RESEARCH AND PRACTICE
IN HUMAN RESOURCE MANAGEMENT

Highlight, copy & paste to cite:

Singh, D., (1996). Special Report: Benchmarking the Compensation System for Executive Staff, Research and Practice in Human Resource Management, 4(1), 115-124.

Special Report: Benchmarking the Compensation System for Executive Staff

Darshan Singh

Abstract

The present study looks at a sample of 122 social workers in Singapore and examines whether occupational stress and negative life events are related to negative outcomes such as job dissatisifaction, dissatisfaction with the leader, job burnout, and anxiety and illnesses. We also examine the moderating effect of Type A personality on the relationships between stress and the negative outcomes. The study found that both occupational stress and negative life events are related to negative outcomes, although the impact made by occupational stress is greater. Type A personality moderates the relationships between stress and job satisfaction, and stress and anxiety and illnesses. Implications are also drawn for the management of social work organisations.

Introduction

Compensation is one of the most important human resource management functions in an organisation. For many organisations, compensation is the biggest single cost of doing business. An organisation’s compensation system can help to reinforce the key corporate values, and facilitate the achievement of organisational objectives. By rewarding performance, an organisation’s compensation policies and practices can reinforce employee behaviour that realises its business objectives.

In Singapore, the tight labour market and rapid technological changes have created demands which have raised the cost of salaried staff, and have resulted in a greater mobility of labour. The social attitudes of employees have also changed, and people increasingly expect justification for their salary level. The challenge for management is to improve the effectiveness and efficiency of their compensation system, so that it would help the organisation attract, motivate and retain the right people to achieve the orgarlisation’s objectives; improve the company’s competitiveness by managing labour costs more efficiently, and fleet the needs of employees by convincing them that the system is equitable.

It was with this in mind that the Singapore Institute of Human Resource Management (SIHRM) teamed up with the Fuji Xerox - PSB Benchmarking Centre to conduct a benchmarking study on the compensation system. The objective was to provide the benchmarking group of companies in the study with an opportunity to learn from the practices adopted by the leading companies in developing and implementing their compensation systems. The findings from the study could help the benchrnarking group of companies to improve their compensation systems. These companies decided that the study should focus on the compensation system for executive staff. The term “executive staff” in the study refers to managers, professionals and executives in a company.

Approach Adopted for the Study

Benchmarking is the search for best practices that will lead to superior performance of a company (Camp, 1989). The study adopted the proven benchmarking process used by the Xerox Corporation in the United States. This process consists of four phases (Camp, 1989). In each of these phases, there are action items that need to be accomplished. The first two phases, which are described below, are the most important in the benchmarking process.

a. Planning Phase

In this phase the objective is to develop a plan for conducting the benchmarking exercise. It is especially important that attention be devoted to this phase because the investigation will depend to a large degree on how well this phase is conducted. Some of the issues that have to be addressed include:

b. Analysis Phase

The analysis of the data collected serves to provide information on the other companies strengths and to allow for a comparison with the company’s own performance. The major questions in this phase are:

The Xerox experience indicates that if these two phases are done thoroughly, then benchmarking stands the greatest chance of success in the next two phases which deal with implementation. The third phase which is the Integration phase, involves communicating benchmarking findings to management, gaining their acceptance, and revising performance goals. The fourth phase, which is the Action phase, involves implementing recommended practices and monitoring their progress. These two implementation phases can only be accomplished if the first two phases of the benchmarking process are completed effectively. Hence, the focus of the study was on the first two phases.

Benchmarking Group of Companies

Companies which have participated in PSB’s benchmarking workshops and/or were members of the SIHRM were invited to participate in the study. Seven companies agreed to participate in the study. These are:

The first step taken in the study was to have each company in the group prepare a brief on the existing compensation system for executive staff in their organisation. The brief covered the following areas:-

The preparation of the brief by companies had a dual purpose. One was to ensure that group members knew their current compensation processes and carried out an assessment of their strengths and weaknesses. The second aim was to have the benchmarking study directly address the chief concerns of the group by incorporating these concerns into the study. This would help to ensure that the study remained relevant to needs of the group members.

Compensation for executive staff is an important consideration in these companies, as they spend, on average, about 20 per cent of their operating expenses on executive compensation. The companies agreed that the scope of study should cover the following stages of the compensation system:-

Selection of Benchmark Companies

The next step taken was to identify a group of benchmark companies. The criteria adopted in the selection of these companies were developed around firstly the nature of the study, which in this case, pertain to companies with a good compensation system for executive staff. Secondly, the characteristics of the benchmarking group of companies, as the benchmark companies had to be comparable companies. Hence, it was decided that the following criteria be used for the selection:

Based on the criteria, a number of companies were invited to participate in the study. The following five companies agreed to participate in the study:

Data Collection

Information about the compensation system for executive staff in both the benchmarking group of companies and the benchmark companies was gathered primarily through the use of a benchmarking questionnaire developed for the study. A draft of the questionnaire was first sent to the benchmarking group for modification and comments. Subsequently, the finalised questionnaire was prepared and forwarded to the benchmarking group taking account of the feedback from members on the draft. The questionnaires were also sent to the five benchmark companies for completion. All completed questionnaires were then returned by the companies to PSB for compilation. The responses from the companies were summarised and tabulated. These summary tables were then circulated to all participating companies.

While analysing the responses from companies, it was recognised that there was a need to get more specific information or seek clarifications from certain companies on their practices. As a follow-up, the study team approached these companies, and conducted telephone or face-to-face interviews with the HR professionals in these organisations.

Findings of the Study

Adoption of Compensation Philosophy/Policy

Except for two companies, all the participating companies in the study have a philosophy/policy to guide their compensation system. The most common objectives of the policy in these companies are to:

The compensation policy in the benchmark companies that have international operations is locally-driven. Under this approach, the local entity is often required to work within a broad HR framework set by Corporate HQ This is necessary to ensure that the entity’s approach is consistent with the overall corporate objectives. For instance, one benchmark company has a locally-driven policy formulated within the framework of a world-wide broad policy, based on the HR mission of the organisation. The HR manager of each company entity in this organisation is empowered to develop/revise the compensation system, and the authority for approving such changes rests with the HR Director of the particular region.

In fact, the HR Divisions or Departments in most of the benchmark companies studied have been empowered to develop/revise the compensation system. They do not involve the top management in these areas of work. This situation is different from that in most of the benchmarking group of companies where top management is also involved in developing/revising the compensation system. In the benchmark companies, top management is involved only at the approval stage.

Use of Job Evaluation Systems

Job evaluation is a systematic method of determining a job’s worth to the organisation in relation to other jobs. It is concerned with “how big” or “how small” a job is, The aim is to ensure that jobs of different sizes are paid proportionately different salaries or different total cash compensation (i.e. salary plus cash bonus or incentive). This system helps to establish internal equity and importance of jobs to the organisation.

Those benchmark companies and benchmarking group companies that conduct job evaluation have adopted a proven method of evaluating jobs that they consider effective within the limits of subjective judgment and organisational requirements. Three benchmark companies and two benchmarking group companies, have adopted the Hay Group method of job evaluation. For instance, one benchmark company conducts job evaluation through their yearly panel meetings, and reviews all new jobs and jobs that have been restructured. The company has two job evaluation panels. Panel A comprises of the MD/CEO who evaluate jobs of the direct reports (i.e. heads of department). Panel B evaluates jobs below the head of department level. It comprises of at least 4 members, one of whom is a Hay consultant. The HR manager sits in the two panels, and is chairman of Panel B.

In order to keep the job evaluation system robust, another benchmark company updates the system by reviewing 20% of the jobs annually. Since the company deploys staff to 40 different sites and has more than 1000 different jobs, it has found the manual way of reviewing and evaluating jobs very tedious and time consuming. The company is testing a computerised job evaluation system that can cut down on the use of manpower and time. When reviewing jobs using this system, managers are required to answer questionnaires designed by consultants. The responses to these questionnaires are then keyed into a computer which has software that is capable of using these responses to carry out a job evaluation exercise.

Determining the Salary Ranges

While job evaluation determines the relative worth of each job in the organisation, obtaining market information on salaries and comparing the organisation’s salaries to those for similar jobs in the other organisations make it possible to assign appropriate salary ranges to each job. The common practice of the participating companies is to make use of findings of wage and salary surveys to develop/update salary ranges. For instance, one benchmark company updates the salary ranges annually in November after receiving the Hay Executive Survey Report in September. This report is also used as a basis by another benchmark company to develop/update salary ranges. A third benchmark company, which has adopted a modified Hay system of job evaluation, makes use of various surveys done by consultancy firms and leading companies within their industry to determine the average market rates for benchmark jobs. These rates are used to derive the midpoints for the salary ranges.

One of the benchmark companies pays a lot of emphasis to the market rates for jobs to support its compensation policy objective which is to be competitive in the compensation packages. The company does not consider the internal relativity of salaries important, and hence does not conduct job evaluation. The salaries for all jobs are based on market rates. The company, which regards itself as a “good paymaster”, believes in paying staff such that when staff compare salaries externally, they are unlikely to move to other firms because of salary. To implement this system effectively, the company recognises that it needs to tap relevant and timely information on market rates. As in the case of many other companies, the company obtains information from various published surveys. However, it feels that these surveys are often outdated. Hence, the company also gathers specific and timely information on the industry salary practices through its “network”. This “network” comprises of a group of about 10 companies, and meetings are held regularly within this group. The information compiled by this group is then sent to all participating companies.

The most common sources of market information on salaries tapped by the benchmark companies are:-

The benchmark companies that conduct their own surveys or participate in surveys conducted by industry networks rated them highly in terms of the reliability of the data gathered, timeliness of the data, cost effectiveness, and the survey sample being specific to their industry. These surveys are often done formally involving the participation of comparable companies within the same industry. As for information obtained from market surveys done by consultancy firms and other organisations, most of the benchmark companies rated them good in terms of reliability of data, and the survey sample reflecting overa]l market trend.

As for the time taken to close the gap between own salary levels and that of the industry benchmark, most of the benchmark companies stated that it often takes about 1 to 2 years. However, one benchmark company which places a lot of emphasis on market rates, stated that immediate adjustments would be made if there is a variance. In the case of one benchrnarking group company, immediate market adjustments are made only for selected, high performing individuals. Immediate adjustment in this company refers to adjustment within a month after survey results show a gap between what the company is paying and what other companies are offering. This is especially important for key positions and “fastmoving” jobs, and high performers. The company recognises that it will lose these employees to competitors if it does not act fast. For certain jobs and non-performers, the company will not try to catch up with the market median. Generally, the company will make salary adjustments at the year-end salary reviews, except for above cases.

In order to determine an incumbent’s salary positioning in the salary range, the DELPHI method is used by one company in the benchmarking group. This method seeks the collective judgment of several knowledgeable people within the organisation to arrive at a conclusion. A panel of senior managers will put values to a position, taking into consideration various factors such as market data, the performance of the individual, the existing salary of the individual, and the salary of others in similar positions. This exercise is done on an annual basis and the outcome is moderated before being finalised.

Use of Performance-linked Incentives

All the participating companies in the study have put in place variable bonus/profit sharing schemes in their compensation system. Many of these conipanies also make use of performance bonuses to motivate executive staff whose salaries are close to or at the maximum of their salary range.

Implementation of the Compensation System

In the benchmark companies, the subjectivity of a performance appraisal system is not considered a major concern when linking performance to rewards. These companies have found ways of overcoming the subjectivity of the appraisal system. For instance, instead of using the traditional performance appraisal system which involves a high degree of subjectivity, one company has adopted a performance management system. The difference between the two is that performance management employs more measurable factors. Employees are assessed on their ability to meet the “key results” (i.e. quantifiable targets/objectives). The company is currently applying this system to staff occupying higher-level positions. The performance appraisal system is still used for staff at lower levels, but the company has plans to extend the performance management system to cover these employees as well. Another benchmark company has a very well-defined written set of standards for all jobs. These standards ensure consistency of service throughout the organisation. Employees who meet the standard get the same amount of increment. Those who perform below the expected standard are given counselling and training. In cases where standards need to be raised, proposals will be put up to the Executive Committee for discussion and approval. Subsequently, new standards are implemented, and training provided to help staff meet them.

The leading companies tend to make use of employee orientation programmes and meetings/briefings as major channels to communicate and share information with executives on matters relating to their compensation system, such as the philosophy/policy of compensation, and the system for developing pay for performance. practices.

Besides communicating with the executives on the compensation system for them, four of the participating companies gather feedback for improvement from executives on compensation-related matters through an employee satisfaction survey. In one company, the survey is conducted annually and covers all employees. The questions in the survey covers various aspects such as job satisfaction, management behavior, communication and the work environment. Specific questions pertaining to compensation such as whether the employee perceives that they are being paid fairly based on their performance of the work they do, and whether they are aware how their pay is determined, are included in the survey. The survey results are discussed at the meeting of the Executive Committee which comprises the Managing Director and General Managers (GMs). The GM will discuss follow- up actions with the managers and executives in their respective departments, and work on selected areas for improvement.

Auditing and Review of the Compensation System

One participating company reported that the compensation system was continually fine-tuned to take into account new practices in the field and the organisational requirements. An example of a new practice in the field would be the introduction of incentive schemes targeted at a specific group of executives. However, most of the other participating companies stated that these evaluations take place at periodic intervals such as once a year or once every 2 to 3 years.

Performance Indicators Related to the Executive Compensation System

Companies participating in the study were asked to provide data on selected performance measures related to the executive compensation system. Table 1 shows the average performance of the benchmarking group vis-à-vis the leading benchmark company on the measures. Though the companies were not able to provide data on some of the measures, a few conclusions can be drawn based on the data gathered.

In the leading benchmark companies, the key structural aspects of their compensation system for executive staff are well-maintained and deployed. These aspects need to be dynamic in line with changing requirements, and have to be reviewed constantly. For instance, since jobs change frequently, job descriptions have to be rewritten. All the executive jobs in two benchmark companies, have formal, current job descriptions. One of these companies has in addition evaluated and levelled all executive jobs.

Another way of looking at the vitality of the compensation system is to approach it from an exception standpoint. An example of these exceptions are the salary range exceptions, commonly referred to as “red circles”. In the leading benchmark company, 2 per cent of the executive staff had salaries which exceeded the maximum for their grade, compared to an average of 2.36 per cent for the benchrnarking group.

As one of the main objectives of the compensation system is to attract the desired mix of employees, companies were asked to provide data on the percentage of candidates accepting the company’s job offers for executive staff. There was a 7% performance gap between the average performance of companies in the benchmarking group on this measure and the leading benchmark companies where 100% of the candidates accepted the organisation’s job offers.

Since the executive compensation system is also intended to help retain the right people to achieve company’s objectives, data was also gathered on the average annual turnover rate for executive staff in the companies. The turnover rate in the leading benchmark company was a low 1%, compared to an average of 9.7 per cent for the benchmarking group. Furthermore, the leading benchmark companies estimated that about 5% of their executive staff who resigned indicated that they were dissatisfied with their salary, compared to the 20% average for the benchmarking group.

Table 1
Performance of the Benchmarking Group vis-à-vis the Leading Benchmark Company
Performance Measures Average Performance of Benchmarking Group of Companies Performance of Leading Benchmark Company Gap1 (Difference)
1. Percentage of candidates accepting company’s job offers for executive staff 93% 100% 7%
2. Percentage of executive jobs having formal current job descriptions 70% 100% 30%
3. Percentage of executive jobs which have been evaluated and levelled 92% 100% 8%
4. Percentage of executive staff that has salaries which exceed the maximum for their grade 2.36% 2% -18%
5. Average annual turnover rate for executive staff 9.7% 1% -870%
6. Estimated % of executive staff who resigned that were dissatisfied with their salary 20% 5% -300%

Note: 1 Gap = (Benchmark Performance. - Av. Performance of Group) ÷ Benchmark Performance

Conclusion

The study has found that though some consistency was seen in what the leading companies were doing, specific differences also exist in their approaches. Compensating employees involves an element of human judgment. The leading companies studied have introduced systematic approaches which ensure that the degree of subjectivity is kept to a minimum and that the goals of attracting, retaining and motivating employees are more likely to be achieved. They have put in place systems that are able to meet the reasonable needs of the employees as well as mesh with the philosophy of the organisation and its ability to pay.

References

Camp, Robert C. (1989). Bench marking: The search for industry best practices that lead to superior performance. ASQC Industry Press, Milwaukee, Wisconsin; Quality Resources, New York.