The executive pay debate continues. http://ow.ly/nC9PA
An important approach on HR analytics ht
An important approach on HR analytics http://ow.ly/nCaqG
I really like a Twitter trend #ShoterHR. The idea is to write HR policy in 140 characters or less. Below are some of the best examples together with a number of my own contributions.
This exercise also has a serious point. It would be a major step forward if HR policy could be written in clear and easy to understand English.
Here is a mixture of the funny and the serious.
Death benefit; You die, we pay.
Don’t sack pregnant women, ever. @ http://twitter.com/ljanstis
Deferred bonus: no bread today, maybe jam tomorrow.
Restrictive covenants: Don’t nick our clients, staff or supplies. Or, our price list. http://twitter.com/daniel_barnett
Fire prevention policy: Don’t light fires in the office.
Health and safety: Oh for goodness sake, just be careful won’t you! http://twitter.com/DamsonHR
Retirement age policy: Holding back the years.
Mobile phone policy: Switch it off, http://twitter.com/imhrplus
Personal hygiene policy: No no to BO
Equal Opportunities Policy: Treat everyone fairly and the same, Always. http://twitter.com/JacksonT0ny
Drug abuse policy: no sniffing, no injecting,
Relationships at work policy: Don’t screw the crew. @davidmorganllb
Employee Share scheme: Buy our discounted shares. We prosper, you prosper.
Dress code: you are not clubbing, gardening or at the beach. NB. For lawyers, or going to a funeral. http://twitter.com/rarfarr
IT Support policy: Turn it off, then turn it on.
H R Policy: Be sensible (To replace all policies). @HR_Gem
HR Job descriptions:
HR Manager: Gandhi + Jedi Master
Reward Manager: Gandalf + Dr Who
Training Manager; Peter Pan + Seb Coe
Compromise Agreement: It’s not that we don’t like you, but here is some money, now go away. (Adapted from @dds180)
Clear Desk Policy: Nothing on top after working hours.
Sabbatical leave policy: we will not pay for your mid-life crisis. Enjoy Goa, See you in six months. @beth_Marie
Cycle to work policy: On yer Bike. @davidmorganllb
Industrial Action: Worker unpaid inaction.
I have tried to credit the originator – but it is not always clear who originally wrote these. If you know better let me know. Those not attributed are mine.
If you have better #shorterhr please add in the comments.
The pessimistic person’s pension problems Pandora’s package
I had a letter recently from the Trustees of one of my defined contribution occupational schemes. They told me they were going to change all of my carefully balanced investments in to funds of their choosing. They said they were doing it in the best interests of all members; a reason that gives little room for argument. It did set me thinking of the many pension risks we face; often not of our making.
Here is a list from the Pandora’s package of a pessimistic person’s pension problems.
There is an assumption that our pensions are safe but what about:
- The strength of the sponsor; as pensioners in Detroit have found – nothing is guaranteed
- Investment manager – more on this later; but what happens if our investment manager fails?
- Spouse risk; we assume that our spouse has made appropriate pension arrangements in the event of their death, but have they? What about divorce?
- State risk: some people rely on the state to provide a pension. Research has shown that there are a lot of European countries who will not (and in some cases currently cannot) be able to afford the state pension burden. If, it is going to be paid followed by when is it going to be paid followed by how much is going to be paid?
- What tax regime are we going to face on our future savings and on pensions in payment? In the US have we made use of the Roth rollover? In Europe, what are marginal rates of tax going to look like in the future given the deficits are likely to last for another twenty years?
- What limitations and regulations are going to be put in place now and in the future? In the UK the limits on pension savings change every few months. Are we going to face a savings limit; or like Australia a reduction in our state pension because we were prudent enough to save for our old age? We know this is on the agenda of the UK and other European governments.
- Are our pension’s savings going to be confiscated by the state at some stage, as we saw proposals to take savings from bank accounts in Greece recently? Do not think because it has not happened it will not happen in the future.
- For those countries that allow income drawdown; will those rights be curtained or removed thus driving the proverbial coach and horses through our pension planning.
- Regulatory risk; in order to protect pensions will regulators have to put such high hurdles in place that pension provision becomes impossibility expensive.
- What happens to our savings when QE ends and the bond bubble bursts?
- What happens if inflation takes off, as I consider very likely? Are our savings and our pension payments protected against massive price rises?
- Our country goes bankrupt! Not at all impossible in these volatile times.
- Annuity risks: are annuity risks going to crash even further (yes, probably). Meaning we have to save vastly more for the same level of pension.
- Research by Fidelity and others have shown that very few people are saving enough to meet a basic standard of living let alone meet their retirement aspirations
- Economic shocks for individuals such as unemployment, depression in the real level of wages, rising costs taking larger proportions of income are becoming the norm rather than the exception
- Annuity rates are falling and there is little sign on the horizon of increases. Forecasts based on old or historic annuity averages will underperform against the market reality
- Life expectancy; this is the good news bad news story. It is great that people are living longer. But, that also pushes annuity rates down even further. Someone (that is you) has to pay for all those extra years of pension
Where does one start?
- Do we invest conservatively to reduce volatility; but with a greatly reduced investment return or do we invest more aggressively and risk losing it all?
- Market timings – when do we buy and when do we sell; is our “lifestyle planning” going to mean our fund manager exists equities at exactly the wrong time?
- Hidden costs eroding our pension savings. De we actually know how much we are paying for all these advisors, fund managers, intermediaries, actuaries, professional trustees, pension lawyers, pension administrators and other assorted hangers on who seem to make a very good living out of our pension savings?
- Investment advice; should we be in bonds or equities, infrastructure or emerging markets debt? Even if we avoid the perils of active management do we know where we should be invested?
- Diversification risk, everything seems to be correlated with everything else when we look at investments. Are we over diversified or under diversified; should we be diversified? Are our fund managers over or under diversified
- Active vs. passive fund management? Should we hope that “our” fund manager can do better than the market over the long term (statistically very unlikely) or should we invest in the market indexes and perhaps lose out on juicy “one-off” investment opportunities?
- Vanilla or exotic investments. Should we invest just in main index stocks, or should we use derivatives to help hedge our exposure? Are Credit Default Swaps a good or a bad place to be; or both?
- Have we got good fund administrators?
- Are our pension records with our advisors correct and up to date? Does someone still hold the record for the pension I took out in 1984?
- Are our pension administrators undertaking the correct highly complex calculations correctly to ensure the correct final pension payment? Some years are indexed against one figure (In the UK, for example, against RPI) and in other years against another index (again, for example in the UK, CPI). Has inflation indexing, if we are that lucky, being calculated correctly.
- Would we ever know if any of the above does contain errors?
- Are the auditors of our pension scheme doing a good job for us?
- Are the pension lawyers looking after our best interests
- Have the pension trustees made the right investment and administrative decisions?
- Have the regulators got sufficient resources and expertise to ensure that pension scheme members are being treated fairly?
- Are the pension scheme communications easy enough to understand so we know the risks we are taking?
I could have gone on and on looking in my Pandora’s package but I have depressed myself enough already writing this. I am going to have a little lay down and a cup of tea.
Wellness as a reward strategy
The UK Health and Safety Executive claim that 27 million days were lost to sickness or injury in 2011/12 at a cost of 13.4 billion in in previous year. A lot of the illness is due to lifestyle choices such as diet, lack of exercise and stress. There is a strong argument that including “Wellness” as part of a reward strategy is a powerful and cost effective way of increasing engagement, reducing sickness absence and increasing productivity.
Advantages of wellness initiatives
- It is a cost effective way to improve engagement
- Employees appreciate the interest shown by their employer
- Increase in productivity
- Contributes to the “common good” – therefore good CSR management
- Wellness initiatives can integrate with health and safety programs and occupational health activity giving a virtuous circle of employee wellbeing aligned with good business practice.
Development of a “wellness” culture
One of the most difficult things to do; but the most rewarding, is to develop a culture in your organisation of wellness. By which I mean developing and encouraging behaviours that support wellness. So it becomes the norm in an organisation for people to eat property, take exercise and take responsibility for their own and their family’s health.
This can be achieved by the same tools that we achieve any culture change. Leadership is important. In one company I worked for there was an open competition between the CEO and the CFO on a number of sporting achievements. Lots of staff took part with these leaders or at least supported their healthy activities.
The “nudge” approach so favoured by the UK government can also work. By only serving healthy food in the canteen employees have little choice. By having employees opt out instead of opting in to annual health checks will considerably increase the take-up. Reducing the number of car parking spaces and replacing them with bike racks and showers nudge people in to considering using a bike rather than a car. There are a number of small, inexpensive changes that can nudge people in to a healthier lifestyle.
Pricing actions can also help with the establishment of a wellness culture. Subsiding health options and making more expensive less health options is a good way to nudge people in the right direction. Increasing the reimbursement rates for using public transport and decreasing milage rates make people consider the costs of motoring against public transport. Subsidising gym membership is another good approach to encourage take up. With some work and analysis these types of pricing approaches can lower the total benefits spend while leading to a more healthy group of employees.
Wellness culture can also be encourage by carrying out regular health audits of staff. These can be carried out by occupational health or an outside advisor looking at patterns of staff activity and how wellness initiatives are working and perhaps suggesting new lines of attack.
Examples of wellness approaches
Wellness approaches can be split in to:
- Risk Benefits
- Environmental changes
- Professional support services
The two most obvious benefits here are private health insurance and Health screening. Many organisations offer private health insurance with, in the UK for example, BUPA or PPP. But what is sometimes overlooked is that most health insurance organisations offer and in some cases encourage health screening. A mixture of these two benefits can pay big dividends to organisation by both reducing time off sick by obtaining immediate treatment and health screening can pick up health issues at an early stage and deal with them before they turn in to long-term sickness issues.
Although not strictly speaking a risk benefit (although with some ingenuity it can look like one) is the provision of an on-site or near site private GP service. I worked for a financial services organisation that provided a near site private GP service; which, while expensive, paid for itself by the reduction in staff having to take time off to see their local GP; often requiring a half day for a simple 10 minute appointment at their home location. It was also very useful for visiting overseas staff and inward expatriate staff who often found it difficult to get treatment with a local doctor. (This tends to apply to the UK rather more than other countries). The same type of approach can be used for the provision of private dental treatment on a “near site” basis.
Making the workplace healthier is easily undertaken. Replacing high fat snacks and drinks with healthy alternatives is but one suggestion. Provision of showers for staff that bike ride in to work or like to exercise at lunchtime is another key initiative. Opening up staircases as the preferred access and egress routes rather than elevators or lifts, perhaps by designating half of these as for visitor use only. There are a number of simple environmental changes that will encourage a healthier lifestyle.
The provision of healthier snacks, drinks, tea trollies and canteen meals can make considerable changes to the diet of our employees. Healthy eating does not have to mean uninteresting eating. When I visited the Head Office of Commerzbank in Germany they had interesting Asian and African foods in the canteen; as well as it being open to the public…
Professional support services
This is another area that can create considerable leverage in employee wellness. As an example, mental health is now recognised as a major issue for employers. Time off for stress and depression is rising rapidly. The provision of confidential counselling is an excellent way to provide support to employees. Likewise drink and drug awareness and support initiatives can often catch problems at an early stage.
This type of support can extend to the provision of “at desk” massages’ to help relieve stress and long hour exhaustion. There are many other creative and innovative solutions available in the market place to drive home the wellness message and provide support to staff.
Finally in this section, let us not forget trauma support. Unfortunately, unexpected but dramatic incidents are an on-going fact of life in all countries. These can vary greatly from terrorist attacks to train or airline crashes or sadly mass shootings in our locality. It is essential to have appropriate professional, qualified trauma counselling available immediacy after an incident. Services can support staff, managers and families in the event of tragedy; minimising the possibility of long term mental issues arising from the trauma. Do not forget, in the event of an incident many organisations will be looking for this type of support so simply get in first and have contingency arrangements in place with approved suppliers. This is all part of the wellness agenda; be it often over looked.
Wellness is an important, but often overlooked part of reward strategy. Yet it is a cost effective way to improve both productivity and engagement to our valued staff. It turns the phase “our staff are our biggest asset” from meaningless marketing to a working reality appreciated by staff and other stakeholders as part of a cohesive CSR policy.
On the subject of cohesiveness a well manufactured wellness approach can be closely integrated with business continuity, health and safety and occupational health. The impact on the employee brand and proposition will be enormous – without a large cost.
I do not know why this approach is not more widely used. Do you? And, have you any suggestions for innovative approaches on wellness in the workplace that I can share as part of an on-going dialogue on “Wellness in the Workplace” which will focus on some of the individual initiatives and providers who can help build this simple but highly effective reward intervention.
Rewarding Reward Podcast http://www.idavidson.podbean.com/
I have produced the fourth podcast in the series “Views over the City” http://www.idavidson.podbean.com This podcast covers pay and reward issues on a global basis. This podcast includes:
- Banking remuneration – Comments on the UK banking standards report
- Executive Pay – discussion on the MM&K ( http://www.mm-k.com/ ) survey on Eexecutive Pay
- Strong Analytics – using and presenting reward data
- Peter Cook, Author and innovation guru – a conversation
- His free Punk Rock book is available from http://www.academy-of-rock.co.uk/punk-rock-hr
- Find out more about the polymath Peter Cook at http://www.academy-of-rock.co.uk
- Middle East reward: see also http://compensationinsider.com
For more on Banking remuneration see: https://iandavidson.me/2013/06/12/rebuilding-trust-in-the-city-of-london/
“I was at a recent meeting in the City of London to launch the document “Focus on rebuilding trust in the City” a Chartered Institute of Personnel and Development (CIPD) survey of staff in financial services in the City of London on trust and their employment relationship”
For more on Executive pay https://iandavidson.me/2013/06/18/balance-of-power-executive-pay-and-shareholders/
“There is considerable controversy over levels of executive pay. There are a multitude of stakeholders or would be stakeholders pugnaciously striving for influence. Remuneration committees are supposed to control executive remuneration. However, as the MM&K recent survey shows, FTSE CEO Remuneration increased, on average, by 10% in 2012. Why are shareholders allowing this to happen?”
For more on strong analytics:
“As a reward specialist I am asked questions like, what is our pay inflation going to be next year? I used to go away, do research and say 2.4% – having used the historic average. Of course it was never exactly 2.4% so my boss would turn round and say – “but Ian, you said it was going to be 2.4%, you’re fired”. If asked the same question now, I respond with an answer; “there is a 50% probability that it will be 2.4%; but there is as 10% probability it could be 4%, so we should factor that in to our budget.”
My new reward podcast give a wide view over the reward landscape as well as a fascinating conversation with innovation guru and author Peter Cook.
If you would like a guest blog post or to guest blog post on this influential reward blog please get in touch.
UK Government’s own goal pay farce
It is reported today that UK politicians are seeking to block a pay rise for themselves recommended by an independent body. The IPSA, an independent body that acts as a policeman on MP’s pay and allowances is alleged to be recommending a pay increase of £10,000 per year for UK Members of Parliament. The politicians are rumoured to be very concerned about how the public would view such a rise in the context of UK standards of living decreasing over the last ten years with average pay increases being well below the rate of inflation
Caught in the pay paradox
Politicians are facing exactly the same paradox as remuneration committees. The expert, independent advice is that the CEO or CFO are underpaid against the market; but the remuneration committee knows that to give a large increase to the CEO to bring her up to market rates would be unacceptable. Caught in the pay paradox.
Not carrying out the recommendations risks MP’s falling further behind the market (is there a market for MP’s?), but granting the statistically justified increase would bring large amounts of unpopularity with the (voting) public. I hear echoes in the Great Hall of Westminster of “We are all in this together” dying an unpleasant and messy death.
A touch of real life
It is just possible that politicians will begin to appreciate the very real challenges of remuneration committees as they struggle to balance the demands of a thriving market in executive talent with the environment created by the politicians and the media that consider any pay increase for executives as some form of inherent evil.
How will this end up. I would guess that some messy compromise will be reached that will further distort the “earnings” of UK politicians; which will please no one and still result in a further dilution of public trust in the institution of parliament.
The pay paradox has been recognised for some time. There is no easy answer, if any answer at all. Politicians have designed and built a rod for their own backs. Remuneration Committees have the same issues before them in the current environment. Although I think it is unlikely, let us hope that UK politicians get a better understanding of the pay paradox as a result of this unfortunate farce.
What do you think?
Why thinking in averages is below average thinking – Strong analytics II
As a reward specialist I am asked questions like, what is our pay inflation going to be next year? I used to go away, do research and say 2.4% – having used the historic average. Of course it was never exactly 2.4% so my boss would turn round and say – “but Ian, you said it was going to be 2.4%, you’re fired”. If asked the same question now, I respond with an answer; “there is a 50% probability that it will be 2.4%; but there is as 10% probability it could be 4%, so we should factor that in to our budget.”
The problem is that point data estimates, like, pay inflation is going to be 2.4%, have a high possibility of being wrong. Using a probability approach gives more information about outcomes and new ways of thinking about those low probability, high impact events in our lives – our “Black Swans”. Dr Sam Savage, a pioneer in work on probability, tells the story of the mathematician who drowned in a river that had an average depth of three inches – that average hid a deep trench right across the centre.
Average forecasts are wrong on average
Taking point averages and using them to forecast is a common fallacy. House prices have gone up, on average, $20,000 per year, the forecast is that they will go up $20,000 next year – oops, they fell $50,000. Using a probability approach tells us that there was a less than 40% chance of a $20,000 increase and, a 10% chance of a $50,000 fall.
Playing with Monte Carlo
So how do we get to the “50% probability that inflation will be 2.4%”? My favourite method (but not the only one) is to use a Monte Carlo Simulation. This is a statistical technique that allows me to account for volatility in numeric analysis. It does this by producing a probability distribution for any factor that has variable outcomes and by producing a large number of random samples. What does this mean? Well, I took some UK National Health Service (NHS) quarterly sickness data over five years. The average percentage absence was 4.2%. I ran one million random trials (it took about twelve minutes) against the data distribution. It showed that while there was a 50% chance of absence being 4.2% there was a 10% chance of it being 5%. That may not seem like a big difference but when you are dealing with the biggest workforce in the UK, 0.8% is a large number of doctors and healthcare workers off ill. I used a different set of NHS data on the number of sick days lost per employee. The 50% probability of days lost was 6.1 – but there was a 10% chance of 9 days, a large difference.
As an HR professional it is better to say that we have a 50% probability of wage inflation at 4.2%, which clearly gives a large range of other probabilities than saying it will be 4.2% with a very high probability of being wrong.
There are a lot of advantages to using the probability approach. We can show what might happen and also the probability of each outcome. One example of this that I have used is to look at the probability of different performance measure outcomes in an organisation if they were normally distributed. I then compared this with actual outputs and was able to show the CEO which departments were “outliers”; had produced markings that were higher or lower than forecast. That allowed us to talk to the line mangers to find out why the department was marking higher or lower than was predicted if the performance was normally distributed – which is what you would expect.
Using probability analysis is invaluable for “what if” exercises. How many times have we been asked to model what would happen if you cut the budget by 3%? Using one number you get one output. Using the probability approach you can give a range of possibilities. I have looked at death rates in an organisation against the probability forecast. On one occasion, using a probability approach, I suggested increasing insurance cover just in time for a sad increase in the number of employees dying. (The increase was, of course, entirely random, but I had forecast that probability).
Another important use of probability is that of project planning. One statistical quirk in project planning is that if all the tasks are completed, on average, on time, then the project will be delivered late! (Think about that for a minute….)
Fooled by Black swans while thinking fast and slow
You may have read “Fooled by randomness” by Taleb or “Thinking fast and slow” by Khaneman. Both make the same point. As humans we are programed to apply heuristics and biases to problem solving: dismissing or ignoring the unlikely in favour of what we think we know or what happened recently. Yet unlikely outcomes are more common than most people would guess; also the outlier outcomes tend to be extreme by definition. Of course, in HR we work with people, who act in quite random ways sometimes……
Bombs and gas masks
When in investment banking I worked with an outstandingly good business continuity manager called Stuart Dunsmore. He talked about the possibility of a bomb in central London being extremely small; but the effects would be highly disruptive. Sadly, he was proved right, but the upside was we came through the London bombings with our UK business unharmed due to his preparations.
When in the City of London I carry an emergency gas mask. Why, well, the chances of needing to use one are small, but I only need to use it once to save my life! The probability of a biological or chemical attack in London is tiny; but the chance of death is high. Low probability events with high impact; do not let them take you by surprise.
The dark side
Now for a public health warning. First, those of you who have a statistical background (unlike me) will spot holes in my argument. There are issues with Monte Carlo simulations or even using probability approaches. But, they are better than point averages for forecasts. It is a continuum, yes, there is better mathematical or statistical approaches available but even starting to think on the basis of probability is a game changer. Second, probability often depends on the future being similar to the past – but it will not be! However, using the probability approach makes us more aware of both that factor and that highly unlikely events do occur with surprising frequency.
Most of us in HR are not statisticians Using the probability approach does involve some understanding of statistics and how to use the programs that are available, be they Microsoft Excel add-ins or programs designed specifically for this work. However, taking the time to understand probability both as a mind-set and as a set of techniques is a major game changer for HR.
I would urge you to give it a try; you have little to lose. The gains are large; greater chance of producing “better” forecasts, certainty of being wrong, on average, less often. Increased credibility and perhaps a more open mind set to when those outlier events do occur. Enjoy!
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Balance of power – Executive pay and shareholders
There is considerable controversy over levels of executive pay. There are a multitude of stakeholders or would be stakeholders pugnaciously striving for influence. Remuneration committees are supposed to control executive remuneration. However, as the MM&K recent survey shows, FTSE CEO Remuneration increased, on average, by 10% in 2012. Why are shareholders allowing this to happen?
Balance of power argument
I had a fascinating discussion with the executive pay guru Cliff Weight on the subject of the balance of power argument (although the discussion below is entirely mine) when looking at executive pay.
The Executive’s power
Most of the time the executives hold the balance of power because:
- Changes in executive board members, unless well managed, tends to lead to a fall in share price
- Changes in senior management generally signals a failure of strategy or strategic uncertainties – which lead to a fall in share price
- A lack of good succession planning by the Board so there is no immediate, obvious internal or external replacement.
- A shortage of good candidates with the relevant experience and willingness to take high profile roles. This tends to mean organisations can be without a CEO or Finance Director for six to nine months; which leads to a fall in share price.
No Board or Remuneration Committee wants to be seen to be acting in a way that damages shareholder returns.
The Stephen Hester debacle
A good example of how NOT to carry out changes in senior management is shown by the apparent decision of the UK Treasury to replace Stephen Hester, the CEO of RBS. The announcement seemed to take the markets by surprise – leading at one point to a 7% drop in RBS share price. Further, the lack of any successor or allegedly any succession planning by HM Treasury means there is something of a leadership vacuum in RBS (even with their excellent senior management team) that causes great uncertainty to both investors and employees. This, just at the point when RBS had turned around and had a clear and compelling vision of its mission and future.
The Shareholder’s power
Shareholders have limited power over executives; they have the upper hand mainly when:
- There are downside earnings surprises
- Takeover or mergers are under discussion
- There is a strategy dislocation – a disruptive technology or social trend; look at Smartphones impact on the traditional phone manufactures
- The market loses confidence in the management of an organisation
These tend to be seminal points in an organisation’s existence that hopefully do not occur too often.
Important issues for Remuneration Committees and Executive management
Both parties to pay discussions need to think about the balance of power issues and how they influence the reward dynamic. Strategy needs to be owned and driven by the entire executive team; hopefully mitigating the effect of the departure of any executive.
Good management of shareholder relations and open communication will help reduce any share price “shocks” when changes do take place. Good financial PR will again mitigate both the shock and share price impact.
The paradox of succession planning
One of the potential failings of Boards when considering the balance of power argument is succession planning. In an ideal world a replacement for the CEO would have been identified and prepared for the new role well in advance of the change. Unfortunately there is a paradox here. A CEO could perceive that work by the Board to identify her successor was a signal of their imminent departure. As invariably such issues leak, so the market would view it in much the same way. Dammed if you do and dammed if you don’t. There is also the issue that the heir apparent may become impatient with the wait and either go elsewhere or worse actively seek to undermine the existing CEO with the Board.
There is no easy or obvious answer to the succession paradox; but clearly it is an issue that must be taken on board in the balance of power debates.
The balance of power approach is a useful framework to view trends in executive pay. I can see no immediate answer to how or even if, the balance of power should be more equally distributed. Like any good explanatory framework, the balance of power debate asks more questions than it answers.