How important is guaranteed remuneration in the overall pay mix? The answer is quite simple – as important as any of the other elements. In this article we unpack important questions that every organization needs to ask when it comes to pay mix.
Following the first democratic elections in 1994 South Africa enjoyed a period of relative economic success. According to SouthAfricanMI.com during President Mandela’s reign as leader of the country South Africa experienced massive Foreign Direct Investment (FDI), as sanctions against the country lifted. Strong FDI usually leads to a strong currency as the demand for the domestic currency increases. It also drives construction and infrastructure development. At the same time, South Africa also experienced increased foreign trade as sanctions lifted.
During President Mandela’s presidency (1994 to 1999) the South African economy grew on average by 2.5% (quarter on quarter annualised data). During President Thabo Mbeki’s tenure as leader of South Africa (1999 to 2008), South Africa experienced an average GDP growth rate of 3.25% (quarter on quarter annualised)
The economic boom years in South Africa were accompanied by a war for talent of unprecedented proportions. As companies strove to deliver revenue growth north of 20% they were acutely aware of the human capital needed to deliver these results.
Financial, engineering, and technical skills were particularly scarce as South Africa embarked on it’s biggest infrastructure investment in history.
This was a time where the full extent of employee engagement strategies were put into practice. As an important pillar of attraction and engagement, remuneration was sometimes pushed to the limit. Remuneration practitioners were challenged to use Guaranteed Pay, Short Term Incentives (STI), Long Term Incentives (LTI), and alternative remuneration approaches, to ensure that key talent were not poached by the competitors. Notwithstanding this, many organisations suffered an unusually high employee turnover rate in their core skill areas.
STI and LTI are examples of areas that were particularly highly leveraged. A view that gained prevalence was that guaranteed pay could be maintained below market median. The thinking was that guaranteed pay at a mediocre level would be acceptable if augmented by very high STI payments and strong LTI performance.
This did work well when superb company results resulted in STI payments well over target. To add to the festivity, stock markets at all-time highs produced strong LTI performance.
The crunch however came when the economic euphoria resulted in many employees becoming over indebted. Some employees had spent well in advance of their earnings.
The global financial crisis (2008) introduced a scenario that not many people had expected. In a very short time some employees went from relying on their STI’s and LTI’s to augment their day-to-day spending, to realising that guaranteed cash was king. The reality of paying a home loan and one or more car repayments is that monthly cash is required, not the hope of exceptional STI outcomes once a year.
This over reliance on incentive-based remuneration even had the unfortunate consequence of some employees resigning from their jobs in order to access their retirement funds.
Fast forward to 2020 and we are once again staring down the barrel of a global event which has negatively affected corporate earnings and, in turn, will impact short-term incentive schemes. Stock markets have had a torrid time, and this will impact long-term incentive schemes.
All of this brings us to the point of asking “Just how important is guaranteed remuneration in the overall pay mix?”. The answer is quite simple – as important as any of the other elements. This does not imply that organisations should over invest in fixed pay. It simply implies that organisations need to have a clearly defined remuneration strategy setting out their comparator market and desired market position. They should then use reliable market data to inform the design of their remuneration structures and actual pay levels, especially for core and/or scarce skills. It is very difficult to move the super-tanker that is guaranteed remuneration. If an organisation finds itself wanting on guaranteed pay, be it through design or neglect, it can take a long time to correct the weakness. Most organisations do not have the luxury of time in a world where fortunes can be ruined in one or two financial years.
Here are some simple checks to help you determine if your organisation is vulnerable when it comes to guaranteed pay:
- Does your organisation have a remuneration strategy that sets out your comparator market and your desired market position for guaranteed and variable remuneration?
- Does the strategy define your desired pay mix – that is the relationship between guaranteed and variable pay?
- Is there an over reliance on the variable portion of pay, even to the detriment of guaranteed pay?
- Has your organisation identified it’s key jobs – those jobs that are essential to the success of the business and which have proven to be difficult to attract and retain?
- Do you have a handle on your overall market position on all jobs, and more specifically on your key jobs?
- Are you seeing a trend of increased labour turnover due to uncompetitive guaranteed remuneration?
We should be cautious of over-emphasising any one element of remuneration as this can leave us vulnerable when the market and economy shift unexpectedly. The role of the remuneration practitioner is to guide their organisation to a robust remuneration structure that can weather the storms of change.