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01 Jul 2016

Remuneration Design

By John Day

An appropriately designed, and strategically based, employee remuneration system is capable of serving many purposes for an organisation. These purposes are often summarised as fulfilling the need to “attract, retain and motivate” employees.

 

But it is also broader than this. 

 

How employees are remunerated will affect how they think, work and behave. If behaviour and actions of all employees are to be aligned to achieve the corporate objectives of the Shareholders/ Directors, it follows that the remuneration structures, particularly the short term and long term reward strategies need to be also aligned to those corporate objectives. 

 

Total Reward

The total reward structure comprises base pay, performance-based pay, compulsory employer provided benefits (such as superannuation and various paid time off such as sick leave, annual holidays and long service leave), as well as those benefits provided at the discretion of the employer (eg employee share plans, cars, health care, study leave and the like).

 

These are factors that will have a direct impact on employee productivity and morale. For this reason, the design of a total reward structure must be consistent with the management philosophy and values of the enterprise, and deliberately support its achievement of its business objectives.

 

Performance Based Pay 

Another important aspect of reward is to link it with the performance of the employee and the organisation. Performance based pay systems are attracting the attention of many organisations in the Australian public and private sectors, and across all industries.

 

There is evidence to suggest that a well-designed incentive plan, combined with effective job design, can impact performance positively for both the employee and the organisation. Incentive plans vary from individual plans to sales incentive, managerial and group plans. 

 

Similarly the rewards may be paid annually or more frequently, and may be in cash or, as often applies to senior executives, in Shares.

 

Employees – Stakeholders 

The transformation of employees to stakeholders, and to becoming a major business asset requires the establishment of a set of organisational values which reflect the value the organisation places on itself and its workforce and then the effective communication of these values to all employees. Remuneration planning is one of the most efficient means of communicating these business values to employees and a most effective way of obtaining their acceptance of these values. The aim of this communication is to encourage the employee to maximise his or her value to the organisation, and correspondingly, enables the employee to be remunerated according to this increased value of the organisation.

 

It can be achieved as follows:

 

  1. Agree on realistic performance targets with an employee which provides a real incentive to achieve those targets;
  2. Enable the employee to share directly in the benefits generated for the organisation in achieving those targets; and
  3. Allow remuneration to be taken in a form which enables the employee to more easily meet their financial needs, and achieve their financial and lifestyle objectives earlier.
 

Remuneration planning

Remuneration planning communicates organisational values to employees in strong and often unintentional ways. They can reinforce existing sets of behaviour or stimulate the development of different ones.

 

A well-planned remuneration program can successfully link organisational values with employee values, thereby bonding the employee to the organisation. The highly competitive environment into the 21st century will demand more than ever the use of remuneration as a strategic organisational tool, central to the achievement of organisational goals, such as improving productivity, increasing profitability, improving shareholder value and building employee commitment.

 

The emphasis of the next decade will be on customised, organisation-specific, remuneration programs that build support for changing and evolving business strategies on the one hand, and on the other, strategies which are sensitive to each employee’s unique needs and objectives. 

 

Remuneration planning is really concerned with retaining valued employees and deriving income by remunerating employees in such a way that motivates and encourages them to achieve their personal goals as well as those of the organisation to recognise their role as stakeholders in that organisation. At the same time, they can be provided with an environment that provides the security of protection from many of the financial risks and hardships inherent in one’s lifestyle.

 

Effective remuneration planning is, therefore, not just about paying employees, but is also concerned about rewarding employees. Those rewards can be classified into three distinct types; base remuneration as well as short-term and long-term incentives.

 

Market practice

A recent study shows that 85% of Companies are Targeting the Market Median when, setting employees’ Base Remuneration levels. A recent study observed that: "85% of the respondents indicated they target employee base salary at the 50th percentile. Employers tend to largely assess the market value of jobs on an annual basis and address current market conditions on an as-needed basis. Currently, the market isn't compelling employers to accelerate wage growth in any significant way."  These are the findings of a survey, titled "Compensation Programs and Practices," published by WorldatWork, which is a leading USA based human resource association. The survey of the association's membership, conducted in 2014, focuses on the prevalence of base and variable pay programs, as well as common practices used to administer and communicate these programs. Similar surveys were conducted in 2012, 2010 and 2003. 

 

As Kerry Chou, CCP, WorldatWork Senior Practice Leader observed, "the percentage of organisations providing minimal pay-related information to their employees is increasing, up to 39% in 2014. The report also shows that pay for performance continues to thrive, with 72% of respondents indicating they have a rating system with a performance score tied to pay increases”. 

 

Furthermore, the results indicate that each employee's understanding of the organisation's remuneration philosophy tends to be higher when there is greater differentiation in increases between average and top performers.

 

Delivering performance-based pay

 

Additional highlights:

 

  • 82% of organisations use bonuses to deliver performance based pay, which is the most frequently used variable pay plan for some or all employees. 
  • A majority (59%) of base salary structures for employees are still adjusted once a year, with 14% of companies adjusting their structures once every two years. This is a five-percentage point increase from the previous two surveys. 
  • In 2014, as in 2012 and 2010, individual performance based pay levels only resulted in moderate variations, with top performers receiving 1.5 times the average increase being the most typical variation in salary increases between average and top performers. 
 

Short-term variable remuneration is over and above base remuneration 

 

Its purpose is to provide specific incentives to influence behaviour to achieve certain specific organisational requirements. For example, the short-term valuable remuneration is often based on Divisional profit improvement, increased sales or other specific empirical or judgmental objectives.

 

Long-term bonus provides an employee with a vested interest in increasing the value of an organization and is often achieved by rewarding performance with a stake or share in the organisation. This is often achieved by using an employee equity plan.

 

The key objective of the equity based reward is to focus an employee’s attention on the organisation’s owners (ie the shareholders) objectives, which are maximising the long term value of the organisation, rather than focusing attention on the short-term or annual returns of the organisation.

 

Conclusion

With the trend to “fix” base remuneration to the market median, there are a lot of opportunities in designing remuneration, by having increased emphasis (% of Total Remuneration) on well-designed Short Term and Long Term Incentive arrangements. In so doing, the organisation will achieve the Optimal Remuneration Mix, in order to achieve the objectives of Employee Attraction, Retention and Motivation, while at the same time achieving and maximising the Directors’ and the Shareholders’ corporate objectives.

01 Jul 2016

Staying in touch

By John Day and Alex Tilley

Today’s technology enables us to carry our work with us wherever we go and ensures our capacity to connect is almost endless.

 

But such capabilities have blurred the boundary between work and home. New research suggests that some employees don’t know how to leave work when they leave the office. ‘Smart’ devices are changing the paradigm of the traditional workday; ‘working nine to five’ may no longer be the way to make a living.

 

Possession of a Smartphone enables many people to fit the epicentre of their office into the palm of their hand, allowing them to monitor multiple inboxes, and providing instant access to a world of information. We can view presentations, type and edit documents, research statistics, and conduct face-to-face meetings with people on the other side of the globe at the touch of a screen. There can be no doubt that we are more connected than ever, but are we less capable than ever of disconnecting?

 

A recent survey conducted by CareerBuilder.com suggests that many people remain ‘checked in’ to the office long after they have left. Of the 1,078 participants, 63% agreed they struggled to switch off mentally after leaving the office, and 38% said they frequently worked outside of office hours. One in four people admitted to checking their work emails whilst with family and friends.

 

Concerns have been raised about the impact this may to have on an employee’s health, personal relationships, and on their overall work/life balance. Mark Cropley, a professor at the University of Surrey in the UK outlines some of the health consequences of being constantly connected, “Physiologically, people who can’t switch off are tense and irritable, they have high blood pressure, a high heart rate, and that puts stress on the cardiovascular system. We’ve also shown that people who can’t switch off have high levels of cortisol, the stress hormone, they have sleeping problems, concentration problems, and other issues.” Cropley also noted that being constantly “checked in” to the office may even be counterproductive. “People find themselves working in the evenings, either finishing projects or checking emails to make life easier for the next day, but this means they can’t switch off. They’ll be in bed and their mind will still be on work. They’ll go round and round in circles thinking ‘I’ve got to do this, I’ve got to do that.’ Then they go back to work the next day feeling more fatigued and more likely to make mistakes.”

 

What is interesting about the results derived from the CareerBuilder survey is that 62% of the participants reported seeing constant connection as a choice, rather than an obligation. Indeed in a society as fast-paced and device-reliant as ours, it would be pointless to try to resist these technologies. Instead we need embrace these advancements and ask ourselves, how can we use them to our advantage? Perhaps the answer lies in the eradication of the ‘nine-to-five’ mentality of our workforce. Dissolving this dated concept could make room for a new era shaped by new technology. "Workers want more flexibility in their schedules, and with improvements in technology that enable employees to check in at any time, from anywhere, it makes sense to allow employees to work outside the traditional nine-to-five schedule," says Rosemary Haefner, Chief HR Officer at CareerBuilder. "Moving away from a nine-to-five work week may not be possible for some companies, but if done right, allowing employees more freedom and flexibility with their schedules can improve morale, boost productivity and increase retention rates.”

 

But what about the aforementioned health concerns of constant connection? These may be a consequence of the current transitional phase, where employees are attempting to adhere to the nine-to-five and be constantly connected. Flexibility and trust from employers is key to empowering employees to manage their work/life balance. Lizzie Penny, Co-founder and Joint CEO at Huckleberry Partners and Futureproof, notes that the concept of nine-to-five is older than electricity, and was born from conformity rather than practicality or productivity. Penny predicts that empathy is the way of the future when it comes to business, “In order for an employee to feel connected to and motivated by their employer, mutual understanding is crucial. This requires the employer to truly empathise with the person behind the employee, and appreciate the richness and complexity of their lives outside of work. Failure to do so may encourage the employee to seek out a more “caring” work environment, or follow the growing trend towards self-employment.” She argues that “Future-thinking businesses must trust employees to manage their own workload and abandon presenteeism.”

 

What we are seeing is massive shift towards constant availability, if employees are willing to work outside of ‘traditional’ hours, what is there to gain from strict adherence to a nine-to-five routine.

01 Jul 2016

UPDATE Draft Taxation Ruling TR 2014: Income tax - Employee Remuneration Trusts

By John Day

Draft Taxation Ruling TR 2014/D1 Income tax: Employee Remuneration Trusts was published on 5 March 2014, and explains the Commissioner’s preliminary views on the taxation consequences for employers, trustees and employees who participate in employee remuneration trust arrangements established by an employer as a means of delivering benefits to employees via a trust.

 

The intention of draft ruling was to clarify ambiguous or grey areas of the law, primarily to ensure ERT’s are implemented and administrated in accordance with the law.

 

Comments received when TR 2014/D1 was issued, have been considered. Given the nature and range of the comments received, a second draft version of TR 2014/D1 is expected to be issued towards the middle of the 2016 calendar year.

 

The ATO has prepared a discussion paper, intended to facilitate further consultation in relation to particular aspects of the views in TR 2014/D1, and to clarify the scope of the second draft.

 

The ATO is seeking written feedback on the Draft Discussion Paper.For more information, please contact John Day on 03 9650 6599.

01 Jul 2016

10 employee retention strategies to keep your most valuable employees

Implementing a program that rewards and recognises work and behaviours and supports the mission, goals, values and initiatives of the organisation, is critical for employee retention. Congratulating an employee on a job well done costs very little, but to your people, it's priceless. When people feel that leaders notice and truly value their contributions, their motivation and loyalty grow.

 

Critically, a reward and recognition program motivates employees to change work habits and key behaviours and build a positive and supportive culture.

 

Incentives, both financial and non-financial, can be offered based on performance and be applied consistently across the board.

 

Financial retention strategies

 
1. Employee equity ownership

Financial studies have shown by far the most effective means of retaining valuable employees is the participation in long-term incentives through equity ownership plans. 

 

Equity plans, properly designed, align the internal shareholders with the external shares to attract, motivate and, most importantly, retain valuable employees.

 

They provide an increased sense of ownership and association with the organisation, improve awareness about decisions, directions and corporate plans of the organisation.

 
2. Competitive remuneration

Remuneration is another critical factor to employees. When you pay people below market value, it suggests that you do not truly value them or their work. If you withhold raises and bonuses during the downturn and have yet to implement any positive changes, you are at real risk of losing staff.

 
3. Employment agreement

The conditions contained in an employment agreement are critical to retention. It is not uncommon to have a six-month notice period and six-month redundancy payment.

 

By extending the redundancy notice period, particularly for senior employees, you are giving these employees additional time to seek employment elsewhere. Generally, it takes between six and nine months for an employee to secure an equivalent position as senior employee positions are very limited in any industry, particularly in the oil and gas industries.

 

As a result, a six-month redundancy payment would offer some financial stability to the employee, which enables them to focus their energies on the operations of the company rather than stressing about the volatility that may be present. Not only can a six-month redundancy payment be used to thank departing executives for their long-term and/or outstanding service to the company, it also provides an incentive for employees not to disclose corporate information to competitors or cause adverse publicity when leaving the company.

 
4. Flexible remuneration packaging

Offering employees the ability to choose how they receive their remuneration within their total employment cost can increase their feeling of economic security. For example, salary packaging with education and learning benefits, employee discounts, novated and associated car lease, etc.

 

Non-Financial Retention Strategies

 

Though often not appreciated, so-called non-financial (even though they still cost money) strategies, can have a stronger impact on employee retention. By far, the strongest is sustainable, clear leadership. My personal experience is that a company with a strong leader (CEO) is inevitably more successful. Part of that success is due to the retention of employees. Non-financial strategies include:

 
5. Freedom and flexibility

Flexible working arrangements (e.g. flexible working hours, working from home) give employees the ability to balance work and personal demands which can help to reduce absenteeism. Offering your employees flexible working arrangements shows that you care about them, which leads to strong loyalty to your organisation.

 
6. Professional and career development

Continuous and ongoing professional development helps overcome skills shortage and retain expertise within your organisation. By providing ongoing professional development, you can ensure that your organisation has the skills and capabilities required, and that all employees are making the best possible contribution. Development also allows your organisation to strengthen individual employees’ skills in the direction of existing skills and knowledge gaps.

 
7. Performance management

A well-implemented performance management system can help to achieve the organisation’s business objectives. By providing employees regular feedback, they know what to aim for, when they are doing well, and what they need to improve on. Studies have shown that effective performance management systems can lead to happier, more motivated and better performing employees.

 
8. Employee engagement

Employees who are engaged are more productive and content, and more likely to be loyal to your organisation. By measuring employee engagement, you will have an accurate assessment of an employee’s commitment and contribution to the success of your organisation.

 
9. Clear Career Path

Employees want to know they have a future at your company.

 
10. Clear Communication

Last but not least, unambiguous communication is the foundation for all your other retention efforts. Keeping employees in the loop helps them feel they are a key part of the organisation and that they have a role to play in upcoming plans.

01 Jul 2016

Smooth sailing: employee share ownership is easier than you think

By Alex Tilley

An employee share ownership plan (ESOP) is an arrangement under which an employee is provided with shares, or the opportunity to buy shares, in the company they work for. Participation in an ESOP transforms an employee into a part owner; increasing employee engagement, productivity, and retention in a way that no other form of remuneration can compete with. When a plan is structured correctly, business owners can provide equity to their key employees with no adverse tax implications.

 

A key benefit of employee share participation is the alignment of employer and employee interests. Though not always measureable, significant costs to the company are incurred when the interests of the employee are not congruent with those of the company. Most notably the impact can be seen in low productivity, low employee morale, and poor employee retention. Additionally, customer satisfaction is directly influenced by employee satisfaction. Unless a business ensures its employees feel engaged, valued and satisfied, it is unlikely to have customers that feel engaged, valued and satisfied. It goes without saying that a company’s greatest asset is its employees, and a great company nurtures great employees who do great work.

 

Imagine two boats. The captain of the first boat is motivated, hardworking, and has a clear understanding of where his boat is headed. His crew however, aren’t clear on where the boat is going and they don’t really care, they get paid just for showing up. On the second boat, captain and crew share the vision of where their boat is headed, each member working as hard as the next to reach their collective destination. The captain of the first boat is equally as keen to reach his destination as the captain of the second boat, but with a disconnected and unenthusiastic crew, he is unlikely to get there. Ask yourself, which boat does your workplace resemble? Are your employees truly “on board” with the company’s objectives?

 

In many companies, employee retention is a critical issue. Without an effective talent management strategy, a company can easily lose big money replacing employees who have “jumped ship”. According to Josh Bersin, Principal and Founder of Bersin by Deloitte, “Many studies show that the total cost of losing an employee can range from tens of thousands of dollars to 1.5-2X annual salary.” Not to mention the damage done to productivity, employee morale and workplace culture. Whilst the costs of recruiting and training a new employee are easily measured, the true impact of high employee turnover on productivity, morale and workplace culture is less calculable, but can be equally damaging to a company. Even with quality initiation and training, a new employee still may not reach the productivity levels of their predecessor for several years. This is not necessarily a reflection on the individual, rather the simple fact that the longer an employee is with an organisation the more productive they are likely to be. It takes time to learn a company’s systems and products, and to build relationships within the organisation with suppliers, customers etc.

 

Most new employees will be a cost to the business before they become valuable. In addition to this, high employee turnover distracts from the company’s long-term objectives and hurts business. Talent retention is a crucial element of business success, so how do we ensure it? Employees expect to be financially rewarded for their work, and financial incentives such as commissions and bonuses can be effective, but even companies with higher than average wages, bonuses, and commissions still experience issues with employee retention. Research suggests that employees are seeking more than just financial remuneration from their company; they want to influence the management of the company and have a say in the decisions affecting daily work, they want fair treatment and a sense of community. Employee share ownership is an immensely powerful strategy for satisfying these criteria and ensuring your valued employees don’t “jump ship”. When employees feel they have a direct interest in the performance of the enterprise, their commitment to the company and the objectives of the company is greatly enhanced. ESOP’s facilitate employee engagement in the company and provide incentives for employees to achieve high levels of productivity. As part owners these employees don’t just expect a return from their company in the form of salary, they want to contribute.

 

Despite this, the perceived complexity of employee share ownership is still holding some businesses back from realising the numerous benefits of implementing an ESOP. ESOP’s have been criticized as being legislatively problematic or administratively demanding, but carefully designed policy can address each of these shortcomings. The benefits of employee share ownership are dependent on the strategic design, implementation and management of the ESOP, as well as adherence to relevant legislation. This should not be a deterrent to companies however, as these administrative and legislative ‘hurdles’ can be managed by competent Advisers and Administrators. Relieved of these burdens, companies and their employees are free to realise the immense benefits of employee share ownership.

 

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