Pay round processes – a “big data” approach. Including the add-on benefits to recruitment, training and development and succession planning

Introduction

The key to using data intelligently in HR is to start with the business numbers.  This article is about how to structure a pay round driven by business results.  It focusses on data rather than the normal subjective judgements and gaming that goes on in the vast majority of companies at pay increase time.  The objective is to reward what matters to the business.

This is a long post; but it is not going to give the full detail of the approach.  This will differ in each organisation.  It is a new approach in thinking about the pay round process and the article gives the broad concepts and approaches to the subject rather than a detailed “Dummies guide”.  (I can provide one of these for a reasonable fee).

Effective and efficient

This approach is based on good use of data and behavioural psychology.  It generates rewards for behaviour that is important to the business.  By doing this it sends out a clear message both on culture and on what behaviours are rewarded in the workplace.  This creates the “virtuous circle” of reinforcing profitable behaviour leading ultimately to high performing teams.

You should use this approach.  It gives hard statistical evidence as to why pay increases were, or were not given.  It gives a better return on your pay increase investment.  You are rewarding behaviour that benefits the organisation; not a managerial whim or some perception of employee merit based on last week’s conversation.

In the beginning

Like all good science, start with a test group.  Select a discrete group of employees where business and HR data is available.

Key business success metrics

The key business success metrics for this group need to be clearly defined.  As an example, if looking at sales staff then consider sales revenue, the conversion rate of sales calls to sales, repeat sales and so on.  It is advisable to weight these business success metrics from the most important to the least important; always focussing on the bottom line impact of these factors.

Rank the employees

The next step is to rank the employees against the business metrics.  This must be undertaken strictly against the business metrics.  It is difficult, but is an essential part of the process.  It may well be that your “best” employees are not those who score highest on the metrics.  Stick to your original business metrics.  Do not change them because the employees in the list do not fit your perception of “good”.

What makes these employees “good”?

This is the most difficult part of the process, but the most important.  This is where the power of big data starts to prove itself.  Now take the HR data on each of the top employees to see what common factors make these employees perform better against the business metrics than others.  This could include:

  • Time in role
  • Education level
  • Personality profile
  • Supervisor
  • Training courses
  • Previous roles
  • Previous employer(s)
  • Outside interests
  • Social network size
  • Email activity – internal and external
  • Sales calls length and frequency
  • Time and attendance data
  • Daily newspaper and magazine reading
  • Social profiling (you can use postcodes for this)

As long as you have the data and you should have the data, you can include it as a factor.

You will now need some strong statistical knowledge to undertake a regression analysis to identify the common factors for your high-ranking employees.  I am aware there are a number of statistical techniques that can be used at this stage.  You pay your money and you take your choice.

The outputs from this exercise will depend both on the richness of the data you hold on employees, the type and location of your organisation and your company culture.

It is important to note that this technique is not limited to revenue generating activities.  We can build success factors for HR, cost of hire, attrition, benefit spend, payroll costs and so on.  Or much the same in Compliance, for example.  External audits passed, compliance costs, compliance checks carried out – you can fill in the blanks.

Results part one

What you will have, if the process has been carried out correctly, is a list of individual factors that predict behaviour that support business success.  Some of the factors will appear not to be relevant; and I am aware that correlation does not imply causation.  Some of the factors will be surprising, do not rule them out or ignore them.  GO WHERE THE DATA TAKES YOU.  Human beings are programmed to look for patterns where none exist and make choices based on often faulty heuristics.   The data may not always take you in the right direction – but normally it will.

The ranking

This is the easier part.  You rank the employees by the factors.  This process is already part carried out by the earlier steps.  The exact nature of the ranking will depend on the analysis.  One approach may be to rank the employees by the factors with the highest correlations to business metrics success.

The pay increase allocation process

In an ideal world you would allocate 80% of your budgeted increase to the top 20% of employees.  That is because it is statistically likely that 80% of your revenue comes from this top 20% of employees.

This process largely removes the subjective elements and gaming that goes on around pay allocation in most organisations.  Decisions can be justified and supported by the data.  A clear signal is sent out to employees as to what is being rewarded.

Extra benefits to recruitment, training and development and succession planning

By having identified the factors that are correlated to business success (provided you have chosen the business metrics correctly) you have a powerful dataset to aid recruitment, training and succession planning.

Recruitment

You have a list of factors that predict business success and effective employees.  Using these factors a template can be developed to quickly and factually identify those applicants who are most likely to do well in your organisation.  It may not be the only measure; but it will provide an excellent screening tool.

Training and development

The factors that lead to success have been identified; thus you can train and develop employees based on those success factors.  A provable bigger bang for the training buck.

Succession planning

From the analytical process you will have identified both the success factors and those supervisors who have the most successful teams.  A variant on this exercise can be used to identify what factors make up the most successful supervisors and managers and build your succession plans accordingly.

Power of big data

The above discussion shows how HR data can be used to drive business success.  One of the tenants of big data is to automate the analysis of the data.  With a little work it is easy to automate the data scrapping processes to allow the identified factors to be ranked against employees and allocate the pay increases once the basic rules have been formulated.  Having the data available and categorised allows for very powerful management information reports and data visualizations.

Warnings and alternatives

The above process is, for the majority of organisations, new and perhaps frightening.  It will not work the first or second attempts.  However, the very process of data scraping and analysis will yield a honey store of good things.  The process can be changed and refined to fit the organisation.

This is different HR.

It is data driven and business focused.  Some will argue it takes HR away from its traditional routes; why not?  HR has not yet earned a full place at the board table with its current approach.  Finance, IT and other support functions have a greater claim, because they have the data and facts to support cost activity.

Conclusion

This concept is fairly new for most organisations and will take:

  • A change in mind-set
  • A robust data store of employee and business data
  • A strong understanding of the underlying statistical processes to carry out the appropriate analysis
  • HR working with Finance, IT and data professionals, statisticians and the business to get the clear benefits from the approach.

When this approach is fully working it provides a rich and effective way of spending the salary budget as well as providing a firm “big data” base for HR strong analytics.

Working this way gives credibility to HR and builds up a subjective data bank of HR information with which to support business decision-making.  Implemented appropriately it is a win win for all parties in the annual pay round process as well as for the wider HR community.

Employee benefits – cultural mood-music

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Employee benefits are often overlooked when thinking about organisational culture. Yet they are a powerful framing or reframing mechanism for amplifying the message in our organisation of “the way we do things around here”. Like a good base guitarist they can provide the rhythm underscoring the melody of our set piece riff.

Messages – explicit and implicit
There are a number of signpost continuums that are reflected in our benefit offerings;

  • Traditional to playful (think pensions vs bike to work)
  • Collective to individualistic (Set menu vs flex)
  • Paternalistic to intelligent consumer
  • Slow moving to early adaptor (Notice board vs Twitter)
  • Tea dance to Lo-fi (Think tea trolley to “Sushi made at your desk” (Hey, is that a new benefits concept?))

You get the idea. The what and the how of benefits delivery as well as the communication sets the mood music for how our organisation is perceived by employees and the wider world.

Conclusion
Benefits are not something that should just happen. They are an important rhythm to the music of our organisational culture. Not up there with the lead guitar perhaps; but an essential, if overlooked nuance and shading of the message of who we are and who we want to be.

A time travelled reward strategy; Who?

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Introduction

I was listening to the excellent “Dr Who at the Proms” on the radio.  The music was evocative of different times and alien terrains.   A thought struck me; what would the reward landscape look like in ten years’ time? Two alternative possibilities collided in my mind: a sort of Matrix like choice of different futures, a red pill or a blue pill? These were:

  • A continuation of what had gone before with ever increasing inequality between high and low paid
  • A more equal, transparent approach with some convergence between the levels.

This article will be looking at the outcomes of these two scenarios and the different pressures that may lead to one or the other becoming the new reward reality.

Continuation of the status quo

A troika of forces support the status quo.

  • The self-interest and power of those who benefit from the current system
  • A lack of political will to make changes; perhaps connected to first point.
  • As the economy improves the supply and demand equation will reassert itself.

There is a large amount of vested interest in the status quo.  This is not only from the direct beneficiaries of high pay; but also from those who benefit indirectly.  The barrier between board rooms and politicians together with senior public servants has always been porous.   Politicians and public servants often move in to corporate board rooms following retirement from “public service”.  It may be argued that waiting for those who currently hold the levers of power to reduce their future earnings potential in the private sector is like turkeys voting for Christmas; unlikely to happen.

Although outside the parameters of this article there is some interesting research to be undertaken on the issues of power and ideology as they relate to the economics of reward.

Even when the global economy is in recession it is difficult to attract the right calibre of staff in to executive management positions.  Or, if we look at the highest paying sector (putting aside football players and those in the entertainment industry), in to investment banking.   Getting the right people in role can make a great difference to organisational and financial success. When Stephen Hester was unexpectedly removed as CEO of RBS, its share price fell by about 7%.   At the top levels it is a seller’s market, with, arguably, an increasing international dimension.  There is anecdotal evidence that top mangers’ prefer moving in to private equity where rewards are higher but less transparent.  Likewise the increasing, and in my view, mistaken, prescriptive approach by the USA, EU and regulators on financial services pay, has the potential to lead to a flight of talent to less regulated shores; much the same as we have seen in the past with corporate tax planning.  This means a race to the top for the best talent with organisations worried about falling behind their competitors; the stairway is to heaven for the high paid.

There are considerable forces of inertia to be overcome before we can travel to a more progressive pay landscape.

What will the status quo pay landscape look like?  I used some data from the excellent MM&K survey of executive pay to develop a model.  The current position in the UK FTSE 100 (the UK top 100 companies by capitalisation) is:

  • Average FTSE 100 CEO remuneration:       £4,516,474
  • Average FTSE employee pay:                       £        33,957
  • Ratio of employee to CEO pay                                    133

If we look at the last ten years, the average increase in CEO remuneration has been 5.8% and 3.9% for employees.  I build a Monte Carlo simulation (with a heroic assumption that the increases were normally distributed and appreciating that ten data points is not a good sample) that showed there was a 50% probability that the following would occur;

  • In 2022 average FTSE 100 CEO remuneration:        £7,972,054
  • In 2022 average FRSE employee pay:                       £      49,668
  • 2022 ratio of employee to CED    pay                                       161

So inequality between those at the top of the pay scale and those on the average wage would get progressively worse.  A “Hunger Games” scenario with a large population of lower paid supporting a small population of very high paid.

There is a counter argument to this approach.  As the Institute of Fiscal Studies reports:

“Income inequality in the UK fell sharply in 2010–11. The widely-used Gini coefficient fell from 0.36

to 0.34. This is the largest one-year fall since at least 1962, returning the Gini coefficient to below

its level in 1997–98. Although this reverses the increase in this measure of income inequality that

occurred under the previous Labour government, it still leaves it much higher than before the

substantial increases that occurred during the 1980s”.

Thus, income inequality is a moveable feast with volatility making it difficult to confirm a consistent trend given the constant transformations of the tax and social security structures.

A more equal, transparent approach with some convergence between the levels.

There are a number of important pressures that indicate that this is the more likely outcome; albeit occurring over a long period.  As Jon Terry of PwC, a globally recognised FS reward expert, notes they can be broken down in to three broad areas:

  • External pressures
    • Pressure from shareholders
    • Pressure from the regulators
    • Economics
    • Cultural pressures

External pressures

I had a very interesting conversation with Cliff Weight, another internationally recognised reward expert, from MM&K.  This was on the subject of the balance of power between shareholders and executive management.  It is my view that in the past shareholders were more relaxed about the quantum of pay. This is because they were making a good return on their equity.  That situation has now changed.  Return on equity has, in many sectors, reduced considerably.  At the same time the percentage being spent on executive remuneration has risen.  Shareholders are now taking a much more detailed interest in the balance between what they earn and what the “talent” gets paid as a percentage of revenue.

It is also worth mentioning the role, particularly in the US but increasingly in other countries, of the activities of shareholder advocacy groups such as Institutional Shareholder Services (ISS).  I am not a fan of their somewhat tick box approach; but I fully appreciate that they do an important job in highlighting what may be seen by some, as poor pay practice.  Institutional shareholders are increasingly (although perhaps wrongly) relying on the advice given by these organisations.  The pressure on pay is always downwards.

A similar downward pressure is beginning to be exerted by the regulators; albeit often accompanied by prescriptive, counterintuitive and sometimes downright stupid regulations. There is a good summary of the latest UK regime on remuneration reporting here.  A downward pressure on remuneration by regulators is a clear and present danger to the maintenance of the status quo.  Linked to this are the regulatory requirements, initially in financial services, but likely to move to other industries, to hold sufficient risk based capital to support operations in the event of black swans, unlikely but catastrophic events.   This reduces the risk capital that can be invested in higher risk; higher return activities, so, picking up the issue in the paragraph above, reducing the potential returns to shareholders.

Economics

There are two opposing economic pressures affecting this debate.  Shareholder returns are dropping, as discussed above.  There are structural changes taking place that indicate that we may never see a return to the fifteen per cent plus returns before the financial crisis.  If that is the case there is going to be considerable downward pressure on remuneration in order to ensure a more “equitable” division of return between capital providers and employees.  The counter argument is that if there is a return to high inflation (and that has a high possibility in my view) and good economic growth, there is the likelihood of higher relative returns, while the scramble for labour intensifies and earnings at the top of the ladder explode.

Currently the balance appears to be in favour of the economic constraints on equity return leading to downward pressure.  But, as previous booms and busts have shown little is impossible, even if very improbable.

Cultural pressures

This is the most interesting of the downward pressures on pay.  I discussed this issue extensively with Cliff and Jon.  There is a clear consensus between the three of us that there are strong undercurrents of social pressure to increase transparency and have a more equitable distribution of pay.

These pressures are coming from all levels and in some cases some unexpected directions.  We are currently seeing the senior executives of some large organisations preaching pay restraint and greater responsibility.  Although, as the recent CIPD report on “Rebuilding trust in the City” (of London) shows there is a long way to go and some leaders still work on the basis of do not do what I do, do as I say.  But, this apparent change by the changing leadership of some large organisations is an interesting trend.

It can also be argued that those currently coming in to the system or beginning the climb up the greasy pole of corporate life have a different approach to reward, work and life balance.  Perhaps there is something less of a drive for personal gain and more a realisation of the importance of social contribution; we can but hope.

I am unsure that issues of high pay have yet entered the popular consciousness; a bit like the zombies in “World War Z”; we know they are bad but we are not going to come across one in real life.  Very few people have even indirect experience of high pay either in an absolute or relative sense.  Thus, while there is a broad sense of moral outrage driven by an often misinformed media; there is a limited popular demand for restraint on high pay and even less of an understanding of labour market economics or the complex nature of senior reward.

Having said that, social pressures are leading to what Jon Terry described as a “noticeable shift” in attitude by those both at the top of the tree and those who are working their way up the branches.  It is not yet revolution but is most certainly evolution.

What is clear is that social pressure is building up a head of steam and will have, perhaps, a defining effect on the reward landscape a decade hence.

Conclusion

My travel in to the future of reward is complete.  The evidence supports the scenario that in ten years’ time we will have a more transparent, more equal, reward landscape.  It is also likely to be an extremely regulated environment, particularly for high pay.  The issue is that state intervention starts to look like pay policy and pay policy, as history has shown, seldom works and discourages an open market in reward with frequent unintended consequences.

Executive Directors, consultants, remuneration committees, regulators and last but not least, reward professionals must start to prepare themselves for the changes that are beginning to appear on the horizon of the reward landscape.  It must be acknowledged that the future seldom turns out the way we expect; but there are sufficient broad trends emerging to at least give a probability of a more equal approach on pay.  In some ways this becomes a self-fulfilling prophecy.  If we start to think and prepare for a more transparent and equal pay environment it is more likely to happen.

Acknowledgements

I would like to thank two globally recognised reward experts, Jon Terry of PwC and Cliff Weight of MM&K for sharing their insights on the subject with me.  However, all the views expressed in this article are mine alone.

Zero hours contracts: Extreme segmentation: the labour market dynamic

The news that the number of zero hours employees have been greatly undercounted illustrates a fundamental change in labour market dynamics. We are seeing an acceleration in the divide between the haves and the have nots. Those in the core on good pay, benefits and job security and those outside the core on poor pay, limited benefits and insecurity.

This enhanced segmentation highlights issues of social cohesion and human capital development. Could it represent the marginalisation of the young, the old and the unskilled into labour market ghettos, conceptual slums bottom feeding from leftovers of the core. A world where our children, our older relatives and the disadvantaged live on the crumbs from the rich person’s table. Not quite the brave new world we hoped for.