Chapter 1 - Class Notes

Remuneration policy and strategy

- need for the remuneration policy and strategy and systems to underpin business strategy has
never been greater
- organisations have had to down size, right size and so forth to enable them to compete in the
twenty first century
- well designed remuneration systems play a strategic role by promoting organisational success
in highly competitive markets
- some researchers have linked remuneration system design and organisational performance

Flexible reward practices

Total rewards
- once an organisation adopts a total rewards framework, the next step would be to offer
employees flexibility to choose from the different components included in the framework
- total reward framework allows for the design of different employee initiated reward profiles
- however this flexibility may not be practical for large organisations where thousands of reward
profiles may be initiated by employees
- one way to overcome this is to segment the workforce in which employees with similar needs
are grouped together
- reward profiles for different segments of employees are more manageable than thousands of
different individual reward profiles
- for most organisations, the cost associated with salaries, benefits and so on is the largest
expense on their income statement
- includes remuneration, benefits, work-life, performance and recognition, development and
career opportunities

Multidimensional construct of reward

- reward can mean different things to different people depending on contexts and situations

Elements of a reward system

1. Policies
-which provide guidelines on managing rewards

2. Practices or systems
- provide for financial and non-financial rewards and outcomes that can be either
performance or non- performance oriented

3. Processes
- concerned with rewards, for example job evaluations
 4. Procedures
- followed in order maintain the reward system and ensure that it operates efficiently and
flexibly

5. Reward criteria
- the bases on which organisations determine and distribute rewards

6. Reward strategy
- sets out what the organisation intends to do in the longer term
- informs employees of the direction the organisation wishes to take on reward
management as well as the type of rewards that are offered to support accomplishment
of the organisational strategy
- effective reward strategies positively influence employee behaviour by incorporating
extrinsic and intrinsic motivators
- total reward framework revolves from the organisation’s reward strategy
- total rewards - combination of all types of rewards including financial and non-financial
rewards indirect as well as direct, intrinsic and extrinsic, which are available to
employees

Remuneration strategy process

- vision
- mission
- strategic objectives
- functional strategies
- hr strategy

Industry growth rate and remuneration strategy

Embryonic
- less emphasis on salary, benefits and perks
- attention to share options and long term incentives
- stress on non-financial rewards

Growth
- continued emphasis on long term incentives with increasing attention to ways to promote short
term results

Mature
- most attention focused on keeping salary and perks competitive
- reduced concern for long term incentives
- bonuses oriented to productivity improvement
Ageing
- benefits and salary are king
- very little attention given to long term growth oriented incentives

The pay continuum

Stage 1
- pay is centrally managed, emphasis on internal equity
- salary increases may have moved from time based increases to merit pay increases

Stage 2
- pay is decentralised, emphasis more on external market
- variable pay for non-supervisory or non-sales employees with diminished role of merit pay
- benefits cost contained

Stage 3
- pay system communicates importance of performance
- team business unit or company performance measure introduced
- variable pay present in the form of gain sharing
- skills based pay and choice in benefits introduced

The planning process

- strategic plan should support the organisation’s objectives
- should include:
- base pay
- short and long term incentives
- fringe benefits
- growth opportunities
- recognition - accessing current remuneration system and developing a pay structure

- ultimate objective of the scheme are to ensure that the organisation attracts and retains the
right employees and that it motivates them to do those things that support the business plan
- recognition for outstanding performance is also an important part of the process

Steps

1. Identify business objectives

- use plan as a reference

2. Access the current remuneration system

- evaluate how well it supports the business objectives

3. Develop pay strategy

- close the gaps identified in step 2
Remuneration strategy
- 3 key themes emerge

1. Increase return on investment

2. Optimise cash generation
3. Grow knowledge and skills

Developing pay strategy

- include cash generation and knowledge leveraging
- develop equitable pay and pay grade solutions
- convert executives to full total package
- develop project bonus schemes
- review long-term incentive scheme
- develop a defensible allocation model for share options
- award performance related schemes

Key trends
- many organisations want to know what is happening nationally and sometimes intentionally
- nationally

Pay goes from…to

FROM TO

Traditional add on Total package

Fixed pay Variable pay

Little or no shareholding Bigger stake in the business

Board decides Non-executive remuneration committees

Board disclosure More disclosure

Performance management goes from…to

FROM TO

Activities Outputs or results

Executive bonus Workforce bonus

Work goes from…to

FROM TO

Job descriptions Flexible, adaptive

Guaranteed employment Role descriptions

Hierarchical structure Staying relevant, contract

Hierarchical structure Broader bands

Remuneration policy
- should cover the following:
- statement of intent
- purpose
- application and scope
- document control and versions
- links to performance management
- communication and the extent of transparency allowed

Remuneration committee guidelines

- establishment of the committee - it is established with the powers and duties
- it will report and derive its powers from the board of directors and conduct its business subject
to the board
- membership of the committee - will be appointed by the board and will continue to act until
they resign or are removed from office
- it will comprise not fewer than three serving directors of the organisation of whom the majority,
including the chairman will be non-executive directors

Instructions of the committee

- the committee will observe the following guidelines and procedures
- organisation will use all components of the remuneration system to leverage
performance
- in order to achieve balance in the remuneration package, the committee will determine
fixed pay
- employee may select benefits to sit his or her requirements
- comparison with peer companies may be conducted at annual intervals
- investigations and research to be conducted by the committee will allow sufficient time
for final recommendations to be submitted to the board
Power of the committee
- members will have full access to all financial information contained in the books and records of
the organisation
- committee may appoint external consultants for the purpose of obtaining salary survey
information and for peer review
- committee may consult with the organisation’s attorney and its auditors where necessary
- committee is also empowered to obtain assistance from the human resources executive or
department in obtaining the relevant information

Proceedings of the committee

- chairman will be responsible for the convening of the committee, maintaining minutes and all
copies of all reports and data which have been utilised by the committee in reaching its
decisions as well as the communication of decisions to the board, where applicable