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Designing a Sustainable Pay Structure for your Organisation

Designing a Sustainable Pay Structure for your Organisation

An equitable remuneration structure is a key component of any business. Ensure your business has an equitable pay structure. A pay structure puts people in grades. Each grade will have a minimum, midpoint and maximum salary. The minimum salary reflects what the business is willing to pay for any position at entry into that grade. The midpoint is a premium reserved for above-average performers. It is normally a reflection of your target market position (25th percentile, median, 75th percentile, etc.). 

The maximum salary, which in a normal case, no employee should earn should be carefully watched. If an employee is being paid at the top of their salary range as a reflection of their contribution they are probably due for promotion. So what should you get from your Human Resources Manager, maybe every quarter? Request for a compa- ratio report that shows how far individuals are progressing within their pay ranges. The ideal compa- ratio range is 80% to 120%. Anyone being paid below the 80% mark is being underpaid and anyone paid above 120% is overpaid. Check that your top and consistent performers are being paid between 100% to 120% compa- ratio. This is the starting point although other more technical analysis can be done depending on the technical know-how of your HR advisor.

Starting Salaries for new employees – Remember that giving someone a salary is taking a risk as this new person may or may not deliver. If you start the new employee close to the mid-point (market premium) and they fail to deliver it means you are losing value. It is always recommended to start all new employees at the minimum of their grade. If the new employee demands more, you need to say to them I will offer you the minimum of e.g. $2000 and will add an extra $1000 to take you to the midpoint after probation if they happen to be a good performer. The other way to deal with this is to say I will offer you $2000 as guaranteed pay and the extra $1000 will fall away if I discover that your value is not at a market premium. This should normally happen after the probation review. 

Performance Related Pay – If your organisation pays or decides to pay a performance-related pay you must check if the system has been designed properly. The best systems are those that are self- funding.  You only share out of the extra value that has been created after taking care of the shareholders. You must be careful that you are not rewarding people for what you are already paying them to do. In the market, most systems we are seeing are poorly designed.

Benefits– Look at each benefit and see how it is supporting your business. You may be aware that most companies give benefits not because they make people perform better but instead, they give because other companies are offering the same benefits.  To stop their employees from leaving, they copy what their competitors are offering.  Benefits such as loans (housing, car and personal) should first be accessed by your top performers. In practice, most policy documents use the length of service for accessing such benefits. It is a bad policy that offers a benefit based on time served instead of the value an employee brings to the business. Put most of the benefits into the total cost to avoid incurring unforeseen and unbudgeted staff costs associated with such practices.

Higher salaries – higher value – Once you give an employee a higher salary it does not follow that they will consistently deliver higher value to the business due to several factors.  Tying your business in a high-cost structure without corresponding value being generated is not good business practice. Instead, in the current environment, opt for once off payments that do not add to your fixed cost should you decide to award any form of increase.

Retention Allowance – This should only be given when it is really necessary. Again please do not give this as a fixed component of the salary. Remember skills are not always in demand. A skill that is in demand today may be in abundant supply two years down the line. Instead, offer a discretionary retention allowance that is not guaranteed. It can be withdrawn if the incumbent’s performance deteriorates below a certain level and should fall away if the skills supply situation changes.  

Employers need to review and reconfigure their remuneration benefits Pay practices have the biggest impact on the profitability and sustainability of any business. For this reason alone, companies cannot afford to just copy what others are doing without linking the changes to their business circumstances. We propose that companies in Zimbabwe relook at the benefits currently being offered in the country and see if these are still relevant and sustainable in the current environment. One of the notable things employers need to take note of is that employees would never say no to the benefits offered to them as long as they benefit.

Company vehicle – this is one of the most popular benefits in the country where the employer gives fully expensed company vehicles to eligible employees. One important point to note with this benefit is that regardless of the type of vehicle and fuel you give under this benefit, the performance of the company will not change simply because you are giving the top of the range vehicles to your employees. The reason why employers have fallen for this benefit is a competitive necessity; because other companies are giving and if we do not give this benefit we will lose staff. It is very true that in some instances if you do not offer fully expensed company vehicles your staff will go where these are offered. The most worrying practice regarding this benefit is that Zimbabweans love cars, very expensive ones for that matter.  In some instances, companies that are heavily undercapitalized still go-ahead to purchase top of the range vehicles. Besides the cash outflow arising from the purchase of these vehicles, the running costs for these vehicles for most companies run into thousands of dollars if not millions. The key question is, “Is it still necessary to give fully expensed company vehicles or should you go the total cost route and reduce your costs significantly to give your business breathing space?” If you still want to go the fully expensed company vehicle route, maybe you need to consider cheaper vehicle models. This must be supported by a strict company vehicle administration policy to curb abuse which tends to increase the cost of running the vehicles.  Relook at this benefit and save money without losing your best talent.  

Medical Aid – Most companies provide medical cover for their employees, spouse and an average of three children. This is a very good practice but it needs to be managed properly to reduce costs. It is prudent at this stage to share the cost of medical aid cover with the employee (50/50). While you are restructuring this benefit, you must make sure you allow the employee the choice to decide who should be on their medical aid. As an example; if the employee is not married but has a mother and brothers to make up for the four dependents, can they include them on the company medical aid scheme? The answer is why not? Why should they be discriminated against on the basis that they do not have children? The best way to handle this is to say “the scheme covers the employee and three dependents of the employee’s choice and contributions will be 50% employee and 50% employer”. Several companies are incurring huge bills related to medical aid because of the way their schemes are structured.  Review your medical aid scheme with the view to make it more equitable and sustainable.

Education for Children – Most companies that offer this benefit are very generous. They often go to the extent of paying university tuition for senior executives’ beneficiaries. How sustainable is such a practice in the current environment? Restructure this benefit to take into consideration the current realities and address equity issues in the process. This is one of the most inequitably distributed benefits in most companies as it is dependent on the employee having children. Why should that be the case when several children an employee has is not a business driver at all? This benefit must be level-based instead of basing it on the number of children that an employee has.

DSTV Subscription – This benefit has no place in the current environment. Why should a company pay DSTV subscription for a senior employee when they can afford their salary.

Other benefits – there are so many other benefits that companies provide that should never be provided considering the current economic realities. Some of these benefits include holiday allowances, generators, housing security, social club membership, and subsidised lunch (unless the company is located where it is not possible for people to get their lunch), internet connection, etc. The list goes on and on. 

Other cash allowances – There are several strange allowances that some companies are giving to their employees. Some of these are historical and some are a result of lack of direction. Some of the strange ones include; danger allowance, representation, retention, uniform, etc.  Most cash allowances range from 30% to 60% of the basic pay.    The biggest danger with some of the benefits above is that they are never accounted for as staff costs. You normally find them under administration costs. Many companies have no idea what their full staff costs are because they have allowed these to be accounted for under a different name.

We see an opportunity for companies to save thousands, if not millions of dollars by restructuring their benefits structures to reflect the current realities in the economy. This will help companies not only save costs but allow them to be profitable. For most companies, the restructuring of the benefits will give significant net savings per year which may be reinvested into the business.

Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant – Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. https://www.linkedin.com/in/memorynguwi/  Phone 481946-48/481950/2900276/2900966 or email: mnguwi@ipcconsultants.com or visit our website at www.ipcconsultants.com

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