual vs. Target Salary Distribution Employee Perception of Salary Fairness Internal Equity Audit Checklist Measure Board Compensation Committee (BCC) Decides what the Overall Increase Budget is Guidance From HR Role Players Decisions Line Managers Grant Salary Increases to Individual Employees Salary Equity Model Tools Job Evaluation Salary Surveys and Market Anchors Performance Management

9. Pay Reward EquationPerformance Management The likely performance distributions curve in a high performance organisation Nearly There & Inadequate Solid Citizens Stars 15% - 25% 65% - 80% 5% -10%

10. Issues relating to traditional performance management… How many performance categories ? How do I reward my stars and stay within budget ? and then came the right question… What salary distribution am I targeting and in relation to which factors… 12% 10% 8% 6% 12% 4% 8% 2% 4% 0% 0%

11. Pay Reward EquationPerformance Management A 4-Point Performance Rating Scale… EXCEED • Outstanding Performance which has exceeded normal expectations by far. • “The Individual scored a hat trick of 3 goals, including a winning goal, and prevented a definite goal by the opposition.” • Good Performance which met expectations. • “The Individual made a valuable contribution to the team effort.” SUCCEED NEARLY THERE • Signs of below average performance which did not meet expectations • “The Individual had a very quiet match, but will be retained in the team because of his potential. Will however be dropped from the team if his performance does not improve.” • Performed well below normal expectations • “Scored an own goal and continually lost the ball to opponents. An opportunity has arisen for a new player to prove himself.” INADEQUATE

12. Ensuring Equity: Developing a Pay Policy Line 8 7 6 5 4 3 2 1 monthly salary (R000) PAY Line of Best Fit 40 80 120 160 200 240 280 320 Job Evaluation Points

13. Developing a Pay Policy Line Predicted Salary = R7,128 8 7 6 5 4 3 2 1 monthly salary (R000) Predicted Salary = R6,486 PAY Job Evaluation Points = 315 40 80 120 160 200 240 280 320 Job Evaluation Points

14. Pay Grade Structure 8 7 6 5 4 3 2 1 monthly salary (R000) PAY 100 150 200 250 300 350 Job Evaluation Points

15. Pay Reward EquationSalary Equity Model Understanding what a comparatio is….. • A comparatio is your salaryexpressed as a percentage of the reference market salary(market anchor) for your job grade: Salary X 100 Market anchor for job grade • Example: Market Anchor Salary R1000 R1100 R 1100 x 100 R 1000 = 110 Comparatio

16. Pay Reward EquationSalary Surveys & Market Anchors… What do you need from a Salary Survey in order to calculate Market Anchors Upper quartile, Median and Lower quartile values for each of your job grades Anticipated annual movement in each of the above Need strategy decision by company as to which pay line should be used as reference for market anchors

17. Market Anchor 100 Salary equity model… 140 Exceed Employee A 130 Comparatio 30% monthly premium for performance and skills contribution 125 Reward for exceptional skills Market 90th Percentile 115 110 100 Market Upper Quartile 95 90 Succeed 90 Nearly There Inadequate

18. Pay Reward EquationDetermining Who gets What Increase Does my % increase tell me something… Unfortunately not, as a matter of fact it can be very misleading… Example: The purchasing power of person B has increased with 20% more than the purchasing power of person A, yet when judged against the % increase on its own, it creates the perception of no differentiation between A and B

19. Pay Reward EquationMacro Model Target ProcessResults Actual vs. Target Salary Distribution Employee Perception of Salary Fairness Internal Equity Audit Checklist Measure Board Compensation Committee (BCC) Decides what the Overall Increase Budget is Guidance From HR Role Players Decisions Line Managers Grant Salary Increases to Individual Employees Salary Equity Model Tools Performance Management Job Evaluation Salary Surveys and Market Anchors

20. Pay Reward EquationTargeted Process Results • Employee Perception of Salary Fairness: • Measure through perception survey • Internal Equity Checklist: • Assessment of the comparatio of individual employees relative to the following criteria in order to determine whether a special adjustment could be considered for the employee: • Employees with exceed performance ratings falling outside the desired comparatio range for exceed performers: • No comparatio adjustments for employees: • With personal grades, OR • That have been in their current position for less than 12 months. • Comparatio adjustments can be considered for employees: • Outside the exceed comparatio range AND • Who received an exceed rating for the last three consecutive years. • Employees with succeed performance ratings falling outside the desired comparatio range for succeed performers: • No comparatio adjustments for employees: • With personal grades, OR • That have been in their current position for less than 12 months. • Comparatio adjustments can be considered for employees: • Outside the succeed comparatio range • There are two options for granting such special adjustments: • As individualised lag adjustments during the annual salary review • As an interim adjustment between salary reviews

21. Monetary Incentivisation & Non-Monetary RecognitionKey Issues and Principles… Key Issues Key Principles • How do you ensure that the hearts and minds of employees are focussed on delivering high company performance ? • How can you reinforce constructive employee behaviour in the company ? • Use a short term incentive arrangement to focus and inspire employee outputs which contribute to high company performance. • Use a Non-Monetary Recognition arrangement to reward constructive employee behaviour.

22. Monetary Incentivisation & Non-Monetary RecognitionShort Term Incentive Schemes… Business Imperatives for introducing a short term incentive scheme… • In the emerging world of work, business success is increasingly determined by team effort rather than individual effort. • Money can influence behaviour which in turn can influence main stream company results.

23. Monetary Incentivisation & Non-Monetary RecognitionShort Term Incentive Schemes… Key Design Criteria for short term incentive schemes… • Inclusiveness: • “Include everyone.” • Reward team results as opposed to individual results • Line of sight: • “Ensure that employees see a link between what is required of them and the incentive payments.” • Simplicity: • “Keep it simple.” • Incentives must become part of the daily business agenda • “Incentive targets and achievements against these targets must be common knowledge for employees and a source of daily inspiration for behaviour”

24. An Example…. Monetary Incentivisation & Non-Monetary RecognitionShort Term Incentive Schemes… Four Company and Functional Performance Levels Model Incentive Scheme Design Company Charter with KRA’s & MOS’s Bonusable Items for Incentive Payment Stretch Senior Management Target All Employees up to Senior Manage- ment Functional / Unit Charter with KRA’s & MOS’s Minimum + Inadequate Two Thirds Company One-Third

25. An Example…. Monetary Incentivisation & Non-Monetary RecognitionShort Term Incentive Schemes… • Annual Road Show • Provide feedback on past financial year results. • Communicate Company Charter for new year • Monthly Feedback Reports by Line Managers on both Company and applicable Functional Charter. • Half-year Status Report through MD Video Presentation. Communication - The Enabler of Success

26. weighting 30% 15% 15% 10% inadequate stretch minimum target 30% Monetary Incentivisation & Non-Monetary RecognitionShort Term Incentive Schemes… Monthly Feedback Report Template share productivity supply chain cash profit

27. Monetary Incentivisation & Non-Monetary RecognitionShort Term Incentive Schemes… Modern vs. Conventional Approach to Incentive Schemes Modern Approach Conventional Approach • Inclusive of All • Incentive Payment based on Company and Functional Team Performance ONLY • Line of sight between Company / Team Objectives and Individual Contributions created through Line Manager CentredCommunication Model (thus avoiding the complexities of individual incentive targets) • More exclusive and often limited to Management specific Functional Groupings (i.e. Sales Force) • Incentive Payments often (at least partially linked to Individual Incentive Targets, believing that the Individual Incentive Targets are required to create line of sight

28. Creating line of sight through annual incentive scheme…. Line of sight in objective reward 100% Annual incentive payment to senior management Bonusable objectives (5) Company performance rating company charter Line of sight objectives 67% Functional objectives functional charter Functional performance rating Annual incentive payment to all other employees 33% individual performance contract Individual objectives (key result areas) Individual performance rating Line of sight in objective setting Individual salary

29. Monetary Incentivisation & Non-Monetary RecognitionNon-Monetary Recognition • Employees that feel valued are likely to engage in constructive behaviours to the benefit of the company. • Such constructive behaviours can be facilitated by providing non-monetary recognition in one or more of the following ways: • Personalised Thank You Cards • Small Gifts / Vouchers to Express Gratitude • Achievement “Oscars” / Certificates

30. Benefit Selection and DesignDeciding on WhichBenefits Offer… • Defining open ended liabilities: • Any benefit where the cost of the benefit to the company is significantly or fully determined by factors outside the direct control of the company, is an open ended liability. • Examplesof open ended liability benefits: • Employee is given a fully paid and maintained company car to use for business and private purposes. • Company contributes 50% of and employee’s medical insurance premium. • The company pays the employee’s monthly electricity bill. • The other major problem usually associated with open ended liability benefits is the remuneration inequity it creates between same status employees….

31. Benefit Selection and DesignDeciding on WhichBenefits Offer… Electricity Benefit Values generally vary due to individual utilisation of benefits ? Size of total remuneration package value fluctuates due to actual benefit utilisation by employee Car Benefit Basic Salary The fluctuating benefit values due to differences in individual benefit utilization results in remuneration inequity between same status employees. Traditional remuneration package with open-ended liability benefits

32. Benefit Selection and DesignDeciding on WhichBenefits Offer… • Defined company contribution benefits…. • The acceptable alternative to open ended liability benefits • In a defined company contribution benefit the cost of the benefit to the • company is directly and fully governed by company decision making. Open ended liability examples… • Employee is given a fully paid and maintained company car to use for business and private purposes. • Company contributes 50% of and employee’s medical insurance premium. • The company pays the employee’s monthly electricity bill. Defined company contribution alternatives… • Car allowance of a particular value plus reimbursement of business related travel at a set rate per kilometre. • The company pays an allowance of a particular value towards the medical insurance premium of the individual. The allowance is reviewed during the annual salary review. • The employee is paid a fixed monthly allowance for electricity expenses which is reviewed during the annual salary review.

33. Benefit Selection and DesignDeciding on WhichBenefits Offer… Electricity Benefit Same value benefits to same status employees No fluctuation in size of total remuneration package value due to actual benefit utilisation by employee Car Benefit No fluctuation in benefit values due to differences in individual benefit utilization, results in remuneration equity between same status employees. Basic Salary Creates the platform for individual benefit choice on an equitable basis. Modern remuneration package with defined company contribution benefits

34. Benefit Selection and DesignDeciding on WhichBenefits Offer… • The starting point in deciding which benefit to offer is a benefit audit • In a benefit audit you: • List and briefly summarise the current benefit practices in your company. • Identify whether any of your current benefits practices are an open ended liability for your company. • Survey and summarise the benefit practices offered by your key competitors for talent (or a representative sample of such key competitors). • Identify and note any labour law or other regulatory provisions applicable to the benefits listed in the benefit audit. • Identify the desired scenario for your company on each of the benefits listed in the benefit audit. This should also include a desired position on benefits not offered by your company, although offered by at least some of your key competitors (as identified through the survey). • Identify the priority, timing, actions and resources required to achieve the desired scenarios for each benefit.

35. Main types of employee benefits • Pension schemes: generally regarded as most important • Personal security: enhance personal and family security regarding illness, health, accident or life assurance • Financial assistance: loans, housing schemes, relocation assistance, discounts on company goods and services • Personal needs: interface between work and domestic needs – holidays, other leave, child care, career breaks, retirement counselling, personal counselling, fitness and recreational facilities • Other benefits: improve standard of living – subsidised meals, clothing allowances, telephone costs, cellphones, credit card facilities • Intangible benefits: characteristics of organisation contribute to make it attractive and worthwhile place to work for

36. Taxation, flexible benefits, total remuneration • Most benefits taxable – exceptions pension schemes, medical to some extent • Flexible (cafeteria) schemes allow employees to decide within limits how to structure benefit package • Total remuneration based on principle of treating all aspects of pay and benefits as a whole – cost to company – value of each element to individual can be assessed to adjust package according to organisational and individual needs – competitiveness in market can also be considered.

37. Responsibility for reward • Trend to devolve more responsibility for pay decisions to line managers • Dangers: inconsistency between managers’ decisions, favouritism, prejudice, illogical distribution of rewards • Research has shown many managers tend not to differentiate between performance of individuals – most people clustered around midpoint • Must be briefed thoroughly on their responsibilities, the organisation’s pay policies, principles to be followed in conducting a review and how to interpret and apply pay review guidelines – the need to achieve equity and a reasonable degree of consistency across the organisation emphasised – should be given training and guidance

38. Communicating to employees • Reward systems send messages about the beliefs on what is important when valuing people in their roles: this is how we value your contribution, this is what we are paying for – transparency essential • Employees generally should understand: • The reward policies in setting pay levels, benefits, progressing pay • Pay structure – grades and pay ranges, how structure managed • Benefit structure – range of benefits, details of pension scheme and other major benefits • Methods of grading and re-grading jobs – job evaluation scheme and how it operates

39. Communicating to employees … • Employees generally should understand: • Pay progression – how pay progresses in pay structure, how pay decisions affecting employees collectively and individually are made • Pay-for-performance schemes – how individual, team and organisation-wide schemes work and how employees can benefit from them • Pay for skill or competence - how skill- or competence-based schemes work, the aims of the organisation in using them and how employees can benefit from them • Performance management – how processes operate and parts played by managers and employees • Reward developments and initiatives – details of any changes to the reward system, reasons for changes and how employees affected

40. Communicating to employees … • Individual employees should know and understand: • Their job grade an how it was determined • The basis upon which their present rate of pay has been determined • The pay opportunities available to them – the scope in their grade for pay progression, basis of link between pay and performance, acquisition and effective use of skills and competence in career development – actions and behaviour expected of them for their pay to progress • Performance management – how performance reviewed – their part in agreeing to objectives and formulating personal developmental and performance improvement plans • Value of employee benefits they receive – level of total remuneration, including pension, medical, etc. • Appeals and grievances – how they can appeal against grading and pay decisions or take up a grievance regarding any aspect of remuneration

41. Grade and pay structures • Provide framework for managing pay • Although grade structures increasingly used a part of non-financial reward processes – mapping career paths without direct reference to financial implications • Usual outcome of formal evaluation programme new/revised grade structure – with market rate analysis provides basis for designing and managing pay structures

42. Grade structures • A grade structure consists of a sequence/-hierarchy of grades/bands/levels into which groups of jobs that are broadly comparable in size are placed. • May be a single structure with sequence of narrow grades (often 8 – 12) or relatively few broad bands (often 4 - 5 ) • May consists of number of career/job families (grouping jobs with similar characteristics), each divided into 6 – 8 levels

43. Definition of grades, bands or levels • By means of range of job evaluation points – jobs allocated to grade/band/level if points fall within range/bracket of points • In words describing the characteristics of the work carried out in the jobs that are positioned in each grade/level – these definitions set out key activities and competencies/knowledge and skills required at different points in the hierarchy • By reference to benchmark jobs/roles that have already been placed in the grade/band/job family level

44. Pay structures • Pay structures provide framework for managing pay • Grade structure becomes pay structure when pay ranges/brackets are defined for each grade/band/level or when grades are attached to pay spine • Some broad banded structures, reference points and pay zones are placed within the bands, these define the range of pay for jobs allocated to each band • May be single structure for whole organisation or one for staff another for manual workers or directors may be treated separately

45. Types of pay structures • Two main types: • Graded, broad banded, family structures: pay ranges/scales for jobs grouped into grades/bands/job family levels – define different levels of pay for jobs/groups of jobs by reference to their relative internal value determined by job evaluation, external relativities established by market rate surveys and where relevant negotiated rates for jobs – also provide scope for pay progression linked to performance, competence, contribution or service • Pay spines: hierarchy of pay/spinal column points between which are pay increments and to which grades are attached

46. Rationale for grade and pay structures • Provide logically designed framework within which an organisation’s pay policies can be implemented • Enable organisation to determine where jobs should be placed in a hierarchy, define pay levels and the scope of pay progression, provide basis upon which relativities can be managed, equitable pay achieved and monitoring and controlling the implementation of pay practices can take place • Medium through which the organisation can communicate career and pay opportunities available

47. Criteria for grade and pay structures • Be appropriate to culture, characteristics and needs of the organisation and its employees • Facilitate the management of relativities and achievement of equity, fairness, consistency and transparency in managing grading and pay • Be capable of adapting to pressures arising from market rate changes and skill shortages • Facilitate operational flexibility and continuous development • Provide scope for rewarding performance, contribution and increases in skills and competence • Clarify reward, lateral development and career opportunities • Be constructed logically and clearly so that basis of operation can be communicated to employees • Enable organisation to exercise control over implementation of pay policies and budgets

48. Types of grade and pay structure • Single or narrow graded structures: consists of a sequence of job grades into which jobs of broadly equivalent value are placed – pay range attached to each grade • Maximum of each range typically 20% - 50% above minimum • Also described as % of midpoint • Midpoint often reference point/target salary, rate for fully competent employee – usually aligned to market rate in accordance with organisation’s policies (called ‘market stance’) • Pay ranges provide scope for pay progression usually related to performance, competence/contribution • May be 8/more grades in structure • Grades may be defined by job evaluation in point terms, grade definitions or jobs slotted into grades

49. Single or narrow graded structures … • Differentials between pay ranges typically around 20% - usually overlap between ranges (can be as high as 50%) • Overlap provides flexibility – highly experienced person at top of range may contribute more than one that is still learning at bottom of next higher grade • ‘midpoint management’ – techniques analyse and control pay policies by comparing actual pay with midpoint which is regarded as policy pay level – ‘comparatios’ can be used to asses the relationship between actual and policy rates of pay as a % - if coincide comparatio = 100%

50. Advantages of single or narrow graded structures • Provide framework for managing relativities and for ensuring equity • All jobs in single structure – not divisive (criticism against job family structures) • Enable process of fixing rates of pay and pay progression practices to be controlled • Easy to manage and explain to employees