Tag: Compensation Surveys

MANAGING COMPENSATION WHEN UNCONTROLLABLE EVENTS OCCUR

Written by Bianca Valencia on . Posted in Resources.

Lately, we have been receiving a lot of inquires from clients about how to best manage compensation in high-inflation countries, including Ghana, South Sudan, Zambia, Argentina,  Venezuela, Kazakhstan, etc. (to name a few!). This post shares our guidance about managing compensation when uncontrollable events, like hyper-inflation, impact the labor market.

What are “Uncontrollable Events”?
The world is a complicated place to do business. There are many unforeseen circumstances that occur to disrupt the normal dynamics of a labor market. Examples include:

  • hyper-inflation, devaluation and other economic events;
  • natural disasters, such as earthquakes, floods, etc.;
  • periods of unrest, civil war or other armed conflicts; and
  • accidents impacting infrastructure such as the power grid and telecommunications.

I’m sure you can think of other situations that fit the definition.

You Need to Have a Policy for “Special Measures”
The common thread in all of the above uncontrollable events is uncertainty — nobody knows what’s going to happen, how long it will last, and what tomorrow may bring.

A Special Measures Policy is a way to assist managers and staff when a crisis occurs. The policy outlines what the company will do when certain uncontrollable events occur.

It might not be what employees want or ask for, but it’s what they can count on from the Company, which turns out to be even more important. Let me give you some examples using the topic everyone is asking about – high inflation.

How to Manage Compensation During Periods of Economic Turmoil
Suppose the situation you are concerned about is similar to what happened in Ghana in the summer of 2014. Devaluation over the 12 months from July 2013 in Ghana was approaching 50%. Various sources reported the annual rate of inflation in Ghana around 15% and trending higher, perhaps towards 20% by year-end. Some sources were reporting even higher numbers.

The first thing to consider is whether or not the situation qualifies as one which should be addressed by special measures. Inflation of 15% to 20% is high, but if the increase is gradual each month then it might be possible to address it through normal compensation management, perhaps with an extra pay adjustment mid-year. But if the inflation rate were higher, say 25% or more, and the increase in inflation happened all at once (or over a short period of time), then special measures might apply. Devaluation is generally not a factor in determining salaries for local staff. However, high devaluation is normally followed by periods of high inflation, so it becomes relevant.

Our recommended approach to managing a situation like the one described above is as follows:

  • If the threshold you’ve set for inflation (for example) is reached or exceeded, apply your special measures. When establishing thresholds, be sure to identify multiple, reliable data sources. Be wary of official sources.
  • We suggest providing an across-the-board increase of no more than 25% of the inflation (e.g., if inflation is measured at 40%, provide no more than 10%, which is 25% of 40%). Be sure to consider your desired market position and adjust the increase to be sure you don’t exceed where you want to be positioned in the market.
  • Treat the increase as a temporary allowance separate from base salary.
  • Monitor the market over the next three to six months through the use of market surveys, and conversations with consultants and other employers in the market.
  • When the market movement, as measured by the surveys and other data, exceeds the amount of the temporary increase, it’s time to convert the temporary allowance into base salary.
  • Having two increases per year instead of one often helps smooth out the disruptions, too.

Why does this approach work? There are several reasons:

  1. You have a policy which can relied on by your employees, providing them with some certainty in an otherwise uncertain period in their country.
  2. While employees often express the need to be “kept whole” that is not how it works — your policy clearly indicates that the Company will offer only partial compensation for special measures. There are no surprises, and you continue to use cost of labor, not cost of living, to drive your compensation program.
  3. It’s a very conservative approach, allowing you to continue to monitor the situation and increase salaries slowly, ensuring you can continue to manage your compensation according to market conditions rather than uncontrollable economic events.
  4. It’s unlikely that you will over-compensate for an event, thus allowing you to have positive employee communications and avoid any possible acquired-rights issues.

There could be variations on how a Special Measures policy is implemented, which types of events are covered, and the specific steps each Company decides to follow.

The important thing is to have a policy and use it.

Employees want to rely on you to help them during a crisis, and managers want to be able to make decisions quickly during difficult times. A clearly written policy for Special Measures addresses these concerns easily.

Other Resources
I have written a few other articles for my blog on related topics that you might find useful as well. Although they were written a few years ago, the information is applicable to current conditions as well.

Here are three useful links:

DOWNLOAD PDF

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

COMPENSATION TIPS IN WAR-TORN COUNTRIES

Written by Bianca Valencia on . Posted in Resources.

Geopolitical tensions in the Middle East have taken a severe toll in the region’s economic stability. Countries currently confronting waves of unprecedented civil wars such as Yemen, Syria, Iraq, and Turkey, along with an unprecedented flow of refugees, have achieved very minimal GDP growth in the recent years. And there is spillover to neighboring countries such as Lebanon and Jordan as well. 

The economy of Yemen, for instance, contracted by 28.1% after a year of ravaging conflicts since March of 2015, indicating an imminent hyperinflation. On a broader scale, inflation in the MENA region surged from 3.9% to 4.1% in May – the highest rate since October of 2015. 

Living in war-torn areas is grueling and difficult for employees.  Volatile prices result from high inflation rates, coupled with periodic shortages of goods. These uncontrollable events are disruptive, and quite often, employers are compelled to rethink compensation packages to help address the pain and difficulty of living amid civil unrest, especially where the turnover of staff is uncomfortably high. 

In countries experiencing a crisis, monitoring GDP, inflation rates, and other economic indicators along with survey data may be insufficient for you to determine proper salary actions. As employers, you need to ask: with fluctuating inflation and limited availability of reliable data, what is the best way to manage compensation packages? 

A Way Forward 

Reviewing your compensation policies requires looking at how other organizations adapt and react in conflict-stricken economies. Instead of just increasing base salaries, which permanently increases fixed costs, employers sometimes provide special benefits such as cash allowances instead, which are usually implemented on a temporary basis. This approach allows employers to respond conservatively and manage costs effectively until the political turmoil in the region gets resolved. In Iraq and Syria, for example, some employers have reported providing a Risk Allowance to their staff during times of conflict.  Such steps go a long way towards ensuring loyalty and reducing undesirable turnover. 

Employers can also take steps to assist staff with commuting to the office safely, and other security measures.  Work from home options are also helpful when it is too dangerous to travel to the office. 

Even though declining oil prices are impacting the region’s economy, the World Bank reports that the private sector is hoped to become the backbone of a new growth model in the Middle East, especially when effective policies are able to address security conditions and long-standing conflicts that currently upset business sentiment. As the economy recovers, the market will soon catch up, and salaries will increase more rapidly. 

Birches Group provides updated, concise, and easy-to-digest labor market data reflective of the actual market conditions on which you can base your decisions. Using a cost-of-labor approach, our data allows you to monitor market movement over short- and long-term periods.  Our surveys are updated three times a year, in April, July and October, providing a current window to market practice on a continuous basis. 

To find out more about the conditions in countries mentioned in this article, or to learn more about Birches Group surveys throughout the developing world, please contact us. 

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

WHY INCUMBENT DATA IN SALARY SURVEYS IS MISLEADING

Written by Bianca Valencia on . Posted in Resources.

For many years, employers have used salary surveys to provide market references to manage compensation in their organization and to “price jobs” in the market.  Conventional wisdom suggests a high-quality, reliable survey has the following characteristics:

  • The largest possible group of participants
  • The greatest number of specific jobs
  • The highest number of incumbents reported
  • Survey statistics based on incumbent-weighted averages

In short, bigger is better.

As is often the case, we believe that the conventional wisdom is wrong!

Incumbent-based data is not job-based – it’s personal!

Think about it.

  • Salary ranges represent the range of pay an employer is prepared to offer for position with the same level of contribution to their organization (e.g., the same equivalent worth).
  • All incumbents are placed within the same internal, generic range (employers do not usually have separate salary scales for each occupational group or function).
  • Individual salary levels are not determined by any job factor!  Incumbent salaries are based on personal characteristics such as qualifications, skills, experience and performance, and organizational constraints such as internal policies and guidelines, and internal equity.

There are no job-based factors used to determine placement in the range.  It is easy to conclude using actual incumbent salaries instead of salary ranges is — at best – misleading, if not entirely invalid.  But don’t take our word for it.  Let’s put it to a test.

Salary Range Data is Highly Correlated to Incumbent Values

Birches Group did an analysis of actual incumbent data values and the corresponding salary range values for BG-10 level Senior Working Professional roles in Jamaica.  The dataset included positions from seven different job families.  Twenty-nine employers reported data at this level.

To start the analysis, we examined each discrete position reported by each employer.  In the chart below, the positions are color-coded by occupation (job family), and each employer is represented by a vertical array of dots.  The chart shows all observations, not a specific percentile.

You can see there is a wide variety of values, both within each employer and across different ones.

Next, we examined the salary ranges for these employers, and determined how the incumbent salaries fell into each employers’ salary range.  The chart below shows the ranges.

It’s clear that except for two employers with no formal range defined (the two single dots in the chart circled in red), the rest all have salary ranges defined.  Some of the incumbent values are distributed across the ranges, while some are more clustered, but they are all within the range!  You will also notice that the range spans (the “distance” from minimum to maximum) varies quite a bit – some employers use narrow ranges, others wider ranges, depending on their unique circumstances and requirements.

A common benchmark that many clients use is the 50th percentile or median of the market.  While we could debate the definition of “the market” (and we will in another post), it is possible to measure the median of the salary ranges in a market.

For BG-10 in Jamaica, the subject of this analysis, the 50th percentile salary range is J$ 6,273,150 to J$ 9,576,152.  We calculated these numbers by simply separately calculating the median of all the reported minimum values, and all the reported maximum values. The next chart shows this median range added to the incumbent chart.

Now you can see which incumbent data points are within the 50th percentile range in the market.  It’s important to realize that a percentile value in a salary survey should never be a single number; it should always be a salary range.  If you rely only on incumbent data points when using surveys, you are missing out on what is really happening in the market.

Combining the two prior charts yields the next one, which shows the employer salary ranges against the 50th percentile (shaded blue horizontal bars):

You can observe that just 6 employers (about 21% of the sample) have ranges that are totally outside of the 50th percentile range of the market.  Or stated another way – nearly 80% of employers have a salary range that intersects with the market median range.

We also examined the data by occupation, looking at the mean range for each occupation versus the market.

In the above chart, you can see, aside from Logistics and Program, which were matched by fewer than 8 employers and not truly representative, the rest of the occupational data ranges fall well within the overall 50th percentile.  In other words, the occupation or job family doesn’t impact the going rate for a job very much at all, and it would be very easy to just use the overall data, without any occupational designations, as the basis to determine your market position.

Think about it.

You go crazy trying to match multiple benchmark jobs in surveys.  Then you take that data and apply a secret formula (perhaps weighted averages by incumbent count, for example) to arrive at a “going rate” for your midpoint.  But the data you are combining isn’t really that different; our data shows you could just take the range we report and go from there.  Much easier.

A New Vision for Salary Survey Data

Birches Group believes that salary survey data should be job-based, not personal.  Salary ranges represent for an employer the potential range of salary which the organization is willing to pay for a job at a specific grade level in the organization.  In other words, the range represents the value the organization attaches to all jobs at that grade level, which are deemed to have equivalent worth because they have been evaluated to the same grade.  Salary ranges, not incumbent data, represent job-based values which are appropriate for benchmarking salaries.

By comparing salary ranges instead of incumbent data, employers avoid using personal data, which is volatile and introduces a level of false precision which is misleading when specific jobs or occupations are compared to each other.

Introducing Community™ Market

Community™ Market is the new name for the Birches Group salary and benefits survey.  The survey format has been streamlined and simplified and includes several new features, including an easy and convenient way to assess your market position at a glance.  Another important change is the way job information will be captured.  We will no longer show separate market values for each benchmark job.  Instead, we will show data aggregated for all jobs at the same Birches Group level.  We will still identify which jobs are in which grade, but as we’ve demonstrated, the occupational differences reported in surveys (including ours) are resulting from personal data, not job-based information, and are not appropriate for benchmarking.

Community™ Market is part of the Birches Group Community™ platform for integrated HR management.  The platform includes modules for job evaluation (Community™ Jobs), skills assessment (Community™ Skills) and performance management (Community™ Performance) in addition to market surveys.  The job levels established using our Community™ Jobs methodology are used to provide job levels in our surveys, and to assess skills and performance against standards that reflect the same job levels.  It’s the first integrated approach to human resources management.

Learn More

Contact us to learn more about the changes in our survey methodology, or to explore how the Community™ platform can be useful for your organization.

Want to know if your existing compensation practices have the elements of a good compensation program or if there are areas that could use some improvement? Take our quick Compensation Program Assessment Quiz to know your score!

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

TWO SALARY SURVEYS ARE BETTER THAN ONE

Written by Bianca Valencia on . Posted in Resources.

If you work in international HR, you know how important market data is for the management of your international operations. Finding reliable data in all of your countries is undoubtedly a challenge. Each country has different survey suppliers, different employers participating in the surveys, and variable levels of quality. So naturally, when you find a survey you trust, the tendency is to stick with it. But is one survey enough? I don’t think so.

Two Surveys Provide A Balanced View of the Market

Typically, your “go-to” survey has several characteristics:

  • It reflects the market in which you compete – the participants are the ones you are most often look for, usually from the same sector. It’s the survey “everyone” is in.
  • It’s the one that “corporate” designates (and pays for) – sometimes it’s not the best, but you have to follow headquarters instructions, and besides, it doesn’t hit your budget.
  • It’s the survey you’re used to – why bother exploring another option when you’ve finally mastered this one?
  • The survey results are OK – you’ve never had a problem using the survey, well, except a few times when some of the data was a bit suspect, but overall, it’s fine.

These are some of the typical reasons why companies participate and rely on surveys year after year. But these same reasons often stand in the way of exploring additional options.

They say two heads are better than one. While I have yet to meet a two-headed individual, I have worked with a lot with surveys, and I can attest to the fact that two surveys are better than one!

There are many reasons for this — here’s just a few:

  • Some key employers might be missing – by participating in another survey, you will get an alternative group of employers and therefore, a broader view of the market. If your main survey is a sector-based one, try a general market survey to complement your sector data.
  • Survey methodologies vary – and this means the results from another survey could be different. Different could be good – it will challenge you to dig deeper and try to understand the differences. Perhaps the alternative survey provides more details in certain areas, such as non-salary allowances and benefits in-kind, or uses a unique valuation for benefits.
  • The results might actually be aligned – maybe the data from the two surveys match closely. That reinforces the conclusions you may have already reached and raises the confidence in both surveys as a result.
  • The results might be totally different – thus allowing you to explore the full extent of the market options. Is it the employer group that causes the difference, or the methodology? How do you know which survey is right?

The answers to these dilemmas, of course, vary according to your unique situation. Which country? Which sector? How great are the differences? You have to explore to find the answer for your company.

So Look Beyond Your Old Reliable Survey

Challenge yourself to participate in at least two surveys. Make sure that they focus on different aspects of the market and bring a unique perspective. Analyze the data carefully and apply your judgement to incorporate data from both perspectives. Soon you will find you have a better understanding of the market.

If you need a first or second survey source for your international locations, be sure to check out Birches Group surveys. We cover 148 developing markets, more than any other global provider, updated three times a year. Together with Aon Hewitt, our marketing partner, we cover the world.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

SALARY SURVEY MARKET PERCENTILES EXPOSED!

Written by Bianca Valencia on . Posted in Resources.

In the first installment of this series, we wrote about why jobs don’t matter in salary surveys.  We hope you’ve already read it, but if not, be sure to do so.  This week, we will bust another myth – market percentiles.

Users of salary surveys are accustomed to referring to the market data in terms of a percentile.  The most common percentile of reference is the median average or 50th percentile.  Simply stated, the 50th percentile of an array of values is the point where there are equal numbers of observations above and below.  This is a definition from mathematics – it has nothing to do with salary surveys.

For example, suppose you want to analyze passengers at a bus stop.  If you capture the number of passengers boarding each bus during an hour and sort the data from low to high, the middle value is easy to spot.  You can calculate the median number of passengers getting on at that particular stop fairly easily.

Salary survey providers also report data back to users as percentiles.  If you are targeting the 50th percentile, you might look at a range including the 25th, 50th and 75th percentiles in order to decide on the value to use in your analysis.  The graph below illustrates the “pay line” approach found in most surveys:

You can start your analysis with the 50th percentile value (97,777), and adjust it up or down to suit your needs.  As you move horizontally along the x-axis, you pass through multiple percentiles – increasing to the right, decreasing to the left.  But there is no information about vertical movement.  We refer to this as a horizontal market model.

But wait a minute!  Is that right?

Is the 50th percentile of the labor market in a salary survey a single value, like the number of bus passengers?

Nope.  For any percentile value, the labor market is more accurately measured using a range of values.  You see, organizations define their salary structures with minimum and maximum values.  All staff are paid in between these bookends, defined by grade or band.  At any given moment, you would ideally be able to see the 50th percentile range of the market, from the salary scale minimum to the salary scale maximum.  The incumbent value could be captured too, since it falls somewhere in between the minimum and the maximum.

At Birches Group, we call this the Market Footprint™.  In our surveys, we capture three separate pay lines – one for the salary scale minimum, one for the salary maximum and the incumbent average, MRP or market reference point.  The graph that follows illustrates the Market Footprint™.

What is interesting about the Market Footprint™ is the rich level of information you can observe by just adding two more pay lines (the minimum and maximum).  Now, if you settle on the 50th percentile, you have a range of values to choose from within that percentile, by moving vertically from minimum to maximum.  And while it is possible to also move horizontally through different percentiles as before, you can also observe there is some overlap across percentiles.  The orange arrows in the graph show two examples of values that occur in two of the market reference percentiles simultaneously.  In addition, the red line illustrating the incumbent data clearly has variations depending on the percentile.  In the 25th percentile, employers are paying closer to the minimum of the range, while at the 50th and 75th percentiles, the incumbent average is close to the actual midpoint of the range.

We strongly believe that looking at market data in one dimension (horizontally) doesn’t allow employers the flexibility needed to design compensation structures properly.

Using a two-dimensional approach (both horizontal and vertical) gives employers the flexibility to address both individual situations and the overall company requirements.

Suppose you have a salary band and one group of employees, say engineers, needs to be paid higher than other occupations due to market pressures.  If you had access to market ranges by percentile, you could easily set the salary of the engineers at competitive levels to the market but still within your stated market reference (say, 50th percentile).  This allows you to address a market issue and stay true to your policy at the same time – quite an elegant outcome.

Another useful outcome of taking a Market Footprint™ approach is setting your salary range spans – the “width” of your pay bands from minimum to maximum.  In many developing countries, the spans vary widely, and even within the same country, vary substantially by level.  If you use survey data that captures the ranges, you can benchmark against the actual spans in the market, and adjust yours to match the common practice, if desirable.  This avoids overpaying on the low end and underpaying on the high end of the range.

We hope this has given you some food for thought.  Using range data as part of your market analysis will free you from the confines of your current approach.  This series of articles is designed to help employers consider how they use survey data, and open the discussion about the pitfalls of the common approaches.

It’s time to rethink how surveys are conducted and used.  One-dimensional analysis just doesn’t cut it any more. You need to look for sources that give you a flexible way to analyze your market data.  We will share more ideas in the coming weeks.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

RETHINKING SURVEY COMPARATORS – YOUR SECTOR IS NOT AN ISLAND

Written by Bianca Valencia on . Posted in Resources.

One of the most important steps in deciding on a salary survey is identifying which other employers are included as participants and their relevance for your company.  Conventional wisdom would dictate that you should look primarily at other companies in your sector.  In fact, many survey companies have built their businesses over the years exclusively with this approach.

Do sector-based approaches work in developing countries? At Birches Group, we would suggest, in the majority of cases, the answer is NO!

Here’s why:

  • Individual sectors are not large enough.
  • Data stratification – there are big gaps between the best and the rest.
  • Your sector is not an island – you compete with all sectors in the market.

Let’s examine each of these reasons in more detail.

Sectors are too small

In developed markets such as North America and Western Europe, sector specific data is common.  It is also true that there are large numbers of companies in each sector, so the chances of getting access to a survey for your sector with at least 15 companies is fairly high.

However, in developing markets, a sector-based sample could fall short.  First of all, there are fewer comparators operating in these markets.  Instead of 15, you may be able to access only 6 or 8 companies.

And it’s not just the number of companies, but the scope of their operations, too. One may have full operations and another might consist of just a small sales office. If your company has full operations, comparing to small sales operations isn’t too useful.  This is a case where revenue data is not too helpful, but number of employees might be useful.

Data stratification

In developing markets, the gap between “the best” and “the rest” is very large.  Most prominent employers want to compete with the best, but their sector-only survey is missing a big piece of that market, because it includes many smaller companies, perhaps local ones, which may not be competitive with multi-nationals.

Multi-sector approaches work better

We are strong advocates of a multi-sector approach to surveys. In highly stratified markets, “the best” employers will likely be a few from each sector. So a good multi-sector sample of the best employers from each important sector in the market yields a market profile which has tremendous relevance for dynamic employers.

Which sectors should be used?

So which are the “important” sectors?  In developing markets, there typically are representatives from:

  • Retail Banking;
  • Fast-moving Consumer Goods (FMCG) such as soap, toothpaste, tobacco, food and beverages;
  • Natural Resources such as oil, gas and mining (if present in country); and
  • Technology and Mobile Telecom.

Other important sectors found in some markets include engineering and construction, pharmaceuticals, agri-business, logistics, and more.

What about the International Public Sector?

In addition to all of the sectors mentioned above, another very important sector in developing markets is the international public sector. This sector includes three different kinds of employers:

  • Multilateral organizations such as the United Nations, World Bank, regional development banks, European Commission, and many others.
  • Bi-laterals, including diplomatic missions and development aid organizations from a single country with representation in the subject country
  • International NGOs, which work implementing programs to improve the quality of life and address the toughest humanitarian, health, human rights and environmental issues facing the world today.

One of the best reasons to look for international public sector organizations in your survey group is because they have been operating in developing markets for a very long time. In fact, these organizations are often the first ones to enter a country following volatile events such as political collapse or civil war, assisting with rebuilding civil society and helping to ensure that when private companies operate or expand their operations, that everything works the way it is supposed to work.

As an example, the US Embassy has operations in 144 of the 148 countries where Birches Group conducts surveys. Our largest NGO clients operate across 60 to 70 developing markets.  The International Committee of the Red Cross is in over 90 Birches Group markets.  Few private sector companies have such a large footprint in developing markets (if yours is one of them, we should talk!).

Still, many clients ask us why the international public sector is relevant. They don’t see any connections between economists, aid workers and diplomatic services as compared to infrastructure engineers, brand managers and banking staff.

Here are five more examples to consider:

  1. ALL employers hire people in the areas of administration, finance, procurement, human resources, support and clerical roles, and less-skilled positions such as guards, drivers, and messengers. It doesn’t matter much which sector your company is part of, you are competing with all of them — including the international public sector.
  2. For key professional roles at all levels, private sector firms target the best-qualified workers. So do international public sector organizations!  They are competing with the rest of the market, just like your company.
  3. Each company has unique professional roles that often are distinct for the business and usually sector-specific. Think brand managers from FMCG companies, loan officers in banking, telecom engineers in the mobile phone industry, etc.  Remember these roles can be compared easily using a level-based approach to other jobs of equivalent value from across all sectors.  And if you use the Market Footprint approach to analyze the data, occupational differences driven by market conditions like hot skills can be easily addressed, too.
  4. International public sector employers have strong employer brands, pay well, and offer some unique opportunities, such as programs with important missions, opportunities for overseas assignments, and even the possibility of citizenship in some cases. In many countries, they are prestigious employers, and landing a position is considered an exceptional achievement.
  5. Talent in developing countries moves between sectors, public and private, frequently. Cross-sectoral competition for talent is fierce, and those that ignore it do so at their own peril.

In Summary

We recommend a multi-sector survey approach in developing markets.  In those countries where sector data is also available, it can be useful to look at sector cuts, too. By looking at the overall market data together with sector data, you get the added understanding of how the sector relates to the overall market.  Using a survey which includes international public sector employers ensures that these key players are represented in your market profile.

It’s time to rethink how survey comparators are chosen, and how unreliable, sector-specific data is used, often without the benefit of a broader market context.  We will share more ideas in future installments of this series.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

RETHINKING MARKET COMPARISONS – A NEW DEFINITION FOR COMPA-RATIOS

Written by Bianca Valencia on . Posted in Resources.

Employers use salary surveys to measure the market and remain competitive.  But making such a comparison can be quite difficult, even misleading. Conventional wisdom tells us to compare average incumbent salary to survey data by the job.  This is commonly referred to as the compa-ratio.

Suppose your target market position is the 50th percentile value from your survey, say 110,000.  If your company’s incumbent value for the same job is 98,650, the compa-ratio is 89.7.  This means your compensation value is 89.7% of the target, or to put it another way, 10.3% below market.

Wait a minute!  Is this right?  What if there is more than one incumbent, say one earning 98,650, and another, earning 121,330.  We can just use the average, 109,990.  The compa-ratio has changed to 99.9.  So we’re right on target.  Phew!

You can see that as more data is introduced to the mix, the average will change and so will the compa-ratio.  It’s kind of misleading, isn’t it?

There is another way.  As we explained in a prior post in this series, about percentiles, your target market position is a range, not a single value.  In our example above, let’s try the comparison in a slightly different way.  Instead of looking at the average of all the incumbents in a particular job or grade, let’s compare your salary range to the market salary range.  That’s right.  Compare your minimum to the minimum in the survey, and the maximum to the maximum in the survey.  The graph below illustrates the concept.

The left column shows the employer’s salary range, while the right column illustrates the range found in the market.  The orange portion represents the upper portion of the range, from midpoint to maximum, while the rust portion represents the portion from the minimum to midpoint.  The employer range is symmetric, with the midpoint exactly in the middle of the range, while the market data is shows the incumbent average as the “midpoint”, not exactly in the middle of the range, but reflecting the actual practice in the market.

At first glance, it appears the employer’s range is just fine.  It is entirely within the market range at the 50th percentile, according to the company policy.  Let’s take a closer look.

The red lines in the second graph show how the employer range overlaps with the market.  The incumbent average in the market is clearly higher than the midpoint of the employer’s range, and the market span (distance from minimum to maximum) is wider.   This means that the employer is paying a bit more for new entrants, but their pay is capping out sooner than the market for experienced talent.  Each employer needs to decide if this is a desirable outcome for their unique situation.

How can the compa-ratio concept be applied to this comparison?  At Birches Group, we often do such a comparison as follows:

So, this indicates that the employer is very close to their target – just 0.8 above.  They are 8.2% above at the minimum, but trailing the market maximum by 6.6%.

What else does this sort of comparison tell us? First, it allows a comparison of your salary range spans to market spans.  Oftentimes, clients simply assume spans are the same in every country and at every level of the organization; our data shows that this is simply not true.

Second, you can understand the range penetration in the market – how close to the maximum is the incumbent average?  Is it around the middle of the market span, or closer to the minimum or maximum?  This provides additional insights to employers when updating their ranges.

Finally, you can start to use your salary structure as more than a compensation metering tool.  For example, if you align your spans to your organization structure properly, then for grades where you have jobs for which there is no path for upward mobility, you can deploy wider ranges to allow for pay growth over time without promotions.  Similarly, in grades where the expectation is up or out in a short period of time, a narrow span could work just fine.

In Summary

Relying strictly on incumbent average comparisons to market medians is a misleading approach which is subject to volatility when incumbent data shifts. Comparing salary ranges to market ranges is a powerful alternative (or supplement) which provides employers with additional market insights.

We hope you are realizing that our effort to rethink salary surveys is from top to bottom!  There’s a lot to consider when comparing yourself to the market.  But the most basic comparison – the compa-ratio – can be redefined in a very powerful way.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

IN AFRICA, WATCH YOUR COMPENSATION A-B-C’S

Written by Bianca Valencia on . Posted in Resources.

My business is focused on advising employers on how best to structure their compensation and benefits programs in developing and high-growth markets. We have particular expertise in Africa, where our compensation and benefits surveys cover all 54 countries.

Recently, I helped conduct an employer roundtable for clients in South Africa, focused on fast growing African markets. It was a lively and informative discussion, but one of the charts we looked at stands out: A comparison of the pay mix across 20 different African markets.

You can see there is wide variation across the featured markets in how employers design their pay packages. Base salary is at least 60% of the total package in most countries, but the pattern is not uniform. That’s why it’s important to watch your A-B-C’s — Allowances, Benefits in-kind and Cash.

We are often asked by clients why the pay packages in Africa are so complicated? Why can’t they just pay cash and be done with it?

There are several reasons for the widespread use of cash allowances and benefits in-kind. Here are some to think about:

  • Benefits are provided for critical business reasons – for example, a commuter bus is needed to ensure workers can go to and from the office on time. In some countries, the lack of reliable public transportation, coupled with traffic congestion and the high price of shared taxis is a real hardship for workers. So the company steps in. Similarly, companies sometimes provide in-house medical clinics, free or subsidized meals, and even access to credit.
  • Historical reasons – many cash allowances used to be treated differently for tax purposes, providing a small advantage to staff through higher net income. Most of the special tax treatment is long gone, yet the practice of providing allowances such as 13th month or rep allowance persists.
  • Statutory requirements – certain allowances or benefits are mandated by local labor law, so there is no choice but to provide them.
  • Cultural reasons – a company car is a status symbol in many countries, and even if there is no advantage compared to cash, the car continues to be popular. Why? Well, your friends and neighbors can see the car in the driveway, but they cannot see the cash in your wallet!
  • To save the company money – Really? How can a company save money by providing extra allowances or benefits? If an allowance is paid just once a year at the end of the year, the company has essentially an interest-free loan from employees for the first 11 months of the year.

    We know employers benchmark their total compensation package against the market. The total compensation is a fixed pie that simply gets divided up according to each employer’s policies. Adding a new benefit or allowance usually means reducing other components, including cash, so that the total is still aligned to the market. It’s a zero-sum game, actually.

Our experience working with employers in developing markets in Africa and elsewhere around the world indicates that employers need to pay careful attention to their pay mix at all levels of the organization. If you focus just on cash, you will fall short in the eyes of your employees, even if the cash has been adjusted to “make-up” for benefits and allowances you decide not to offer.

Ironically, one of the most challenging aspects of compensation administration in these markets is reward communication. Many employees don’t fully understand what they get, why they get it and how the company calculates their packages.

So my advice is two-fold:

  • Be sure you have a competitive mix of cash, allowances and benefits in-kind, and that your “A-B-C’s” are aligned to the market and your internal policies and strategies.
  • Communicate, communicate, communicate. Make sure your staff understand their pay packages in total, not just their paycheck. Focus on total rewards in your explanations.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

I HAVE A SALARY SURVEY – NOW WHAT?

Written by Bianca Valencia on . Posted in Resources.

As a data provider and as compensation consultants, clients often ask us for advice and guidance in formulating policies and processes for using market data to inform and manage their compensation program.  The questions range from “What percentile of the data should I use?” to “How should I take inflation into account?”

The answer is to refer to your remuneration framework (aka compensation policy).  Your framework should address the key issues you need to sort out, along with practical steps to move from market data to salary scale.  Here are some tips.

Top Ten Features of a Well-Designed Remuneration Framework

Here are the top ten things that form a solid basis for a well-designed remuneration framework:

  1. Cost of Labor vs. Cost of Living. Salary setting is essentially an application of supply and demand to the labor market.  While managers and employees like to think that inflation is important, data shows that there is little or no correlation between labor market increases and inflation.  So stick to cost of labor, not cost of living for your policy.
  2. Credible Market Sources. You need market data to assess your competitive position.  Use a professionally-conducted salary survey.  Resist the temptation to rely on internal mechanisms such as the “call around” to your peers to see what they’re paying. Not only is this time consuming and fraught with pitfalls, in many countries, it’s illegal to share salary information.  A neutral third-party survey provider will insulate you from these risks.
  3. Solid Job Classification. Despite reports to the contrary, job classification is alive and well, and good practice requires its use.  Comparing jobs is not like comparing a can of peas.  Each organization defines roles differently, so job comparisons are hard.  This is true when comparing jobs internally in your organization, and externally in your market.  Job classification is a systematic and objective way to determine which jobs are equivalent to which other ones, along with building a hierarchy of your organization.  There are many good ways to apply job classification, but before you think about that, be sure you have a robust classification standard in place.
  4. Know Your Market. Organizations should define their ideal comparator group to include peer organizations within their sector, and across all sectors, with whom you compete for talent.  Limiting your comparators to your own sector is unwise. In most developing countries, sectors are too small for meaningful sector cuts.  And even when they are possible, comparing across different market strata is a fool’s exercise.  Instead, focus on those employers in any sector, including the international public sector, that target the same strata as your organization.  If you are a leader, you should compare to other leaders. And remember, your sector is not an island.  Even if there is good sector data available, as you will find in more developed markets, it is useful to compare sector data to general market practices to understand the actual differences.
  5. Total Compensation Approach. There are many parts of total compensation, and there are wide variations within countries and from country to country.  The only practical way to determine your market position is to use total compensation.  If your total comp is right, then you can “unscramble the egg” into the components your company chooses to offer.  If you look at things component by component, it will be almost impossible to achieve your desired target.
  6. Annual Updates. Labor markets are dynamic.  In developing countries, where we do most of our work, the amount of change we see during the year is significant, so much so, that we update our survey data three times a year.  Even in more stable, slow growth, developed economies, it’s helpful to look at the market at least once per year.  Remember, markets are not static – there could be new competitors emerging in previously non-existent sectors, for example, which cause market disruption.  Or a big company could open a new facility and try to poach all the key talent from the market.  With access to current data, you are in a stronger position to know what’s happening and how best to react.
  7. Use Local Currency. With just a few exceptions around the world, such as distressed economies or countries where civil unrest is ongoing, staff compensation should be determined in local currency, without any hard links to foreign currency benchmarks (e.g., US dollars, Euros, British Pounds, etc.).  If you don’t believe me, we should talk so I can convince you.  And you should have a Special Measures Policy (see number 10 below).
  8. Go GLOCAL – Global Standards but Local Adaptation. Organizations often formulate policies on a global basis without enough consideration of local practices.  The world is a messy place and compensation practices vary according to many factors, including local culture, level of economic development, historical practices, and a host of other reasons. Reserve some flexibility to address the market differences that exist which require wider pay spans and variable increase percentages between grades depending on the market.  Pay curves are much steeper in developing markets than in more mature ones.  If you acknowledge this, then your global standard formulaic approach won’t deliver the results you need.  In these situations, trust your local experts – they usually know what’s common in their country.
  9. Ageing of Data. Survey data is always a snapshot in time, and always retrospective, not prospective.  There are many approaches to age data forward to anticipate some market movement that is not already reflected in the survey.  It’s a good practice to make these adjustments.
  10. Address Special Circumstances. We believe every employer should develop a policy outlining specifically what steps will be taken if an unforeseen or uncontrollable event occurs.  Whether it’s economic (inflation, devaluation) or non-economic (natural disaster, civil unrest, ongoing conflict, etc.), your managers and employees want to know, when something bad happens externally, what their employer will do. It’s a real competitive advantage to have a policy in place for such circumstances, to provide clear, transparent information to all those affected, and enable your organization to act quickly and lead the market in responding to the crisis.  Yet few employers have taken the time to develop a Special Measures Policy to do this.  You probably have a crisis management plan in place for other functions, but I bet it doesn’t address these fundamental issues that become especially important to staff when a crisis occurs.

So there you have it – our top ten features to include in your compensation policy to help manage it in a market-driven, cost-effective and professional manner.  It takes time and discipline to do this consistently, but don’t be afraid to try.  Of course, professional assistance could increase the capacity of your organization to deliver and fill in any technical gaps you may be experiencing.

Birches Group specializes in the study of work – how work works.  Our Community™ Platform includes job evaluation, labor market data, skills assessment and performance management.  Through a combination of consulting, simple to use software and our focus on jobs as the core element for every employer, we assist organizations in optimizing their workforce design and ensuring their competitive goals are achieved.

We conduct multisector market surveys in 155 developing country markets, including all of Africa.  In addition, we offer a specialized survey for international NGOs and those companies organizations involved in international development in approximately 85 countries.

Birches Group can assist clients through our consulting services in the areas of job evaluation, salary scale design, compensation policy development (including special measures), as well as support for skills development and performance management.

For more information, please contact us.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.

DO JOBS REALLY MATTER IN SALARY SURVEYS?

Written by Bianca Valencia on . Posted in Resources.

Compensation professionals all use salary surveys as inputs into the management of salaries in their respective organizations.  As we all know, surveys capture market data for benchmark jobs – representative positions that are commonly found across many employers – and this data is then used to inform about other (non-benchmark) roles.

As a survey provider for high-growth and developing markets, Birches Group is focused on countries with smaller markets, fewer employers, and a myriad of different jobs, often defined differently from employer to employer.  In our surveys, we capture occupationally-specific data as a reference, because our clients demand it.  But are these references really valid or meaningful?  Below is an example from Côte d’Ivoire:

You can see that the range of pay provided by job family (green columns) closely matches the overall data at the 50th percentile of the market (grey rectangle).  The incumbent average data also varies a bit by job family, but clusters within the market range.

We would argue that fewer jobs might serve clients better. Here’s why.

Let’s suppose you hire three new staff this week – one in finance, one in marketing and one in engineering.  All three are placed in the same salary band in your company, say band C.  The starting salary for each is determined in accordance with your policy, and takes into account several factors, such as experience, education, past salary history and scarcity in the market.  You might also consider internal equity and compression issues.  In the end, all three individuals are successfully recruited and placed at three different salaries in band C, all within the lower half of the range.

Fast forward to the first pay review for the same three individuals.  What factors are used to determine their pay movement?  Performance?  Budgets?  Compa-ratio? Relationships with the boss and peers? Internal equity?  Yes to all of these.  Now how does their specific job role or occupation factor into the calculation?  Not at all!  You treat all the band C employees the same when applying your merit pay policy, don’t you?

Companies typically have generic pay bands.  Jobs with comparable value to the organization are placed in the same band, regardless of occupation or role.  Pay movement for individuals within the band is based on many factors, but it is company parameters and individual characteristics, not job or occupation, that determine pay progression.

If you agree with this conclusion, then what follows is even more important.  The occupational differences reported by most surveys, while certainly interesting, do not actually mean that the reason for the difference is related to the occupation or the role.  Rather, it illustrates that for any job, there is a range of compensation that varies according to individual circumstances.

Companies build their generic pay ranges by carefully selecting representative benchmark jobs across each job family.  They look for multiple sources of data for each benchmark job and often create elaborate calculations, with weightings of various sorts, and using different percentiles of the market data, to establish the final going rate.  This is then used to build a structure for all of the jobs at that grade in the company.  By blending data into a single going rate, you are in effect, using generic data for your structure.

So, why not simplify your life, and use generic data to start with?  Our grade averages report (other providers refer to them as level reports or roll-ups) provides all of the information you need to build a structure.  Because all job data we collect is included, even those positions with insufficient data to be separately reported, the sample size is the largest and most reflective of the market practice.

Best of all, you no longer have to wring your hands about what to do if you cannot match enough specific jobs to the survey.  As long as you know how the survey provider levels map to your internal grades, you’re good to go.

It’s time to rethink how surveys are conducted and used, and admit that false precision and complex processes are misleading and wasteful.  De-emphasizing jobs is the first step.  We will share more ideas in future articles.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.