Alarm bells rang recently when I was in a meeting with the head of reward for a multinational chemicals company.
Talk turned to the firm’s global reward policies. She explained that her organization pays 5 per cent above the general market across all global divisions. When I asked how this was decided, she replied: “That’s the going rate here at home.”
Perturbed, I went back to the office and analyzed our PayNet database. The numbers spoke for themselves.
She was right, of course: the firm’s home market does indeed pay 5 per cent above the country’s overall jobs market. But in the US, the sector pays a 14 per cent premium. And this rises to 17 per cent in China and 19 per cent in Brazil. On the other side of the coin, the industry pays 16 and 14 per cent below market rates in the Czech Republic and Venezuela respectively.
As I’d suspected, it was time for my client to rethink international pay. Her company was missing out on attracting the best people in three markets, while significantly overpaying in two others.
I’ve seen this happen time and again. Multinationals commonly take their home market as a pay benchmark for the rest of the world.
But just how great are the pay differentials between nations in global industries? Our infographic compares pay in ‘typical’ home markets to countries around the world for multinationals in a range of sectors.
The findings are eye-opening. Here are a couple of examples:
FMCG: A UK producer might not feel the need to pay a premium, with pay in the sector just 2 per cent above the general domestic market. But applying this globally would be dangerous – especially in emerging economies. FMCG employees are paid 35 and 39 per cent above the going rate in China and India respectively.
Why? Because the first-class sales and marketing skills so prized in the industry are far less prevalent in these countries than in Europe or the US – as Unilever discovered when recruiting management trainees in China. The firm received more than 30,000 applications for 100 positions, yetsaw fit to hire only 80 of them. So companies have to pay big for top marketing talent.
Oil & Gas: The sector pays a global average premium of 20 per cent. But this is skewed by whether or not a country has exploration and drilling operations, which require highly-qualified geologists and engineers. The large salaries they command tend to inflate pay across the whole workforce in these markets.
As a result, places like Malaysia pay 58 per cent above general market rates, India 46 per cent and Saudi Arabia 38 per cent; while workers in non-drilling markets such as Italy, Greece and Hungary receive no premium.
A holistic view
The lesson is plain: you cannot set global reward policies according to domestic market dynamics.
This applies not just to salaries, but all elements of remuneration: incentives, benefits, allowances and so on. Different markets have different expectations. What is an incentive in one place may prove just the opposite in another.
Take the example of one multinational that rolled out its employee recognition scheme worldwide. At home, employees embraced the opportunity to exchange points awarded for good performance in return for company merchandize. But this was not seen as an attractive benefit elsewhere.
And pity the firm that allocated the same amount of shares to all senior executives worldwide as a long-term incentive. This worked well as a retention tactic in wealthier economies. But in developing countries, it did the opposite: the shares equated to a very comfortable retirement pot. Swathes of senior executives cashed out at the earliest opportunity.
Avoiding the pitfalls
So how do firms go about setting the right global reward policies?
In my view, it comes down to arming yourself with three levels of information for each territory:
How competitive is your reward globally?
You can find out if your business is offering competitive reward packages. Hay Group PayNet© is a powerful online tool that provides essential and reliable rewards and pay data, specific to your industry, function or location.
PayNet enables you to benchmark salaries against more than 20,000 global organizations, to ensure your rewards and compensation packages attract and retain the best talent.
Hay Group’s analysis for 2013 found an overarching trend of organizations starting to take a more holistic view of the rewards structure. Many of them have realized that the double-digit salary growth rates witnessed in recent years will simply not be sustainable – and as a result we see more and more of them rewarding specifically for performance. Essentially, this implies that in many cases the fixed component of salaries will remain somewhat stable; the hike will be witnessed to a greater extent in the variable component of the package – leading to ‘pay-for-performance’ being recognized as the next big practice.
As we found in our report, organizations are becoming more aggressive about variable pay, with payouts being influenced widely by both individual and company performance. One measure of how strongly this trend has picked up lies in the fact that a very significant 96 per cent of organizations have made payments related to variable pay in the last 12 months itself!
Interestingly, the proportion of variable pay (as a percentage of total CTC) not only varies across levels, but also shows an increase across management levels. It weighs in at 6 per cent at the junior level, 10 per cent for the middle manager, and 14 per cent for senior management. Sector-wise, we found that oil & gas, services, natural resources, and chemicals are more aggressive when it comes to variable pay, while sectors like transportation and construction are still conservative.
The need to motivate the workforce plays a major role in creating a pay-for-performance culture, in addition to the need for instilling a sense of ownership amongst employees as well as encouraging long-term sustainability. A large part of it also relates to overall company performance – which drives the level of aggressiveness towards or away from variable pay.
Read more about rewards in India
The business terrain is volatile like no other time before, and one lesson is clear – this isn’t likely to change any time soon. Globally we are dealing with tectonic shifts impacting traditional business models (e.g. in the retail, print media and manufacturing sectors). On top of this is the power shift from the mature economies of Europe and the US, to the growth economies of Asia and Latin America. Local leaders are also being faced with issues surrounding a high dollar, challenging regulatory requirements and a ’patchwork economy’ which continues to get even more patchy as commodity prices soften.
But there is good news. Unlike a simple downturn there can be significant opportunity and upside in volatility. In fact we don’t need to look too far for examples of success during these uncertain times – organisations such as Virgin Australia, Fonterra and Wesfarmers come to mind as organisations able to position their organisation effectively through the volatility.
The key challenge for leaders is to continue to meet the evolving needs of their customers, while simultaneously balancing their responsibilities to their shareholders/stakeholders. Quite simply, what will differentiate the winners from others desperately struggling to keep up with the pace of transformation can be broadly classified as ‘organisational agility’. The ability to adapt and effectively respond to market shifts. And contrary to popular belief, when it comes to agility, size does not matter.
Based on our work with and observations of agile global and local organisations, we believe that there are eight building blocks of organisational agility. These eight building blocks are discussed in detail in Hay Group Pacific’s 2013 FOCUS publication and fall under three key areas:
Does your organisation think, feel and act like an agile organisation?
A recent survey by the CIPD ranked reward communications as the number one risk for professionals working in this area. To be exact, respondents are most worried about employees not appreciating the total value of the offering provided. It’s staggering, given these times of pay restraint, disclosure and pension reform that it’s communications keeping pay experts awake at night. But they’re right to be concerned. If the reward package is not clearly understood by employees, if they don’t know what they’re entitled to, and if it doesn’t drive the behaviours or performance required, something is wrong.
Sometimes it’s not just what you pay it’s how you pay it. At senior levels in the private sector, the total pay package may be made up of around 60% base pay (i.e. guaranteed cash) with a further 30% coming from either short or long term performance-related bonuses and about 10% from benefits such as pension, cars and healthcare. Lower down the ranks there may still be a proportion of variable performance-related pay but employee benefits become even more important. It is becoming more and more common to see companies devote pages of their recruitment website to both tangible and intangible benefits. Bold statements are made about work/life balance, cycle to work schemes, childcare vouchers and travel ticket loans. In these difficult financial times it is of course important to ensure that base pay rates are competitive, but flexibility also makes a difference to people and may be seen as a positive differentiator in the recruitment process.
Benefits need to have a value though and even the best reward strategies cannot succeed without solid communication and effective leadership. Our surveys often tell us that it’s the small things that make the most difference. Companies spend vast amounts of money on their benefits provision yet it’s crazy to think that many don’t have a sense of what they’re worth. For instance only half of the UK organisations we surveyed benchmark both cash and benefits provision together to see how they compare to others. A similar percentage also communicate the full reward package to staff whereas around 8 out of 10 of the World’s Most Admired Companies do this. The links between reward and engagement are now clear. Our research proves a correlation between rewards, recognition and a positive organisational climate, as well as a link between key metrics such as retention and productivity.
In short, the best organisations communicate both the overarching reward philosophy and the mechanics of what they offer. As you approach this year’s pay review, think first about how your pay and benefits are understood by staff, gauge their views, consider the changes necessary, and then communicate and communicate some more. Only then will your reward strategy truly have the impact desired.
This year, Hay Group in the Middle East is focusing its research on the changing expectations of employers and employees under the banner of the Tawaqquat series. As part of this we explored the idea of how business leadership in the region has changed in the wake of the global financial crisis. Has leadership behaviour in the region changed since Hay Group’s Lift Off research in early 2009?
The results show that the fundamentals of good leadership have not changed: the more leadership styles a leader can adopt, and deploy at the right time, the more effective he or she is. Leaders who can adjust their style to the situation stand a much higher chance of creating a better organisational climate, and getting better results from their people.
However, the global financial crisis, and the ripples felt here in the Middle East do appear to have impacted the way leaders behave. There are three trends which are apparent in the Middle East:
Changes in leadership style
For this research we looked at two timeframes: 2005 – 2008 and 2009 – 2012. In the period 2009 – 2012, leaders in the Middle East with a limited range of styles (0-3 styles) create a de-motivating climate for their employees 89 per cent of the time. Those with more styles (4-5) at their disposal have a much higher chance of creating a high-performance climate. This is a very similar pattern to the earlier data. A leader with only one style has just a 7 per cent chance of creating a positive work climate ; a leader who uses a range of five styles on a regular basis has a 64 per cent chance.
The major difference over time is in the use of the coercive style (gaining immediate compliance from employees) which shows a growth of 10 per cent for the period 2009 – 2012. The coercive style is effective in crisis situations and where short term decision making is vital. It can help to avert crises and accelerate the decision making process. However, if over-used, or used without other styles, this style tends to de-motivate and dis-empower employees.
Use of the authoritative style has also increased post-crisis, use of this style as dominant is up 9 per cent from 32 to 41 per cent. This is higher than the global norm of 33 and indicates that leaders are now explaining more about the ‘why’ and ‘because’ to their employees. This is a trend we have witnessed in our employee opinion data too: employees want better communication and understanding about what is expected of them and how their contribution matters.
Affiliation is a must have in the Middle East
What outstanding leaders do is broadly the same all over the world but what is unique to the Middle East is the importance of the affiliative style (creating trust, harmony, and building relationships). In the Middle East relationships matter: 86 per cent of high performing leaders use the affiliative style on a day-to-day basis. Affiliation continues to be the most important style for a leader in the Middle East. Pre-crisis, 90 per cent of high performing leaders had this style as part of their everyday repertoire.
The affiliative style is effective when a leader needs to create harmony between people, it helps to settle situations and leaders using this style are comfortable in checking how people feel. It can be particularly useful during turbulent times when trust needs to be built or maintained.
Taking leadership to the next level
The Middle East has a strong emphasis on global competitiveness; the region is embracing research and innovation and has a clear vision of its future. At a time when organisations need to tap into the creativity and ideas of their workforce, we need to see a shift from short-term, command and control leadership (coercive) to a more inclusive style which encourages employees to find solutions to problems, generate new ideas and gives them the freedom to make mistakes, as long as they learn from them.
The ability to use the right style in the right situation is the biggest contributing factor on whether a leader creates the conditions for employees to perform at their best. In fact, Hay Group’s research shows that creating a motivating climate can add as much as 30 per cent to a company’s bottom line.
I have an odd fascination with those programmes where people sit around discussing football. I have been known to switch this stuff on at 10am on a Saturday and turn it off again about 8 hours later. If you’ve never found yourself in such a position, let me explain the concept. It is common to see a range of programmes on the sports channels where former professional footballers, sports journalists and anyone else that can be dragged in from the street sit in TV studios and preview future games, comment on current games, and review games that have just been played. It’s fair to say that you need to love football to immerse yourself in this stuff and I certainly do love football.
One of the key topics for discussion on these shows is football management. Followers of the beautiful game will know that managers leave and join clubs at an alarming rate. Often the scapegoat for a poor run of form, you can be a failure one week and a club’s saviour the next. My own club Southampton for instance have had 15 managers in the last 10 years. We’ve seen all sorts of people come and go and the club recently whipped the TV pundits up into a frenzy by sacking a particularly successful manager and replacing him with a relatively unknown Argentine with a dubious looking record.
Although much about the modern world of football is just plain crazy, a recent debate made me wonder about the parallels between the leadership of our beloved teams and the leadership of businesses more generally. The debate centred around the styles of management deployed by various England team managers. A group of journalists discussed the laid-back style of Sven Goran-Erickson and the tactical and organised approach of Roy Hodgson. Both of these approaches however seemed to be rejected by the panel in favour of a more outwardly aggressive and fist-pumpingly-passionate style that could be brought to the job by someone in the Harry Redknapp mould.
So, is there a secret recipe here? Can we recruit leaders of football teams in the way that we recruit leaders of businesses? Will the styles of leadership adopted by football managers really have a demonstrable effect on the way a team performs?
The first thing to say here is that there is no right or wrong leadership style. Any leader needs to use the right approach for the right situation. It often depends on the task in hand, the people being managed, the situation you find yourself in, the complexity of the task, time pressures and so on. The critical thing is that they do observe the situation and are flexible in picking a leadership style to suit. For instance, an immediate problem may require clear and decisive action. If you’ve been brought in to save a club from relegation in 6 weeks you could argue that you need immediate compliance with the plan – a quick fix to the short term crisis. It might not be pretty, it might alienate a few of the self-motivated, high performers, it will certainly be a short term solution, but it might get the job done.
Some football managers are recruited specifically for their ‘man-management’ skills and their ability to get the best out of people. This will require the manager to be affiliative, spend time on one-to-one coaching, include team members in the development of tactics and so on. They will not build long-term productive relationships with their teams if they crack the whip too much and solely adopt a ‘do as I say’ approach.
You could argue that one of the best managers in the history of the game has been Manchester United’s Sir Alex Ferguson. From the outside looking in, he appears to mix and match these leadership styles incredibly effectively. Sir Alex knows when he needs to be a strict disciplinarian and crack the whip with an authoritative style. Although you could argue that his famous ‘hairdryer’ treatment for managing those with inadequate performance shouldn’t necessarily be adopted within wider business, it’s fair to say that it’ll provide players with some additional direction and clarity in difficult situations! What’s less observed on the outside is the time spent nurturing talent, building relationships and driving towards a shared vision that every player feels part of. David Beckham refers to him as a “father figure” and someone he could go to with problems. Not only is Sir Alex an authoritarian, he somehow manages to also gather an incredible amount of respect. Another former player Phil Neville once said “I’ve not known many players leave United and say a bad word about him”.
I’m sure many managers, be it in football or in business more generally would love to be able to balance these leadership styles in such an effective way. Our latest research suggests that only a quarter of leaders utilise more than 4 of the common leadership styles and a third have mastered none of them or only one. An over-reliance on a couple of core leadership approaches to a multitude of challenges will disengage teams and hold back performance. The bottom line is that, just like in business, football managers should create the climate for people to perform at their best. If they get it right they’ll build commitment, standards, and clarity. All key components in the push towards greater team performance.