Matters Column

Balancing the cost and value of employee remuneration

August 10, 2018
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Last month, we wrote about a number of practices to attract, keep and motivate employees. The article had some terms currently used to describe practices that employers use to manage their hiring and retention objectives. These were generally focused on processes. The term remuneration is not one that is frequently used, as it is a bit old-fashioned, but it really covers the full range of tangible matters that employees generally expect when they consider why they work for someone. It is a trade of their services to the organization for what the organization gives them. It comes in many forms. We think first in terms of pay, then perhaps benefits and maybe even consider certain kinds of “perks.”

Even within the three categories mentioned above, the forms used to reward employees for their work has multiple ways that the value is received by the employee. The mechanisms created or used vary tremendously in terms of amounts, format/plans, method of delivery, size and culture of the organization. The one key element that crosses all aspects of these reward systems is that they are a cost to the organization. So, when you consider the cost of almost any product or service, you weigh the value received. Sometimes that is pretty clear, other times not so much.

Unless the purchase is for emotional reasons, we usually go through some kind of process that helps us judge the relationship between cost and value. Sometimes, this is a more formal process than other times. However, in the case of buying employee services, it behooves us to get a strong handle on the value received for the cost. How do we do this? We start by identifying what components will be in our remuneration package. We also have one other little matter to consider: How do the people who are selling their services view the components of our package compared to their willingness to share their service? Getting the right alignment between the employer objectives and the employee objectives is best done by applying many of the tools of the trade.

Applying the tools

The first step in the process is to establish the nature of the job or jobs that you will be asking employees to do. This generally covers what they will be responsible for, what knowledge and experience are required to do the work effectively and what impact the job has on the goals or objectives of the organization. You also may consider additional factors, such as any leadership responsibilities or working conditions or latitude they may apply to certain procedures or processes. Once you’ve captured this (it may be in a formal job description), for each job under consideration, it is prudent to “stack up” the jobs, deciding which job is most important to the organization. There are a number of ways to determine the relative worth of a group of jobs. Some are fairly simple and others are more complex. To a certain degree, it is a function of how many positions are under consideration and the complexity of the jobs. In any case, establishing the proper relationships of the jobs is very important, as it eventually leads to decisions about value and remuneration. The process is referred to as establishing “internal equity.”

Another critical aspect of the process is determining the “external equity” for the position. This is basically how the position is being valued by others in the labor market. Knowing this value is fairly important to both attract and retain the employees who will be doing this work. It should be noted that getting a clear understanding of the external market in many situations may not be easy or absolute and varies from job to job and area to area. This applies to both the employer and the employee. They both want to know what is the proper or fair rate for the position so they can make the necessary decisions.

The next step is then to determine the right balance between the internal equity structure and the external labor market. It should be noted experience shows that internal relationships are the most sensitive, so getting those relationships correct needs to be a priority. Employees know the other jobs in the organization quite well and can make reasonable judgments regarding relative worth. As we’ve said, knowing that outside market is more difficult.

Before you actually put a number to the various positions, it’s time to give considerations to all the components of remuneration that are to be utilized. You also need to know some of the regulations that may come into play so that you don’t end up with legal violations or missed opportunities to maximize the dollars applied to the various options.

When we started discussing the job content and the associated hierarchy, our initial focus was to capture the elements of the job as a foundation for decision-making. To make good decisions regarding the other elements of remuneration, it would be beneficial to capture all the options on a list. Constructing the benefits list may be a little bit of effort to assure that all the pieces to be considered are captured, but it will be worth the effort. It will allow the employer to make rational decisions on what and why provisions should be considered.

Perks, the other form of remuneration, are often overlooked but may have a disproportionate impact on perceived value for cost expended. Things like specialized work schedules or telecommuting may be especially valuable to family situations and cost very little. A car or computers and phones that can be used for personal use may be much more beneficial than the actual dollar cost, as the employer may be able to make more economical arrangements.

Working the remuneration components

No two organizations are alike. So, putting all of the components together in a program that aligns with the achievement of your organization objectives can be instrumental in constructing a remuneration program that works for both employer and employee. Keep in mind that such an effective program requires thought and planning. It just doesn’t happen. When you address the direct pay aspect of remuneration, it may be prudent to think in terms of supplemental options like bonuses or incentives tied to personal, departmental or company goal achievement. When you construct your benefits list, consider the culture and employee pool and utilize those things that make sense and where you can control your costs, such as defined contribution plans, tuition or college loan reimbursement plans. Prudent design can hold employees much more effectively than another $1,000 per year in pay. These same processes can apply to perks, as well. All the components of remuneration have variations that can create value and may achieve more than just more money on the table. To maximize the impact requires more than business as usual. It requires strategy, analysis, creativity, planning and prudent implementation. But the results will be worth it.

Ardon Schambers is president and principal at P3HR Consulting & Services.

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