PAY FOR DEVELOPMENT: A NEW APPROACH FOR A NEW ASIAN REALITY

Transcription

1 PAY FOR DEVELOPMENT: A NEW APPROACH FOR A NEW ASIAN REALITY FERMIN DIEZ, SENIOR PARTNER, HUMAN CAPITAL, MERCER KIMBERLY VIERRA, PRINCIPAL, INFORMATION PRODUCT SOLUTIONS, MERCER

2 Ask any Asian CEO, and you are most likely to hear concerns about people rather than about capital, sales or distribution. In a typical exchange with the CEO of a multinational company, he explained that his business could grow faster if only his human resources (HR) staff were able to find, develop and keep enough key account managers to handle the additional business. Companies operating in the region have found that retaining talent is becoming harder than retaining clients. HR professionals are losing sleep thinking about how to outpace their competitors for talent much in the way the company has to outpace its business competitors. Firms cannot meet their business growth objectives without enough trained and capable people within the organization. In December 2011 a group of senior HR leaders from leading organizations in Asia Pacific met to discuss the talent challenges that are crippling their business performance. This article captures the synopsis of that discussion as well as a perspective based on Mercer s work in this area. Many Asian employers have experienced attrition rates in the double digits (see Table 1). Adding to this pressure is the shortage of qualified candidates to cover vacancies or expected growth. Thus, much of the effort expended by HR teams in Asia today is aimed at trying to stabilize the workforce by finding ways to attract suitable candidates and develop them as quickly as is feasible. At the same time, HR is struggling to stem the loss of employees to competitors in order to fuel future growth. Table 1: Countries in Asia With Double-Digit Staff Attrition Rates in 2010 AVERAGE (%) VOLUNTARY STAFF TURNOVER Australia 14.10% Hong Kong 11.90% India 16.20% Malaysia 16.90% New Zealand 10.30% Pakistan 10.00% China First-tier city 13.50% Singapore 12.90% South Korea 10.70% Taiwan 11.00% Thailand 13.70% Vietnam 15.60% Source: Mercer s 2011 All Industries Total Remuneration Surveys Consequently, retention and attraction have become higher priorities than motivation. Note that our premise is not that motivation is unimportant; rather, in today s Asian environment of skill shortages, retention and attraction are more important. A senior compensation and benefits leader from a well-known multinational summarized this sentiment: Our pay for performance program isn t about attracting and retaining staff; it is about motivating them. But in Asia, we have a retention problem not a motivation problem. The reality that traditional pay approaches are not yielding the expected returns is easy to understand but hard to accept. Yet management is placing these pay programs under a microscope: Is it possible that the corporate payfor-performance approach adopted by most organizations is putting undue emphasis on motivating employees, rather than attracting and retaining them? 1

3 IS PAY FOR PERFORMANCE ACHIEVING YOUR OBJECTIVES? Senior-level Asia Pacific-based compensation and benefits professionals struggle with finding ways to drive sustainable long-term growth via their pay programs. Mercer research echoes these sentiments. In March 2011, Mercer surveyed 349 organizations on pay for performance, with these results: Two-thirds of the companies surveyed said that pay-for-performance objectives were only partially achieved. One-third indicated that their pay-for-performance practices do not help retain employees. Forty percent did not know if there was a correlation between their pay-for-performance approach and their ability to retain employees. At a well-known multinational company, the head of compensation and benefits admitted: The effect of our pay-for-performance program is watered down 90% of the time, we don t get what we pay for. IF NOT PAY FOR PERFORMANCE, WHAT THEN? Since motivation is not the key issue for Asia but retention is and since companies have limited salary budgets, it stands to reason that moving away from pay for performance and moving toward paying in a way to better drive retention is a good idea. So, what would drive increased retention? Our contention is that paying for retention is also a losing battle. After all, companies increase their costs but are still outbid by their competitors for talent. Considering the challenge from a different perspective, however, does offer insight. In the key Asian markets of China and India, performance bonuses or other incentives are apparently less important to employees compared with career advancement, training opportunities and base pay (see Table 2). 1 Table 2: Chinese and Indian Employees Top 5 Most Valued Employee Value Proposition Elements 1 RANK CHINA INDIA 1 Career advancement Career advancement 2 Base pay Base pay 3 Supplemental retirement savings plan Training opportunities 4 Training opportunities Type of work 5 Bonus/other incentives Working for a respectable organization In addition, employee retention is significantly more responsive to growth in base pay compared to variable compensation. As a senior HR executive explains: The positive effect of pay for performance in our company kicks in around mid- November, when performance reviews are conducted, and the effect only lasts until the payout of the bonus in March. The short-term effect is strong, but only for our high performers, and it does not facilitate long-term thinking. 1. Mercer s 2011 What s Working survey 2

4 Mercer s What s Working research confirms this sentiment. Employee retention is more responsive to base pay and base pay growth than to any other type of compensation. In other words, Cash is king and, as Figure 1 illustrates, employees perceive base pay levels and increases to be twice as important as bonus pay. This chart also shows that insufficient base pay is a higher driver of turnover. Figure 1: Employee Retention Most Responsive to Base Pay and Base Pay Growth Employee retention is significantly more responsive to base pay than to variable compensation 30 Pay effects on turnover Negative lower turnover All segments 25 No effect Positive higher turnover Base Base growth Variable receipt Variable amount LTI receipt LTI amount Pay component Source: Mercer s What s Working Study # of cases Evidence where higher base pay is associated with lower turnover, i.e., fewer future decisions to quit DOES PAY FOR PERFORMANCE ACTUALLY HINDER ATTRACTION AND RETENTION? Sometimes, employers find themselves up against a wall, forced to make difficult decisions. The head of compensation from a large regional company confessed: In the Philippines, we had a bad year. However, if we didn t pay out bonuses, we would have lost too many people to our competitors. We need to keep those people, so we paid out a bonus anyway and called it a retention bonus! From a financial perspective, an underlying reason for implementing a variable compensation plan is that it is easier to match results to expenses. In fat years, we have good payouts; in lean years, we have little or no payout. However, when a company experiences a bad year but expects improvement in the future, it wants to retain staff particularly valuable staff. If a significant portion of the pay package is variable, there is a real risk that employees especially in fast-moving markets will seek external opportunities with a company that guarantees a higher level of fixed cash compensation in the short term. Another reason for variable compensation is the belief that, universally, money motivates above all other levers. But this nearly dogmatic idea has received a great deal of criticism of late, being blamed for the recent global financial crisis and the subject of public scorn and government regulation around the world. In his recent and highly read book, Drive: The Surprising Truth About What Motivates Us, author Daniel H. Pink says: Traditional incentive programs can extinguish intrinsic motivation, diminish performance, crush creativity and crowd out good behavior. They can also encourage unethical behavior and foster short-term thinking. Several companies have begun to question the value of pay for performance in the traditional sense. A few, such as Juniper have eliminated performance ratings altogether. 3

5 PAY FOR DEVELOPMENT: A NEW APPROACH FOR A NEW REALITY Employers are not entirely beseiged with gloom and doom. An attractive alternative is possible, if it is well-planned and communicated. Consider the ways in which HR can contribute to a company s long-term profitable growth, by lowering human capital costs and/or increasing productivity. In Asia, where pay levels are generally lower than in the West, affordability is not the major issue; productivity is the larger concern. Hiring and retaining enough employees to drive business growth is the primary focus for most companies, especially in key markets such as China and India. Table 3 illustrates an actual scenario for an electronics company in India (with numbers modified for simplicity). In this example, over the course of three years, the company loses nine senior accountants and must hire 12 to allow for replacements and growth. However, the key numbers to focus on are in the Promoted to the Next Level column. This particular company had a promotion rate of 11% compared with a 40% hiring rate and 20% losses. The promoted employees generally cost less than those hired from the outside as at this particular company, the average premium paid for outside hires was 14% -- and that s not taking into account recruiting fees, loss of productivity and other costs. It is easy to see that focusing and driving retention helped lower costs for this organization. Table 3: Retention Must Be a Priority to Fuel Future Growth Year Hired SENIOR ACCOUNTANT POPULATION AT CO. X Total senior accountants on staff/needed* Promoted to the next level Left company** Year 0 (2009) Year 1 (2010) Year 2 (2011 est.) Year 3 (2012 est.) Total impact * The company expects about 10% year-over-year headcount growth required to meet approximately 15% business growth forecast. ** Numbers are based on typical employee attrition rates in India (about 20%). The point of this analysis is simple: Paying for development can positively drive retention while lowering costs. Linking this outcome to the insight gleamed from Table 1 (career advancement is most valued), the conclusion is that, at least in key Asian markets, paying for development is not only better for retention but perhaps also a better motivator than paying for performance. As the head of HR of a Hong Kong trading company recently expressed: Competency trumps cost! 4

6 10 IDEAS FOR MOVING TOWARD PAY FOR DEVELOPMENT 1. Compensation teams should work closely with the talent management teams. Strengthening the link between pay and development programs can improve overall company performance and productivity. If your company does not hold regular conversations between the two functions, doing so is a good starting point toward future program integration. For example, in a consumer goods multinational subsidiary in China, the compensation and benefits team wanted to apply the survey forecast to salary increases across the board. However, the development team made it clear that, for new hires, the first promotion was expected at the two-year mark, and the second promotion no later than three years after that. The compensation and benefits head realized that to effectively move employees through two salary bands in five years, the company would have to implement increases of twice the survey forecast. The results of a turnover analysis supported the data, clearly showing that turnover was highest in the two-to-five-year tenure group. This insight led the company to introduce a new salary increase policy: twice per year increases at the survey forecast rate for employees performing at a satisfactory or above level, thus substantially reducing their turnover of employees with less than three years in the organization. 2. Carve out a quarter to half of the current variable compensation and earmark it as development pay. In Option 1, a material portion of the bonus can be given out for improvement in competency levels, or acquiring specific skills. Option 2 implies that the performance bonus is halved with the base salary being higher. In Option 3, the idea is to eliminate performance bonuses altogether and ensure that base pay is linked to development in competencies as well as career progression. Eventually adding this portion to base pay can help maximize retention in emerging markets (see Figure 2). Figure 2: Alternatives to Traditional Pay for Performance Approach Alternative pay approaches: Moving toward pay for retention $140,000 $120,000 $100,000 $80,000 $80,000 $40,000 $20,000 $0 Traditional approach Option 1: Development bonus approach Option 2: Base with development increase + performance bonus Option 3: Base with development increase Base Development bonus Performance bonus 3. Measurement is important. If productivity is not being measured, start doing so. Metrics can then establish a link between changes in the pay approach and improvements in people productivity. A pharmaceutical company, for instance, implemented this approach with its sales force by measuring sales per sales person. It was so successful in securing approval for adequate pay levels for this employee segment that the company expanded the plan to include all employees (except senior executives). The firm measures the company s total people cost against revenue (or number of units produced in its manufacturing sites) If your pay for performance approach is in the comfort zone for the board of directors and shareholders, but paying for development is not, consider a pilot program in one market. If possible, have a control group in the same market to track the program s success. With tangible success, it is easier to roll out the program to other key markets. Segmentation is important, so focus on the highest-risk group of employees or markets. A consumer goods company applied this approach over the course of a year. It paid non-executive employees in three locations through different plans: no variable pay, half the amount of variable pay, and the current amount of variable pay. The company found that no variable pay yielded higher retention without a notable loss of performance (business results did not decline). However, its corporate compensation and benefits group did not allow an all base salary policy, so the company implemented the lower variable pay approach.

7 5. Accelerate internal training and promotion in fast-moving markets such as China and India. The company represented in Table 3 created a rule that promotion percentages must match, at a minimum, the turnover rates. The expected result was that the organization would build rather than buy talent as a main mode of development, but allowing for the growth rate of the company to also make room for outside employees. A biased balance towards build vs. buy. 6. Expect and budget for pay growth in emerging markets. When you track market trends for increases in fastmoving markets, you see a blend of incumbents that command higher pay and newly promoted (lower-paid) entrants: Only looking at median or average salaries or increases may provide a distorted overall salary increase picture, especially at lower levels. The cost of losing these employees could be higher than the cost of more frequent or higher-percentage salary adjustments. 7. Track employee lifecycles. Are there dips in retention, especially in the third and fifth years? If so, consider providing development/rotational/promotional opportunities with a tailored pay increase to address this issue. 8. In line with point 7, mobility can be useful as a key retention tool. If no promotional or developmental opportunities are available in the home market, consider an international assignment for high-potential Asian talent. Ensure that the base pay level factors in their newly developed skills and abilities upon repatriation. One multinational company applied this approach for all high-potential employees from smaller markets (with inherently fewer promotion opportunities) by creating a mobility program within the region. 9. Use 360-degree or other outside tools, rather than management perception, to determine if requisite skills have been developed, and consider employees for promotion. Be as serious, or more if needed, about measuring and monitoring development as you are about measuring and monitoring performance. 10. As with any compensation program, employers can fully realize the value of a pay for development program only through clear and compelling communication. Do not overlook the need for effective program communication to line management and employees. A head of HR of a large company in Asia commented that his company s current pay-for-performance plan did not yield the desired results as it was not communicated well: It is not only the plan that matters, it is also how the individual managers communicate and manage the plan that matters. You must have the right infrastructure/framework in place and the right communication from line management, or pay for performance will not work. THE BOTTOM LINE As companies fight for talent in Asia s high-growth markets, more organizations are likely to pay attention to how their current compensation practices hinder or facilitate employee retention the key issue for many companies in the region. Employers may move away, in full or in part, from pay-for-performance practices toward an approach that compensates for developing skills and competencies needed by the organization. There may also be a move away from having significant pay at risk toward delivering more pay as guaranteed cash. The rationale here is that growth in base pay is more highly regarded in the employee value proposition and thereby is more effective in improving employee retention. While any change in a pay approach will be met with some resistance particularly from employees a company can take actionable steps to move toward building a pay-for-development program. Under such a program, HR can better facilitate employee retention and ultimately help drive longer-term, more sustainable business growth. CONTACT For more details or questions, please contact the authors: FERMIN DIEZ, Senior Partner, Human Capital, Mercer at fermin.diez@mercer.com KIMBERLY VIERRA, Principal, Information Product Solutions, Mercer at kim.vierra@mercer.com 6

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