Total Rewards Quarterly

Talking Global Compensation

In conversation with Richard Kantor:

Q. What in your opinion are the three topmost challenges for the compensation function today as a fallout of increasing globalization?

A. Number one is the challenge of balancing the global and local aspects. Most organizations today have a desire for global consistency in their compensation and rewards programs. In some cases, this desire is intense, and it often emanates from the very top of the organization – so it is a pressure that cannot be ignored. The desire for global consistency may be rooted in a desire to use the compensation system as a way to build a common corporate culture, or it may be related to something much simpler, like keeping administration simple. Whatever the rationale, the pressure often is there. Of course, this often conflicts with the local market practice. Balancing these competing aims is never easy, and the appropriate answer is not always obvious. Second, there are the challenges associated with goal setting and rewards. Chief among these is how best to ensure a reasonable degree of comparability in the degree of stretch in all of the targets, but that is closely followed by the challenge associated with identifying meaningful and measurable goals – particularly at the individual level. Of course, in the long-term incentive arena, there is also the challenge associated with trying to set multi-year goals, and this challenge is particularly acute in developing economies and uncertain economic times, such as we have seen recently. Because variable pay plans are increasingly being applied on a global basis, the need for comparability in degree of difficulty in goals takes on paramount importance in ensuring that the programs are perceived as fair.

Lastly, there are issues relating to acquiring reliable and consistent market data for an ever-expanding corporate global footprint. While there are some markets around the world that are almost over-surveyed, there are others where it is difficult or impossible to find reliable, relevant market information. This leads to situations where corporate planners and business leaders need to make decision in the absence of rich information. This is where compensation often becomes more of an art than a science.

Q. Have compensation practices transcended cultural difference? What has been your experience while consulting with clients across the globe?

A. It’s a great question. In my view, compensation practices have largely ignored cultural differences – and I believe this may be one reason why compensation programs and Total Rewards approaches more broadly are failing to deliver superior results for organizations. It is too easy to identify organizations that have put in individualistic compensation systems in collectivist cultures, or hierarchical programs in egalitarian cultures, not to mention highly leveraged programs in risk-averse cultures. Now, to be clear, I am not saying that this kind of thing cannot be done – and even be done successfully. For example, the US is – according to widely used cultural metrics – the most individualistic national culture in the world, and yet there are shining examples of team-based incentive plans that have helped to contribute significantly to business results. So, clearly, you can put in a rewards system that runs counter to the prevailing cultural norms. For starters, we must recognize that cultural norms are just that – norms. National culture involves a distribution of behavior around the norms, usually conceived as a sort of bell curve. So, there is the possibility to recruit from within a slice of the curve closer to the tail than the mean. I believe there are cases where this happens almost systematically. I think the question is whether you can implement compensation systems that run against the local cultural norms without taking care of the communication and management of those programs. In my view, too many organizations today, because of time pressures and other factors, are putting in such 'counter-cultural' rewards systems in the hope that the corporate culture will override the national culture. I do not believe this is wise. It may be leading to some of the sub-optimization that I believe is currently plaguing compensation programs and Total Rewards programs more broadly.


Q. Centralization vs. decentralization – where do you see the scale tipping for compensation? What do you think is the right approach for global organizations?

A. This is a pendulum that seems to always be in motion. I have been consulting on compensation for nearly 25 years now, and I have lived and worked in three global regions and consulted to clients in more than 70 countries. Let’s look at Europe: In the earliest stages of my career, I watched as organizations set up operations in Europe, usually with a very centralized model. It’s funny how when you stand outside any region of the world, you tend to focus on the similarities that 'define' the region, but when you get inside the region for any length of time you are confronted mostly by the differences! So, after a period of time, many multinationals decentralized their European operations and replicated their organizational structure in every country. This was an era when the country head was king. Then, in the 90s, as the European Union really began to take root, those same businesses re-centralized their European operations.

A strong European HQ was established, and the country operations often were scaled back to sales and service – two functions that were still viewed as needing to be delivered locally. Consider that today in Asia, we have global extremes in economic growth rates, with China and India leading the way – if we ignore the Gulf states – and Japan probably bringing up the rear. We also see GDP of $120 million or so in New Zealand and $7 billion in China… and GDP per capita of about $2,500 in Vietnam and something like 20 times that in Singapore. Of course, there is also a rich diversity of religions and languages across the region, too. Aren’t there 21 official languages in India alone? So, what is ‘Asia’? I mention the history of Europe and the demographics of Asia for a reason. The history of corporate evolution in Europe demonstrates that the pendulum on centralizationdecentralization is in constant motion. I believe the lesson for HR in general and for the compensation function in particular, is to understand where the business is in this ever-changing dynamic situation, and support it appropriately. The main task is not to be out of step with the business approach. I mention the diversity in Asia because one of the ways that organizations often try to manage the shifting sands of centralizationdecentralization, is through a regional organizational structure. This is probably more dangerous in Asia than anywhere else. As I discussed earlier, what exactly is ‘Asia’? So, the trick here for compensation professionals is not to fall into the trap of thinking of global regions as monolithic. There is tremendous diversity out there. We squelch it at our own peril. If we can embrace it, we may be pleasantly surprised by the results.

Q. What are some of the things global organizations can do to manage compensation risk and ensure effective governance in a global environment?

A. Good question. First and foremost, I think it is important to redefine how we evaluate our compensation and Total Rewards programs. For very long now, most organizations have had an almost myopic focus on what I call the ‘three C’s’: Competitiveness, Cost and Compliance. They are concerned with questions like, “Are we playing the market? What do our programs cost? And are we breaking any laws?”. This needs to be counterbalanced now with the ‘three E’s’: Effectiveness, Efficiency and Exposure. We must ask, “Are our rewards programs doing what they were designed to do – are they effective?”, “Could we accomplish the same result with less – meaning less money, fewer programs, simpler programs – are we efficient?”, “And what sort of risks are we taking in order to deliver these results – what is our exposure?” Most compensation professionals can sort out how to measure effectiveness and efficiency, even if they are not currently doing it. Risk, however, presents a different challenge. I believe that any Rewards Risk assessment model should cover at least four risk types. First, is the Alignment Risk, which is about how the organization has designed its rewards programs – are they aligned with the strategy and other key HR programs? Second is the Execution Risk, which is concerned about how the organization delivers Total Rewards – are our rewards programs being used in the manner intended? Third is the Financial Risk, which checks how much the Total Rewards cost is and whether we are appropriately managing that cost. Last, there is the Regulatory Risk, which is about how we monitor rewards – do we have proper controls in place with respect to our rewards programs? Having identified and assessed the Total Rewards risks, the next step would be to discuss, agree and implement mitigation strategies. Expanding the evaluation of Total Rewards programs to include efficiency, effectiveness, and exposure alongside competitiveness, cost and compliance, is one way organizations can begin to find ways to improve the return on their Total Rewards investment.

Q. How have ‘Total Rewards’ evolved over the last decade, particularly in APAC?

A. I am not sure whether we should call it an evolution or a de-volution! Let me explain why I say that. The cost of Total Rewards is usually one of an employer’s largest expenses. Unfortunately, it’s also often one of the most poorly managed. The return on investment that most organizations get on their investment in Total Rewards ranges from simply mediocre to appalling in some cases. Employees, including high performers, very often, do not see a future with their organization, are increasingly disengaged and are choosing to leave all too frequently. And the situation is actually getting worse. Recent evidence tells us that the corporate response to the economic downturn has exacerbated things across the spectrum. From what I see, confusion and dissatisfaction rule the day in Total Rewards. We frequently see that more than half of the employees do not know how their pay is determined. Many employers have contributed to this by failing to communicate Total Rewards effectively. One recent study in Asia Pacific revealed that two out of three organizations have no clear set of objectives for their Total Rewards. It also showed that 80% of the organizations have either no communication plan for rewards or what they would describe as ‘a very poor one’!

Clearly, there is a ‘knowingdoing’ gap in the Total Rewards communication. This is despite findings that effective communication can have as much impact on employee satisfaction with benefits as the actual benefits offered or the amount of money an organization puts into a benefits plan. I know of one study that found that organizations with above average benefits but ineffective communications averaged 25% employee satisfaction, while those with below average benefits but effective communications averaged 76% employee satisfaction. Put another way, it can be better to provide fewer benefits but explain them well, than to provide an expansive – and costly – package of benefits that employees don’t really understand. So, we are spending vast sums of money on complex Total Rewards packages, but employees do not understand or fully appreciate what we are providing. I believe part of the problem has to do with the complexity of rewards programs and the way organizations have added program upon program to their overall rewards package.

Q. Organizations today have to deal with not only a cross-cultural, but a multigenerational workforce – How has that, if at all, impacted ‘Total Rewards’?

A. It is certainly true that multigenerational issues are having an impact on Total Rewards. Demographics around the world are shifting. Broadly speaking, the workforce is becoming older. The percentage of Hispanics in the US is rising. There are fewer workers in the western world, but excess supply in the developing one. China’s dependency ratio – the number of children and old people as a share of working-age adults – is rising faster than Europe’s. Sub-Saharan Africa is by far the fastest-growing part of the world. Today it is only slightly larger than Europe or Latin America, but it will be bigger than either by the end of the century, and much more than half the size of Asia while today it is only 20% the size of Asia. (it is now only a fifth). Coming out of the great recession, talent is ready to move, average tenure in the US being five years. The competition for skilled knowledge workers is especially intense; they produce three times the profit as other employees. But what do they want? Baby boomers seem to want face-to-face communication that shows respect. They want an open work environment where their contributions are acknowledged and their accomplishments are recognized. You retain them by highlighting their value and contributions to the organization and by developing solutions to help them postpone retirement. Meanwhile, generation X wants communication that gets to the point and email is ok, but face-to-face is better if it is important. They want a job environment that gives them room to explore and find solutions – while having some fun, of course. They want flexible work arrangements and clear steps for advancement, or they will be looking for the door, right? And then you have the millennials… they want you to be ultra-brief in communication since they are the instant messaging generation. They want an environment that challenges them, provides and responds to feedback quickly, and is clear about the end game for each task. You retain them by finding them a good mentor, allowing them to contribute to the community, and introducing them to new opportunities frequently. Simple, right? What does all this tell us? A couple of things; first, if you are not segmenting your workforce in terms of Total Rewards – from recruitment methods, to attraction, to career opportunities, to retention strategies – you need to start doing so. Secondly, while the generalizations about intergenerational differences are useful, they are also dangerous. It is like generalizing about culture. There is a normal distribution around the mean. What matters is what your workforce wants. If you are not measuring engagement regularly and analyzing the data by segment, you should be. If you haven’t started measuring employee preferences for Total Rewards using optimization and conjoint approaches, you are falling behind the times. Thirdly, if you aren’t helping managers to deal with this issue, you are going to regret it. And, lastly, if you aren’t taking different approaches to communicating to the different segments in your workforce – generational and otherwise – you really ought to be. From what I see, talent just about everywhere is ready to move.

Q. You have often spoken about the growing criticality of rewards communication as a success factor in managing global compensation What are some of the key elements of successful communication strategies?

A. Well, I am not a communication expert, but I am a strong advocate. Here’s what I believe, based largely on my own experience, we must have: First, simple effective communication about our overall structure, policy and approach targeted to existing and prospective employees. Second, clear and concise information is required that highlights the advantages or our package to support large-scale global recruiting, and to help retain key talent. Third, regular, high quality input from employees (or managers) and prospective employees regarding their needs and wants, and level of satisfaction with the compensation and benefits we provide. Fourth, managers need to own the rewards programs, with HR playing a supporting role only. And lastly, what is required is a comprehensive communication roadmap and supporting tools and talent (HR support) to deliver. We also must be sure to align and engage key leaders in communicating the rewards strategy. This involves building and delivering a solid business case for any changes to gain leadership support and advocacy. This means we have to equip HR leaders with tools to deliver consistent messages to business leaders. The bottom line is that you must give senior executives a role in creating broad acceptance of the rewards strategy. That is the first step in promoting accountability and informed decision making, which must then cascade all the way down to the manager who is actually having the conversations with employees every day about rewards – they are the ones who must own the programs, the line managers. As far as traditional communication is concerned, I believe it is most effective to sequence targeted information to key audiences providing clear, consistent messaging in engaging formats. Leaders should receive briefing sessions providing the business case, launch plans and timelines. HR professionals should have HR toolkits and training sessions to prepare HR for its role. Managers typically need briefings/ toolkits addressing how strategy impacts them and their team. And employees usually receive messages via meetings, webcasts, FAQs, and – of course – conversations with their manager. (Do you sense the recurring theme here!?) Oh, let’s not forget, regular engagement surveys play a crucial role in ensuring that communication is a two-way street. Globally, it is important for organizations to build capability by providing training to C&B teams and managers. We do know from the Best Employers Studies how crucial manager capability is, right? In building HR and managerial capability, organizations should focus on elements that drive acceptance and commitment to change, and they should clearly identify key audiences and how the new programs will impact them. Finally, I think it is best to focus on proven approaches such as marketing-oriented information, testing the changes and messages – what ever happened to pilot tests?, electronic communication, interactive educational material, personalized communication, just-in-time access to information, and so on. But that is just my opinion. I may be wrong!

 

The history of corporate evolution in Europe demonstrates that the pendulum on centralization decentralization is in constant motion.
Richard Kantor Senior Vice President, Total Rewards Global Center of Excellence, Aon Hewitt
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