Contents

Sl.No. Chapter Title Page No.

Key Characteristics and influences  
Preparing for growth  
Reforms and Performance  
The involvement of investors/auditors/ other advisers  
Reinforcing the culture of success  
  Managing Reward Processes  
Reward Management Procedures
Monitoring the implementation of pay policies and practices
Compa-ratio analysis- types of compa ratios
Interpretation of compa-ratios
Attrition
Monitoring internal relativities
Monitoring external relativities
Market-place matching
Pay reviews- Objectives
An integrated approach
General reviews
Structural reviews
Individual reviews
Timing of individual reviews
Individual review budget
Individual review guidelines
Introduction :
Designing reward systems for new organizations is often fraught with difficulty. Most new
organizations start with a small group of top executives who introduce their own previous
experience and prejudices into the system before anyone like an HR professional gets to look at
it. The thinking of the ‘Start-up’ cadre of top executives will typically be based on:

 Reward systems from previous employers;

 Throwing out the bits of these that they found demotivating;
 ‘Cherry picking’ from reward policies they have known or liked the sound of from other
employers;
 Selection of benefits provided on a basis that suits a balanced group of employees in
maturing organization;
 Failure to understand the underlying pluralism of employment that inevitably not all
employees will be fired with the same enthusiasm as top management. They are in it for
different reasons, like having a job just round the corner from home, rather than
wanting to make their first $ 1 million by 30.

Objectives

The objectives of a reward system designed to meet the of a business start-up are to :

 Attract and keep people anxious to make the organization grow and flourish.
 Reward the risk or coming into a new venture with high rewards an generally a share in
the business if the risk pays off for those who have real control over development. It is
more difficult and probably unrealistic to reward support and more junior staff on a
‘high-risk’ basis.
 Provide a sensible basic salary that is reasonably competitive with the market for most
staff and highly competitive if rare skills have to be brought in. This is one time to pay at
the top of the market.
 Lock people in to give business stability typically with generous share schemes for senior
executives and all employee SAYE share scheme or profit sharing for everyone else.
 Minimize overheads by keeping benefits to a decent basic core until there is some ‘fat’
in the system or where competitive pressure indicates additions to the various benefits.
 Pay out bonuses or provide non-cash rewards when key milestones in the business plan
are successfully achieved.
 Recognize that in the early days office accommodation may be at best basic and
demonstrate willingness to improve conditions as soon as practicable.
 Preparing for growth

Whatever the basic components of the reward system in a ‘Start-up’ they should be
developed with an eye to appropriateness in a larger organization. Particular attention will
be needed in these areas:

 Pensions: Pension schemes for small partnerships/groups of professionals or

the self employed will not easily adapt to cover 140 to 200 employees after
three years. Professional advice will be needed to achieve this.
 Pay Relativities : Pay Relativities Starting on a ‘Spot salary’ basis is logical,
but internal relativities should always be defensible as the organization grows.
 Executive share options/employee share schemes : Executive share
options/employee share schemes should be capable of extension-again an area
for good professional advice.
 Performance rewards : Performance rewards need to relate to the
milestones in the business plan and be based on achievement of agreed
objectives/performance standards. Chief executive-driven discretionary bonuses
are typically suspect unless the boss really is in the ‘tough but fair’category.

The involvement of investors/auditors/other advisers :

If the business is promising and set to grow then sooner rather than later investment will be
sought from providers of venture capital. Such organizations typically take a very robust view of
reward systems, requiring introduction of long-term share schemes and highly geared
incentives to ensure that the top management group they have entrusted with their money
really are fully committed to the business. Clear and well constructed contracts will be required
and the high-risk/high-reward approach mentioned earlier will be what counts.

Reinforcing the culture of Success

Much of the success of a growing organization depends on close and effective team work.
Reward systems need to support this. This means that as organizations grow they have much to
gain from implementing:

 Performance rewards which reflect team as well as individual achievement;

 Consistent and as far as possible harmonized benefits;
 The beginnings of a formal approach to setting. Internal relativities so that a defensible
‘pecking order’ emerges;
  Effective performance management as part of the way the business is run;
 Management of the reward system by an individual who is a wise custodian of both
policy and implementation until the organization is large enough to have a
personnel/HR/remuneration professional to do the job and has grown/improved the
management capability in reward issues.

This last point is, in fact, critical. Experience shows that most of the mistakes made by new
business in the reward area are because the wrong person had accountability for it. If they
perceive reward management as merely an administrative system, fail to take a broad view of
its purpose or (at worst) incompetently develop policies that divide and cause dissent then the
business is at risk. Good and promising businesses have foundered on disagreements over pay.
Sensible pay policies are the oil in the works of any organization. In a small, growing
organization oil can turn to grit very fast indeed.

Managing Reward Process

Reward Management Procedures

Reward management procedures are required to achieve and monitor the implementation of
reward management policies and monitor the implementation of reward management policies
and to budget for and control payroll cost.

The procedures will be concerned with:

 Generally monitoring the implementation of pay policies concerning the pay structure
and internal and external relativities;
 Conducting pay reviews;
 Dealing with specific procedures for fixing pay on appointment or promotion;
 Dealing with anomalies;
 Controlling payroll costs;
 Controlling the implementation of pay policies and budgets.

Many of the procedures required are now operated much more effectively with the aid of
computer software and the use of computers is discussed at the end.

Monitoring the implementation of pay policies and practices

The following pay policies and practices need to be monitored:

 The operation of the pay structure from the point of view of internal and external
relativities, the incidence of grade drift and the degree to which the structure is
appropriate as framework for managing rewards;
 The application and impact of performance management and pay-for- performance
management and pay-for-performance processes and systems;
 The implementation of pay progression policies.

Comparative-ratio analysis

A comparative – ratio measures the relationship in a graded pay structure between actual
and policy rates of pay as percentage.

The policy value used is the reference point in the grade structure which represents the
target rate for a fully competent individual in any job in the grade. This reference point is
aligned to market rates in accordance with the organization’s market stance policy. The
reference point may be at the midpoint in a symmetrical range or top of the scale in an
incremental pay structure. Reference points need not necessarily be placed at the mid-
points; organizations are increasingly positioning them at other points in the range.

Comparative ratios provide a shorthand way of answering the question: ‘how high, or low,
is an organization paying its employees relative to its policies on pay levels.”Comparative
ratios are calculated as follows:

Actual rate of pay X 100 / reference point rate of pay

A Comparative ratio of 100 per cent means that actual and policy pay are the same; less
than 100 per cent means that pay is below the reference point and greater than 100 per
cent means that pay exceeds the reference point.

Types of Comparative ratios:

There are three types of comparative ratios :

1. The individual comparative ratio which describes the individual’s position in the pay
range against the pay policy reference point for the range and can be used to reposition
an individual’s pay in the range if it is too high or low.
2. The group comparative ratio which quantifies the relationship between practice and
policy for the whole organization or a defined population group. It is a calculation of the
sum of actual pay as a percentage of the sum of job reference point rates .This ratio has
an important part to play in the overall pay management process. It can be used to
establish how pay policy has been implemented overall ad identify differences between
parts of the organization which may indicate problems in the policy itself or in the way it
has been implemented by managers. It can also be used to plan and control pay
budgets.
3. The average comparative ratio which is the sum of each individual’s comparative ratio
which is based on the relationship between the sums of actual rates of pay and the
sums of job, preference points of pay, The average comparative ratio can therefore
 differ from the group comparative ratio according to the spread of individual
comparative ratios at different job sizes. The group ratio is more frequently used.

Interpretation of comparative ratios

Comparative ratios establish differences between policy and practice; the reasons for such
differences need to be established. They may be attributable to one or more of the
following factors :

 Differences in aggregate performance levels or performance ratings;

 Differences in average job tenure- average tenure may be short when people leave
the job through promotion, transfer or resignation before they have moved far
through the range and this would result in a lower comparative ratio. Or a higher
ratio may result if people tend to remain in the job for some time;
 The payment of higher rates within the range to people for market reasons which
might require recruits to start some way up the range;
 The existence of anomalies after implementing a new pay structure;
 The existence of anomalies after implementing a new pay structure;
 The rate of growth of the organization – fast growing organization might recruit
more people towards the bottom of the range or, conversely, may be forced to
recruit people at high points in the range because of market be forced to recruit
people at high points in the range because of market forces. In