The seven deadly sins of compensation: are bonuses a waste of money?
There’s a chill in the air as the ‘comp season’ descends upon us once again.
Most organisations are probably now already working on planning budgets, processing market data and kicking off the compensation review season but, in his best-selling book, ‘Bringing Out the Best in People,’ Aubrey Daniels said: “If you think of the bonus season as a way to make up for sins throughout the year, then don’t waste your money.”
This article looks at the seven deadly sins of the compensation season, shares some of the common pitfalls when managing the compensation process, and offers some sage advice for this crucial time of the year.
Sin 1 – Too much focus on process not outputs
The compensation cycle has become an event-driven activity that, from a time management perspective, is all-consuming. In HR and reward we are often trapped in administrative activities, bogged down chasing spreadsheets, corralling data, identifying and dealing with exception populations and, as a result, are often too busy to fully contribute strategically and therefore miss the opportunity to add real business value.
Even from a process management perspective our approach can be lacklustre; dusting off last year’s process, rather than considering what the key business imperatives are for the coming year, or working with complex processes that have evolved historically with workarounds which are often just sticking plasters that don’t address real compelling issues.
Sin 2 – A one-size-fits-all approach
As organisations become more complex & global and our employee base more diverse, it is increasingly apparent that a one-size-fits-all approach will not work for reward.
It is a delicate balance between maintaining a consistent approach to your reward philosophy whilst meeting the needs of different employees and jurisdictions. Your overarching reward philosophy needs to be strong, but allow for segmentation to meet varying employee needs - and this should extend to the compensation review itself.
Move away from an approach that simply ends up allocating the majority of your pay budgets to average performers
With continuing constrained wage growth it is easy to fall into the trap of weak pay differentiation when allocating pay rewards – sometimes known as the 'peanut butter approach'. If you really want to optimise compensation spend, you need to move away from a bell curve approach that simply ends up allocating the majority of your pay budgets to average performers, and instead to one that recognises your key talent.
Sin 3 – Too much focus on budget size and not how it is spent
The budget planning and modelling phase of the compensation review can actually take longer and have more deliberation applied than the allocation phase.
Whilst there are many factors to take into consideration (The CIPD annual reward management survey from 2010 lists the key influences on the size of pay review as: Ability to pay; Inflation; Movement in market pay rates; Recruitment and retention issues; The ‘going rate’ of pay awards elsewhere; Level of government funding/pay guidelines; Union/staff pressures) there is often more focus on budget size than how it is spent.
It is easy to fall into the trap of treating the process as an expense management process rather than an opportunity to recognise your key talent, or address compelling business outcomes.
Sin 4 – Poor data readiness
At a recent client event focusing on business analytics, a surprising revelation was how the annual compensation review has become the key compelling event that drives employee data accuracy annually.
Managing data can be the most time-consuming part of any review season
Obviously with every employee normally touched during the review in some way - and the resulting impact on pay - it's key to get it right. But managing data can be the most time-consuming part of any review season with a significant proportion of time spent gathering, corralling and interpreting data. Some of the key issues faced are:
- The ability to access and calibrate all the data required
- The accuracy of employee data, particularly for pro-ration calculations
- Sharing data securely
- Key man dependency on spreadsheets and data sources
Sin 5 – Lack of risk assessment of compensation process
After the financial crisis we have seen more focus on properly addressing risk assessment as it applies to reward, with effort focused on risk-aligned compensation allocation and reward governance.
Addressing risk does not always extend to the actual compensation review process. With nearly three quarters of companies still using spreadsheets at some point in their review cycle, a key concern has to be data security. There is also significant risk in data integrity.
Over the years working with companies on their review processes, I have heard some horror stories of wrong awards being communicated to employees - with some potentially litigious outcomes.
Sin 6 – Lack of manager empowerment
In surveys identifying areas of reward risk, often cited is poor line management capability to manage performance and reward messaging.
What we should be focusing on is an effective transfer of process ownership from HR to line managers
Concern is often expressed that allowing the line manager’s discretion in allocating the budget may be at the expense of consistency of approach. There is definitely a lack of trust prevailing.
What we should be focusing on is an effective transfer of process ownership from HR to line managers, empowering them with the information and tools they need to make optimal pay decisions. They make business expense decisions every day - why not trust them to do the same with pay budgets?
Sin 7 – Poor communication
Having made it through the review process, there is a tendency to breathe a huge sigh of relief, when actually the communication phase is actually the most critical. Not least because reward communications is very important for creating perceptions of fairness and equity, and communicating reward issues poorly can erode these perceptions.
Ensuring employees receive timely communication with the right messaging from their managers will go some way to ensuring employees feel recognised for their contribution. In fact, in engagement surveys, open and honest discussion around pay was found to be more important than other typical measures of employee engagement.
Reward communications is very important for creating perceptions of fairness and equity
So, as you progress through compensation review season, take a moment to reflect on whether you are committing any of the cardinal sins outlined above and consider the following check list:
- Ensure strategic context is reinforced; don’t lose sight of the ROI on compensation spend and the need to deliver business imperatives through people.
- Consider moving from an HR-owned process to one that engages all stakeholders, and empowers line managers to make optimal talent decisions.
- Ensure appropriate risk assessment is applied at all points of your process - particularly on data security and integrity.
- Prepare for data readiness as early as possible.
- Make sure every employee receives timely communication with the right messaging.
Ruth Thomas is a founder and Senior Consultant at Curo. With over 20 years of Global HR and reward management experience in the financial services sector she has international expertise in the management of compensation processes and the design of pay and benefit structures, salary progression systems and management incentive plans. Her...