(Don’t) Show me the money

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effective remuneration policies
(Don’t) Show
me the money

(Don’t) Show me the money
Copyright © 2010 Pivot Software Page 1
Disclaimer
This document is intended as a guide only. Readers are advised that before acting on any matter arising from this
document, they should consult Pivot Software.
© 2010 Pivot Software Limited. All rights reserved.

Thoughts from the field about building effective remuneration policies
Contents
(Don’t) Show me the money ....................................................................................................2
It’s not just about the money...................................................................................................3
Rem’s changing face .............................................................................................................4
Don’t be one-dimensional .......................................................................................................7
Dimension #1: Get philosophical ............................................................................................. 11
Dimension #2: External relativity ............................................................................................ 14
Dimension #3: The tough balance of internal equity ..................................................................... 18
Dimension #4: The individual ................................................................................................. 21
Remuneration strategy policy and template................................................................................ 24
Glossary .......................................................................................................................... 26
About Pivot Software........................................................................................................... 28

It’s not just about the money
If your annual or bi-annual remuneration (salary) reviews were just about money the job would be easy. The
human resource (HR) team could pack up and go home early.
The reality is remuneration is far more complicated and emotionally fraught than a simple money equation.
External market factors, internal relativities, company strategy, government regulations, company location or
social standing and personal values are just some of the many variables that need to be considered and
traded-off in the typical salary review.
To help, we’ve developed a model we call “Remuneration in Four Dimensions”. It might sound a bit sci-fi but
it is mainly built from common sense and sound practice we’ve seen in 20 years of being involved with Rem
processes at big banks, government departments, insurance companies, energy companies and engineering
practices in Australia and New Zealand.
Remuneration: salary, pay, moolah, dosh, coin, lucre,
wages, comp. There are lots of names for it. To
keep it simple we just call it ‘Rem’.

Rem’s changing face
Big hair and simple Rem
Remember the 1980s? We do. Apart from disco and big hair, remuneration was also a lot simpler.
Jobs were typically in a box - well defined and very precise. There was limited recognition of an individual’s
contribution. People sought an employment deal based on security, stability and a paternal attitude from
their employer. Negotiating over pay and conditions was left to the union and the employer.
The remuneration approach was pretty simple – pay and benefits. An internal focus, particularly internal
relativities, defined the way compensation was set. Employees could typically only talk to their colleagues
about pay levels and there was little external data available to them. Labour was a lot less mobile – taking
your skills offshore was relatively uncommon. Everyone was paid the same for doing the same work, even
though there were outstanding performers and under achievers.
The battle for talent didn’t really exist; most organisations either had a programme of developing internal
talent or it was a seniority based on service model.
The new reality
Jobs today are more of a balloon than a box; they shift as economies change and company structures morph.
Individual efforts are far more valued and recognised. Security comes from employability rather than paternal
protection.
Organisations have a much more holistic view of the whole employment relationship and its “value”. They also
benchmark salaries against the external market, information that is typically available to some degree to
employees through advertising, chats with mates and peers in other organisations. As much as employers may

wish to “threaten” by stating that your pay may not be discussed with others, ‘loose lips’ are common
practice.
Even with the recent global recession, the labour market power is shifting. In 8-10 years it is estimated that
the world’s labour market will be 10% undersupplied. This means there will be more jobs than people to do
them, as our population is living longer and the world population is growing, so we need more of everything
but our active workforce as an overall percentage is diminishing. This puts the power back in the hands of the
employee and employers need to be armed and ready for the discussions.
In this infinitely more complex Rem landscape there is
more pressure on organisations to have solid
frameworks in place.
Want some proof?
A recent study1
from global consulting company Mercer suggests that inconsistency in adhering to pay
principles has a dramatic impact on corporate costs and staff retention risks.
The inconsistency pivots around the contribution of line managers, who are often less discriminatory in
distributing available pay increases than their business would like them to be. This commonly stems from a
lack of clarity on the guiding principles for making awards and a natural tendency for them to ‘generously’
reward mediocre performance (leaving them with insufficient budget to recognise top performance).
1
Source: Mercer website, published March 2010

Employees are also confused by the mixed messages they get from the company and their manager, ultimately
preferring to trust the grapevine for reliable insights into the company’s pay principles.
According to Chris Johnson, Head of Mercer’s Human Capital Business, “Our research shows that companies
spend nearly 40% of their revenues on employee pay and yet they fail to deliver their pay policies
effectively. Initial data suggests that this leads companies to waste nearly $NZ 8800 per employee, or nearly
8% of their payroll. Employees know that some of their colleagues are over-paid and others are underpaid:
this undermines high performance and employee engagement.”

Don’t be one-dimensional
‘Holistic’ might sound fluffy, but a multi-faceted approach to Rem is a key to success. A one-dimensional,
‘show me the money’ policy is shown to be ineffective and can kill your hopes of an engaged, productive
culture.
In a study undertaken by global consulting firm Hewitt it was shown employees were willing to trade-off 15-
20% of their salary for other job benefits. That means you need to get the rest of the Rem approach right to
attract and retain the right employees.
The importance of having your remuneration process right was underlined in the recent “Best Employer
Study”2
from global consulting firm Hewitt. It found two key remuneration factors that impacted on employee
engagement.
Hewitt “Best Employer study”:
1. Line managers had a good understanding of the remuneration process in their organisation and could
explain that well to staff. The research showed that this correlated strongly with a positive perception of pay
amongst employees.
2
Hewitt Best Employers in Australia and New Zealand 2008

Do Not Underestimate the Importance of Manager Capability
0
10
20
30
40
50
60
70
80
90
30-40% 40-50% 50-60% 60-70% 70-80% 80-90% 90%+
Positive Perception of Pay
Iamwellequippedtoexplainour
rewardstructuretoemployees
Manager
2. There was a greater differentiation of rewards to people based on their performance. In other words if the
remuneration policy is well understood and consistently implemented staff are very happy about people being
paid on performance.
The multiple dimensions:
Staff make all sorts of trade-offs when choosing a job. Money is one of the factors, but it can only balance out
the positive and negatives if they are not too extreme. For example:

Element of employment deal Is it this? (+) Or this? (-)
Brand
Proud and strong in the
community
Employees would rather not say
the name of your company
when asked
Industry Socially acceptable
Ethically has poor public
perception
Working conditions Safe and pleasant Risk- filled; dirty; noisy
Other benefits
Discounted product
Flexible start/end times
Zilch!
Team environment
Socialising
Friends at work
No natural teamwork

Holistic view:
Taking a holistic view of Rem is how you build a strong employment offer and improve employee engagement.
And that’s why we have developed 4D Rem, a multi-dimensional way of looking at the Rem process.

Dimension #1: Get philosophical
A lot of organisations talk about “flexibility” when it comes to rem. You can’t have flexibility without a strong
base though. Flexibility can’t mean you just shift the goalposts whenever you want to retain an employee – it
must be built on some solid and widely accepted principles. Otherwise the credibility of your entire process
will be undermined.
Putting this foundation in place is mainly about being able to answer some key questions about the drivers of
remuneration in your organisation. While fiscal constraints are the main policy guidelines to work within, they
are not the only ones. For example, some organisations will automatically match remuneration to labour
market shifts and/or the CPI (consumer price index). But that is too one dimensional and ignores many other
factors. You need to think more broadly. Who are your stakeholders? That is, who has a legitimate interest in
the manner and amount of remuneration your employees receive? The difference between a small, private
company and a large government organisation is considerable. You can’t underestimate the effect on your
reputation/brand of not dealing with this effectively.

Organisations sometimes underestimate the role of unions or other employee groups in their organisation. You
need to factor how much influence they have in the salary review process, either directly or indirectly. Is this
influence working for or against what you are trying to achieve as an organisation i.e. retention of the people
that help you be successful balanced with what you can afford?
What is your company’s retention policy? If a high performer threatens to leave for more money at a
competitor, what are the accepted guidelines for managers? Unless you have a clear policy these things tend
to be dealt in an ad hoc way, causing resentment. If you don’t have a policy here, the actual practice (what
is occurring in real life), becomes your known policy very quickly.
A related point is an understanding of where your organisational brand sits in the market. Some organisations
need to pay high because their brand is not well known or negatively perceived e.g. tobacco companies. Do
you need to pay a premium?
The flip side is industries or sectors that are relatively “safe havens” in volatile economic cycles - e.g. local
government or utilities. Pay does not necessarily have to match the “high flying” industries/sectors in the up-
cycles, knowing that job security and even pay levels can drop in these sectors when the high flying turns in to
“downhill dives”.
Regulatory compliance also plays a part, especially with growing public disquiet over salaries in areas like
finance and banking. For example there are the Australian Prudential Regulation Authority’s guidelines that
frame several aspects of the connections between incentives, risk and organisational performance.

There is also your organisation’s strategic direction. Are you in growth mode, battling away in a sunset
industry, trying to reinvent yourself, or is the business being prepared for sale? The workforce mix will need to
change or be protected whatever the strategy, and your remuneration approach needs to follow suit.
Finally, there is the big one. How much dosh does the organisation actually have? What are the budgetary
guidelines that underpin all of those many line manager decisions? It is not just simply divide what’s there
though – what is the organisation’s approach – significant rewards for high performers or more even-handed
policy? No Rem strategy is the ultimate; it has to be designed for your organisation’s situation.
While fiscal constraints are the main policy guidelines
to work within, they are not the only ones. You
need to think more broadly.

Dimension #2: External relativity
Market relativity – some people may think this is the easy bit – get some “market data” from somewhere and
that’s it! Simply plug in the numbers and you have what you need. However, relativity is not that easy or
scientific. It is a mix of solid statistics and educated judgement. A mix of art and science.
Simply determining where a job fits on a scale of New Zealand market relativities is not sufficient. There are
so many variations across locations, industries and other trends that you can end up getting it really wrong.

Some organisations build a remuneration policy on the basis that jobs within their organisations are relative to
any other in the country. Pay therefore should be matched to whatever the “average” is for that position.
This is too simplistic. A more realistic picture is to understand where your industry/sector fits relative to
national scales. The nature, scale and dynamics of different industries tends to result in them paying over or
under the average for jobs, from small to large.
The market in the widest sense is actually what every job in New Zealand is paid, and as an organisation you
need to know what “part of that market” you want to consider your “target” to ensure competitiveness in
attracting and retaining people. The reality is the market operates on several different levels and you need to
know where your organisation and sector fits.

Fundamentally remuneration is about demand and supply, so finding the right “price” for your organisation’s
labour is crucial. Relying solely on market data is not the way to achieve this optimal price. You need to
factor in a broader picture – the four dimensional approach to remuneration.
It is also important to remember that while the market data appears scientific, it is only the process of
analysis that is scientific (if purchased from legitimate market survey providers). There is no market survey in
New Zealand that has information on what every job in New Zealand is paid.

Market data is affected by many things:
 The organisations that have agreed to share their data and their methodology for determining what
are “big jobs” and what are “small jobs”;
 The definition of remuneration used i.e. do you include benefits that the organisation offers, and how
is the value of those benefits reflected in the survey;
 How big the sample data is and is it a fair representation of your “target market”. There is no point in
trying to compete for staff with a big city-based multi-national company in your sector when you
largely recruit from a stable local market at the opposite end of the country.
It is wise to use your own judgement in addition to the statistical analysis. Have you had trouble recruiting?
Are people really leaving your organisation for better money or is it something else? It is wise to under-react
if possible to market data until you are sure the issues are real and not perceived.
You need to know this information of course, as your employees, especially the more mobile or smart ones,
will have an idea from talking to friends, colleagues and reviewing data online. You need to have a clear view
of relativity so managers can have good discussions during salary reviews.
Relativity is not that easy or scientific. It is a mix of
solid statistics and educated judgement. A mix of
art and science.

Dimension #3: The tough balance of
internal equity
You need to be focussed on this because employees are concerned about it. They want to ensure they’re paid
fairly compared with their co-workers and in comparison with the market. Creating a system where we can
benchmark jobs internally and establish some remuneration ranges helps us do this. This also ensures it is not
just negotiation skills that determine pay.

Market information is not enough for several reasons:
 If you focus solely on external market rates and market pricing, you communicate the message that
the organisation doesn’t control remuneration policy – the market does, and this can place your
organisation and its people at risk. The extent to which your organisation’s profitability is affected
by the labour input cost is important to understand, so you can determine the extent to which you
have scope to react to labour market volatility.
 In larger organisations you may have your own “market” within your own business where different job
functions are paid at different pay rates, even though you may consider them to be peers within your
business. You may need to match and measure jobs across the business and arrive at an organisational
“pay rate” that considers the rate for each function and creates some middle ground that will keep
both groups happy. This will encourage people to move and contribute to all business areas, while
retaining valuable organisational knowledge and skills.
 Market remuneration information doesn’t recognise variations in job content which are not significant
in the marketplace but are significant to your particular organisation. This can be especially important
in a role that holds significant knowledge that is critical to the organisation’s survival.
Internal equity and external (or market) equity are interdependent - each one is as important as the other.
Internal equity is about recognising the culture of your organisation and understanding how important pay
relativity is to team “harmony”. Simply using the line of “we pay what the market pays” and then realising
that internal perceptions of an individual’s value or otherwise to the organisation does not match what they
are paid, can really affect how people interact with each other. This is a risk because it doesn’t matter how
much you tell employees they must not talk about their pay – they do.

Typically internal equity is developed on the basis of a job evaluation or a “job matching” process.
Methodologies around job evaluation are well developed and understood in most large organisations. Jobs are
split into ‘bite sized’ pieces – skills, experience, accountability, staff, budgets managed etc. Then they are
scored on a standardised model using a methodology like Hay. A hierarchy is built in the organisation which
then helps work out relative pay categories.
Sometimes organisations feel they have done enough to have this in place, but unless you have more
granularities you can cause problems. Sound policies are needed on whether an organisation wants to pay high
performing people more than low performing people in the same “size” job What is the organisation’s
approach to this and how is it communicated during the salary review process?
There are also other issues relevant to internal equity such as industry or company trends. It is not good
business practice to pay above market rates for a job that the company won’t need in the short to medium
term because of a strategy change, unless it is critical to retain existing incumbents until this strategy plays
out.
Equally a role critical to the organisation’s success, if the skills are hard to replace, may need to be paid very
well as the down-time trying to replace the lost skills could be very expensive These things need to be well
understood and must underlie the internal equity decision-making process.
Employees want to ensure they’re paid fairly
compared with their co-workers and in comparison
with the market.

Dimension #4: The individual
The last, critically important, dimension of building a sound remuneration strategy is focussing on the
individual. This means having a strong understanding of your current and prospective employees. Why do they
want to work for your organisation? What do you offer over and above salary and conditions - career
credibility, security, positive community, location and so on? How do their values align with those of your
organisation?

Values
Employees drivers are not always the obvious, and can vary across age, gender and ethnicity. You need to
have in place ways of understanding these drivers and how your remuneration policy can support them.
Recent research has shown that if an employee is happy in every other aspect of their working life, pay has to
be about 15-20% “wrong” before they will consider moving to a higher paying job. It makes good sense then
to get pay ’about right’ and then do everything you can to take their mind off the money!
For example, a simple “thank you” doesn’t cost anything. Researching some recognition initiatives is a good
investment.
Paying attention to the generation employees belong to is relevant. Much has been made of the challenges of
managing the Generation Y demographic. Within your Rem policy you need to recognise that:

 Money is important at different stages of our lives
 What people want out of a job is different at different stages
 More generations are in the workforce now than any other time in history – what motivates each of
them is not just money
Ethnicity is another important part of the values mix. For example team and family are very strong in some
ethnicities. Some nationalities don’t like to separate out individual performance or to be put on individual
pedestals.
Personal values need to be taken into consideration. What does the company look like from an environmental
standpoint; social standpoint – does it fit with individuals and what is important to them. Are there any ethical
issues employees have to confront?
What are an individual’s family needs? For example with work hours are company expectations consistent with
personal requirements. Why is an individual working, what is driving their day to day efforts?
Good money may “compensate” for an imbalance of these things, but this is usually only a temporary solution.

Remuneration strategy policy and
template
When completing this strategy template, refer to the discussion points in each section of this book to ensure you consider
your organisations unique attributes.
Dimension 1: Remuneration philosophy
Statements here need to answer the following questions:
 Is Public or Shareholder scrutiny probable? If so this needs
to be acknowledged as being a factor to consider.
 Are remuneration costs a major expense for the business?
If so a statement should be made to connect the need for
remuneration costs to remain relative the organisational
performance.
 Will you differentiate individual remuneration levels based
on performance? OR is it “Same job, same pay.”
 Will you pay bonuses/incentives? If yes, will these be
connected to individual, team or company performance or
a mixture of all?
 What is your stance on “attempts at poaching” – this is
important for all management to understand and agree?
 What are your organisational considerations when
determining remuneration levels compared to the market?
– eg: if company is on a growth curve – retention of skills
is critical; availability of required skills.
Dimension 2: External competitiveness
 What part of the labour market do you consider
your “market” to measure comparisons? – eg –
public or private sector, what industry/ies,
national or geographical?
 Where in the market do you want to set your
“average payline”? – eg market median, 75th
percentile etc?
 What comparison will you use? – eg base salary,
“fixed package”, “total package including
incentives” – you may state that you will pay
“market median” for fixed remuneration, and 75th
percentile for total package including incentives.
 Will you pay differently in different locations?
 Are some jobs in your organisation compared to a
different market than others? – eg: engineers in
the mining industry will be compared to the same
jobs in that industry, but accounting roles with a
mining company may be compared to a more
general market segment. You may need to do
differentiate critical roles from roles that are more
easily to recruit for.

 Where will you get your market data from? – eg a
reputable market survey provider?
Dimension 3: The individual
 Describe and segment your workforce demographics – age,
gender, ethnicity and consider some possible assumptions
regarding individual needs to help determine what may
appeal as an offering – some examples may be:
o Recognition programmes
o Flexibility of workplace location
o Flexibility of working hours
o Working around childcare or eldercare
arrangements
o Ability to support personal interests – eg sports etc
 Use the demographics to make policy statements regarding
the “Rewards for work”.
 As an organisation are you committed to any benefit
programmes such as Medical care subsidies; product
discounts; supplier/ partner benefits?
Dimension 4: Internal equity
 Do you use a methodology for “measuring jobs”? –
if so state it here.
 If no formal methodology is used, make a
statement regarding how internal relativities are
determined – this may be seniority based on
reporting lines, professional organisation
standings/qualifications, management
determination.
 Do you use “salary bands” to group the pay rates
for similar jobs – if you do, do you publish a) what
band a person is in; and b) the salary range of that
band? This needs to stand up to scrutiny, so it
should be clear as to how a person ends up in one
band versus another. If it can’t stand up to scrutiny
you may have to consider non-disclosure and use as
a management tool only; however in the absence
of information individuals will draw their own
conclusions.
 Will you have different salary bands/ranges for
different job families even though they may be
considered peers in terms of organisational
structure? – eg: Corporate and Administration pay
ranges; technical pay ranges etc.

Glossary
Base Salary (also referred to as Base Pay):
Cash salary received weekly, fortnightly, monthly etc.
Fixed remuneration (also referred to as Fixed Package):
Base salary plus the calculated monetary value of “guaranteed” or set benefits including company car,
company health insurance etc.
Variable Pay:
This refers to discretionary bonus payments, performance rewards, incentive pay etc that are not guaranteed
or set and may be paid based on individual and company performance.
Total Remuneration (also referred to as Total Reward, Total Package or Total Cost to
Company):
Fixed Remuneration plus any Variable Pay.
Median (also called middle of the market or 50th percentile):
This is the point or value below which 50% of data contributed to a market survey falls.

Lower Quartile (also called 25th percentile):
This is the point or value below which 25% of data contributed to a market survey falls.
Upper Quartile (also called Q3 and 75th percentile):
This is the point or value below which 75% of the data contributed to a market survey falls. This is often
referred to as the upper end of the market.
Job Mapping / job scoping / job sizing:
A systematic process for establishing the relative worth of a job within an organisation.
Market Survey (also called pay and benefits surveys or pay benchmarking):
Surveys that collect information on pay (market rates) and employee variable pay and benefit provisions in
other companies.

About Pivot Software
Pivot Software helps organisations use technology to improve their control over complex and often emotional
human resource processes. Productivity, enhanced transparency of outcomes and improved employee
engagement are just some of the positive impacts of implementing our technology. As human resource
professionals, we understand how well managed remuneration and performance management policies bring
organisational values and principles to life. We enable HR interactions that are meaningful and beneficial.
Conversations between managers and staff are supported, and not replaced, using our solutions which are as
easy to use as a simple website.
Over 50 organisations across Australia and New Zealand use Pivot’s solutions, with the majority coming from
the energy, resources, financial services and professional services sectors. The HR policy and strategy needs of
our clients are met using a secure, internet-based, highly configurable software-as-a-service model that fits
within any corporate IT infrastructure. Our clients enjoy a time-saving solution designed for the task; not a
generic tool that is ‘made to fit’.
Pivot Software (New Zealand) Limited Pivot Software (Australia) Pty Ltd
Phone: +64 3 359 1707 Phone: +61 2 9911 4016
Email: info@pivotsoftware.com Email: info@pivotsoftware.com
Address: Address:
Pivot Software Ltd Pivot Software Ltd
PO Box 20 348 PO Box 5373
Bishopdale West Chatswood
Christchurch 8543 NSW 1515
New Zealand Australia
Copyright © 2013 Pivot Software
All rights reserved. All trade names referenced are the service mark, trademark, or registered trademark of the respective manufacturer.

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