Developing a holistic compensation system - The SCS experiment

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compensation.jpgOne of the biggest questions employers ask themselves today is what is the compensation strategy, which will be best suited for the Organisation? Should we go for Performance based compensation, team rewards, individual incentives or non-monetary incentives? The truth is that there is no simple and one answer for this question. A Company’s compensation strategy as with any other system has to relate to the specific needs of its employees and the philosophy of compensation that it would like to adopt.


The amount and manner in which you deal with compensation is a very strong and silent message to the employees as to how you treat them. It is definitely not just about the amount that you pay but also about how you use this to differentiate between employees.


We learnt this when we did our Employee Satisfaction Survey wherein we got an overwhelming feedback about our Compensation Strategy. The basic message we got was that employees were not just dissatisfied with the Salary (who isn’t?!) but what was more important is that they felt that the distinction between the good performers and the poor performers was not significant as the increase in Performance Incentive (variable pay) was linear in relation to performance.


This was a very clear signal, which was against our overall philosophy, because we clearly did want to be a Performance Oriented Organisation and Compensation was one of the most obvious tools to distinguish between different levels of performance. We also wanted to be market driven and specially pitch our employees based on their performance to different market compensation levels. For e.g. our best performers-we wanted to pay them at the 95th /100th percentile salary of the market as against say a low performer who would not be more than 50th Percentile salary level.


We decided to re-vamp it in line with our goals and employee expectations. I would like to share with you not just the process we followed but also the lessons that we re-learnt during this exercise. I used the word ‘re-learnt’ because some of the issues are so obvious yet we tend to neglect them.


There were two parts to our Compensation Strategy – one was in terms of collecting Market Data for comparison. For this we along with a few other like-minded organizations decided to follow a different strategy. Rather than getting the data through a consultant or to bank on the databank available with the consultants, we decided to share the data with each other while maintaining the anonymity of each organization. As a first step we did a comparison to equate various positions in different organizations so that we had the level equivalence across organizations. For collecting and analyzing the data we devised a common format, which could be applied to all. Each organization shared data in that format, without sharing the name of the organization. This was then consolidated and key data was calculated to get the market values of different positions. The above exercise was done within a period of 2 weeks. This is a testimony to the fact that with a common goal, clear transparent communication and trust eight Companies which are competitors in the market, were able to share key data in a efficient and effective manner. Having got the market data, we then looked inwards at our compensation structure. As a first step we demarcated our compensation into two clear components – The Total Fixed Pay (TFP) which comprised of all salary and benefit components except a. The Total Cost to Company, which included TFP and Performance Incentive (PI).


What we decided was that we wanted to distinguish between different levels of performance only through PI. When we looked at our TFP structure there were unexplainable differences in salaries, which we felt, needed to be rectified.


Compensation is a sensitive issue and what we realized and wanted to bring into our Compensation System was a large degree of transparency. It does not mean that there should be no difference between the salary of two employees but the difference should be in line with your compensation philosophy and should be explainable and transparent.


We defined that the TFP would be a function of the ‘Position and the Person ’.


Position was based on qualifications and roles and responsibilities being handled by the employee, this was reflected in the Grade that he is in. We also wanted to take into account the experience levels- a software engineer with two year’s experience would have more value than, say a Fresher who has joined a few months back even though they may have the same grade and responsibilities.


As a result, within each grade we introduced the concept of Broadbanding on the basis of experience. This is the value that the Person brings to the job.


Having defined this we felt that for employees who had similar profiles on all the above parameters would get the same TFP. The TFP thus represented the Value of a position in the organisation. For us this was a process that went beyond Compensation. It made us re-look at our Organistaion Structure, the roles that people play, what is their market value and our own assessment of their worth in Company.


Having decided the position we were able to define the market worth of the positions and fix the TFP accordingly.


The next step was the crucial one – deciding the Incentive Policy – for it is this that would distinguish between the “best and the rest”. We decided to pitch the median salary of a particular rated group to various market levels as per performance. For e.g. the average performers (rated 4 on an 8 point scale) would be pitched to the 60th Percentile at their level. Employees rated 5,6,7 would be progressively rated at higher market levels. We also kept the distinction high between various performance levels, as we wanted to make the distinction very clear.


Another factor, which is built into our PI system, is an element of consistency and service in the organization. PI is thus not just a function of the past year’s performance but also takes into account consistent good performance and an employee’s stay in the organization. No system is totally fair to all – while some benefit, other’s may not. The loyalty angle being reflected in the PI meant that lateral entrants were at a disadvantage – to counter that we built in a component of “special allowance” into the salary for a lateral entrant, which helped to bridge the gap.


In addition to the above we also introduced a Star Performer Award, which is given to outstanding performers in the Company. This has a monetary award linked to it, which is fairly substantial as well as a recognition angle. This too helps to recognize and reward the high performers in the organization apart from pitching him/her into 100th percentile. Not all our rewards are Individual oriented. We also have a team based reward system, which is given when a team reaches an important milestone in their project. All these measures together make for a healthy and holistic compensation structure.


The above exercise was a really worthwhile one as it made our system more transparent and our compensation structure more explainable. We have been able to clearly distinguish and compensate for different performance levels.


(The author of the article is Pramod Fernandes, General Manager – HR with Siemens Communication Systems. Feedback can be mailed to




Issue BG16 July02