4 Critical Success Factors to Build Sustainable Remuneration Strategies_Balancing People and Profit_20 November 2023.pdf

THE FUTURE OF WORK: BALANCING PEOPLE & PROFIT – WHAT
SHOULD BUSINESS LEADERS DO TOWARDS BUILDING SUSTAINABLE
REMUNERATION STRATEGIES?
CHARLES COTTER PhD, MBA, B.A (Hons), B.A
www.slideshare.net/CharlesCotter
SLAZEISI INAUGURAL ANNUAL LEADERSHIP SUMMIT
ELEPHANT HILLS RESORT, VICTORIA FALLS, ZIMBABWE
20 NOVEMBER 2023

PRESENTATION OVERVIEW
• Introduction and Contextualization
• Unpacking the fundamentals of organizational sustainability and ESG;
corporate, HRM and remuneration governance
• Sustainable remuneration guidelines and roadmap
• The 4 critical success factors for building sustainable/future-proof
remuneration strategies (to balance people and profit)
• Summary and Conclusion
• Question and Answer session

ORGANIZATIONAL SUSTAINABILITY (FUTURE-PROOFING) –
THE TRIPLE BOTTOM LINE (3 P’s)

DEFINING ORGANIZATIONAL SUSTAINABILITY
(FROM A HRM-PERSPECTIVE)
• “It is the ability of an organization to maintain and be consistent in its
mode of operandi, which in turn lead to increase in performance,
profitability, enhance customer and workers satisfaction as well as
competitiveness among its peers.”
(Kabiru Ishola Genty, Lagos State University, Nigeria, extracted from
Human Resource Management Practices for Promoting Sustainability,
2021)
• Receptive, Responsive and Responsible (Cotter, 2023)

KING IV (2016) REPORT ON CORPORATE GOVERNANCE – 17 PRINCIPLES
•Principle #14: Remuneration governance –
•“The governing body should ensure that the
organization remunerates fairly, responsibly and
transparently so as to promote the achievement of
strategic objectives and positive outcomes in short,
medium and long term”

DEFINING HRM GOVERNANCE
• The concept of HRM governance is becoming an emerging organizational practice that enforces HRM to design their
functionality and strategy within a governance framework. By doing so the HRM function contributes to the overall
company’s performance.
• HRM governance is the human capital dimension of the corporate governance framework.
• HRM Governance is the effective leadership of the HR function in an ethical and sustainable way.
• HRM Governance focuses on the rules that govern the main components of the corporate entity referred to as the people.
• “The need for an HR governance system that could assist in dealing with many of the HR problems and challenges encountered
by South Africans, such as HR risk management and corporate ethics, which appear to arise from ineffective corporate
governance.” (SABPP, 2009)
• HRM governance is a systematic approach that creates a legitimate platform to achieve the HRM strategy and objectives,
that are directly aligned to achieve business objectives.
• This golden thread of governance informs the operational capability of HRM to achieve and deliver on its outcomes.

6 OBJECTIVES OF HRM GOVERNANCE
• HRM governance is the act of leading the HRM function and managing
related investments to the following 6 objectives (Mercer):
• #1: Optimise performance of the organization’s human capital assets;
• #2: Fulfill fiduciary and financial responsibilities;
• #3: Mitigate enterprise HRM risk;
• #4: Define stakeholders and their expectations;
• #5: Align the function’s priorities with those of the business; and
• #6: Enable HRM executive decision making.

THE STRATEGIC IMPERATIVE OF INCORPORATING
SUSTAINABILITY INTO REMUNERATION FRAMEWORKS
• Incorporating sustainability into remuneration frameworks will help enable:
❑organizations to elevate the prioritization of their ESG commitments,
❑while operationalizing the ESG agenda and
❑encouraging positive societal change.
• EY in collaboration with key partners and subject matter experts have developed Sustainable
Remuneration Guidelines (SRGs) to:
❑enhance the linkage between sustainability, purpose and pay,
❑while attracting, retaining and engaging employees and
❑enhancing business outcomes.
• Given the role that incentives play in influencing behaviour, and therefore corporate decision-making,
it is important to have sustainability front and center in the boardroom.

SUSTAINABLE REMUNERATION MATURITY
ASSESSMENT – A 4-PHASE ROADMAP (EY)
• Phase one: Understand
❑Establish design principles. Assess the ESG ambition and appetite for change based on:
❑Stakeholder interviews
❑Analysis of existing ESG commitments
❑Remuneration frameworks and disclosures
• Phase two: Evaluate
❑Ensure clarity on the current state of:
❑Alignment with sustainable remuneration principles and guidelines
❑Benchmarking of current and desired remuneration practices
• Phase three: Activate
❑Identify enhancements
❑Develop prioritized list of enhancement ideas to support meaningful ESG alignment across remuneration
mechanisms, disclosures and governance
• Phase four: Embed
❑Develop a roadmap of interventions to help deliver sustainable remuneration framework, including:
❑Articulation of phased approach (spanning now, next and beyond) of enhancement opportunities

4 CRITICAL SUCCESS
FACTORS FOR
BUILDING
SUSTAINABLE/FUTURE-
PROOF
REMUNERATION
STRATEGIES
(COTTER, 2023)
High Performance Organizational (HiPO)
Culture
Evidence-based and data driven
remuneration philosophy
Business and strategically-relevant
remuneration metrics
Strategic Total Rewards Management
(STORM) framework

HIGH PERFORMANCE ORGANIZATION (HIPO) CULTURE

DEFINING A HIGH PERFORMANCE ORGANIZATION (HiPO)
CULTURE
A high-performance organization is characterized by clarity and coordination.
Everyone plays a crucial role in driving the company forward, and everything that happens at the
individual, group or departmental level contributes to the organization's goals.
People understand their roles and how their efforts contribute to producing the desired results.
Andre de Waal of the HPO Center offers this more formal definition: "A High Performance
Organization is an organization that achieves financial and non-financial results that are exceedingly
better than those of its peer group over a period of time of five years or more, by focusing in a
disciplined way on that which really matters to the organization."

DIAGNOSIS OF HIPO
CULTURE
• Q1: Your organization's managers optimize employee performance, potential
and talent management by bringing out the best in people; motivate them;
helping them adapt to changing circumstances and promoting good and
harmonious teamwork. It also trains business leaders to manage the change
process effectively in the best interests of the company and its people.
• Q2: Your organization's managers act with integrity and serve as role models
for their reports. They are credible and consistent and exhibit a strong set of
ethical standards that gain the trust and respect of their teams.
• Q3: Your organization's managers make swift & effective decisions and they
encourage others to do the same. They give people continuous support,
coaching and freedom to act in ways that are consistent with the
organization's standards and these managers also hold themselves accountable
for their own decisions.
• Q4: Your organization integrates standards for excellence into it's operating
structures & introduces people to these standards from the moment they join
the organization. These standards are a living document. People are
encouraged to share their ideas & knowledge to stimulate innovation & fresh
ideas and ensure the organization is permanently focused on improvement.
• Q5: Your organization is receptive to and not dismissive of (macro, market &
micro) environmental forces and -change. It is responsible in creating an
organizational culture that is poised to adapt to changing circumstances. Your
organization establishes open, transparent and multidirectional lines of
communication so that these change messages flow freely around the
organization.

DIAGNOSIS OF HIPO
CULTURE
• Q6: Your organization is vigilant, agile and responsive to environmental change.
There is a distinct focus on action; sustaining it's competitive advantage;
harnessing its core competencies; compliance with core values and finding ways
to do it better and/or more cost effectively over time.
• Q7: Your organization has well-defined vision statements that convey the reason
for the organization's existence and are focused on long-term (as opposed to
short-term) outcomes and building sustainable, life-long & mutually beneficial
relationships with key stakeholders and how to create and add real value for
them.
• Q8: Your organization is characterized by role clarity, cross-functional
collaboration, cohesiveness and coordination. Everyone plays a crucial role in
driving the company forward and everything that happens at the individual,
group or departmental level and how it contributes to the achievement of
desirable organizational goals and results. There is a high degree of task
significance and task identity.
• Q9: Your organization works tirelessly to assemble a diverse and balanced team
where individual personalities do not dominate, and everyone works together in
partnership to achieve the mission-critical aspects of the company's strategy.
• Q10: Your organization ensures that every individual is well trained and
encouraged to be flexible, resilient and to apply entrepreneurial thinking,
resulting in a highly creative and engaged workforce where everyone is proactive,
solutions-focused and comfortable with taking calculated risks.

EVIDENCE-BASED HRM
• Evidence-based HR refers to a process in which the organization
evaluates any decision or process against data, real experience, expert
opinions, and/or other types of information to ensure the decision is
likely to have the desired outcome.
• For this to work best, the “evidence” used should be purposefully
sought out.
• When data is taken from multiple sources, ensure it’s applicable within
your context.

8-POINT HRM TRANSFORMATION
(COTTER PhD, 30 APRIL 2023)
• "In order to be feasible, to prosper professionally in 2023 and to be future-fit,
HRM will have to exchange the currency in which they trade from old notes to
noteworthy, Industry 4.0 and business relevant denominations and value.
Specifically, this change translates from:
• 1. feelings to facts;
• from 2. anecdotal to analytical;
• from 3. hindsight to insight to foresight;
• from a 4. business tributary to mainstream;
• from 5. intuition to intelligence;

8-POINT HRM TRANSFORMATION
(COTTER PhD, 30 APRIL 2023)
• "In order to be feasible, to prosper professionally in 2023 and to be future-fit,
HRM will have to exchange the currency in which they trade from old notes to
noteworthy, Industry 4.0 and business relevant denominations and value.
Specifically, this change translates from:
• From 6. rhetoric to meaningful response;
• from 7. best practice (imitation) to best fit (internalization) to next practice
(innovation) and ultimately,
• from 8. a cost to a profit centre.
• Generally, this 8-point transformation means an upgrade to Evidence-based
HRM."

BUSINESS AND STRATEGICALLY-RELEVANT REMUNERATION METRICS

BUSINESS AND STRATEGICALLY-
RELEVANT REMUNERATION
METRICS
• Revenue/Profit factor, which is company total
revenue/profit divided by the amount of full-time employees
• Human capital value added: revenue minus operating
expense and cost of compensation/benefit divided by the
total amount of full-time employees
• Human capital return on investment: Revenue minus
operating expenses and cost of compensation benefit
divided by cost of compensation/benefit
• Total compensation revenue ratio, which is cost of
compensation/benefit divided by revenue
• Labour cost revenue ratio, which is cost of
compensation/benefit plus other employee costs (bonuses,
mileage paid, incentives) divided by revenue

BUSINESS AND STRATEGICALLY-RELEVANT
REMUNERATION METRICS
• Labour Cost Revenue % - The Total Labour Cost as % of organizational revenue or how
much you spend on salaries/wages and benefits as a % of the revenue generated. The
metric can be translated as the amount of investment in your employees required to
generate each Rand of revenue. It can also be used to measure how successful you
pay for performance system is.
• Labour Cost Expense % - Total Labour Costs as % of total expenses. This metric tells
you the percentage of your total operating expenses that are spent on compensating
employees. Labour cost can be a significant operating expense, in particular in an
organization that are labour intensive and/or that relies on human capital to generate
value.
• Benefits as % of Total Compensation, which is the Total cost of benefits as a % of Total
Compensation cost.
• Health care costs per employee, which is total health care cost divided by total
amount of employees
• Sick leave liability, abuse and exploitation of this employee benefit by employees

BUSINESS AND STRATEGICALLY-
RELEVANT REMUNERATION METRICS
• The number of “cents” in total compensation and benefits
costs that it took to generate a rand of revenue (as an
indication of compensation effectiveness, where this year's
ratio would be compared to last year’s ratio)
• % of employees that are satisfied with their compensation
(survey of a sample of employees on their satisfaction between
the rewards and the expectations of the firm)
• % of employees that are rated in the top performance
appraisal level… that are paid above the average salary for
their position and vice versa
• What % of the average employee’s pay is “at risk” based on the
employees on the job output

SUSTAINABLE
REMUNERATION
METRICS
(PAY FOR
PERFORMANCE)
Are we overpaying our employees for the output they produce? (Pay for Performance)
• Can HRM show the impact of pay increases?
• What is the % increase in employee performance as the result of every 1% increase in pay?
• Does paying top dollar matter?
• Do the employees paid in the top quartile of the salary range produce proportionally more output
than those paid in the middle quartile?
• Demonstrate that we have tied a higher proportion of our total compensation to productivity and
company performance than our competitors.
• How much differently do we treat (pay) our top contributors from our average contributors?
• Who are we over/under paying?
• Demonstrate we have an effective system for identifying and forecasting whether we are under or
over-paying our employees.
• Is there evidence that our benefits programs really attract or keep people?

STRATEGIC TOTAL REWARDS MANAGEMENT (STORM) FRAMEWORK

• Strategic reward is based on the design and implementation of long-term reward
policies and practices to closely support and advance business or organizational
objectives as well as employee aspirations.
• “Effective reward is about finding the right reward programs for the strategic
direction of your business.” (Tom McMullen)
• Strategic reward management involves the formulation and implementation of an
equitable reward system that is congruent with the organization’s strategic
objectives.
• The reward system must be congruent with the management style and other
organizational systems, in particular, communication and decision-making. (Lawler)
THE STRATEGIC IMPERATIVE OF REWARD MANAGEMENT

DIAGNOSIS OF CURRENT REWARD
MANAGEMENT PRACTICES
• #1 Your organization offers competitive and market-related/above market-related
remuneration packages to employees (prospective employees).
• #2 Your organization adequately and accurately recognizes the knowledge, skills,
competencies and experience of employees and rewards are sufficiently flexible
and variable.
• #3 Your organization applies fairness in methods, procedures and practices for
compensating, recognizing and rewarding employee contributions.
• #4 Your organization applies equitable methods, procedures and practices for
compensating, recognizing and rewarding employee contributions.
• #5 Your organization promotes transparency through sharing information about
their compensation practices, pay rates criteria and how they are determined –
especially at the managerial and executive levels.

DIAGNOSIS OF CURRENT REWARD
MANAGEMENT PRACTICES
• #6 Your organization applies consistency (standardization) in the allocation of
remuneration and rewards e.g. performance bonuses and incentives etc., thereby
serving as a retention and motivation mechanism.
• #7 Your organization applies objectivity throughout the performance
management process, as the pre-cursor and chief determinant of performance
bonuses.
• #8 Your organization has an efficient, user-friendly and stream-lined job
evaluation and job grading process.
• #9 The value of remuneration and rewards offered by your organization is
affordable (feasible) promoting business sustainability and continuity.
• #10 Your organization’s reward system is effective in that it directly contributes to
and enables the achievement of business management goals e.g. higher levels of
productivity and performance.

8 STRATEGIC MANAGEMENT PRINCIPLES
(APPLICABLE TO REWARD MANAGEMENT)
• #1: (Vertical) Alignment with business strategy, goals and
objectives
• #2: (Horizontal) integration of HRM value chain functions
(bundling)
• #3: Rewards Management conducts environmental scanning and
is highly attuned, sensitive to and pro-actively responsive of
change
• #4: Rewards Management is future-focused (ensuring that the
organization is future-proof)

8 STRATEGIC MANAGEMENT PRINCIPLES
(APPLICABLE TO REWARD MANAGEMENT)
• #5: Reward management adopts a measurement culture
e.g. scorecards, dashboards, metrics, risk analysis and
audits etc.
• #6: Reward management generates business intelligence,
enabling smarter business decision making (operationally
and strategically)
• #7: Enables the organization to gain a sustainable,
strategic competitive advantage
• #8: Reward management practices contribute to a positive
organizational climate, culture and higher levels of
employee engagement.

COMPETENCY AND SKILLS-BASED
PAY
• Competency-based pay is a pay structure that rewards employees based on how well they perform in the
workplace, rather than the hierarchy of their position or years of experience.
• The benefits of competency-based pay structures:
❑ Serves as a motivational tool
❑ It reinforces a culture of self-improvement
❑ It may improve staff retention
❑ It encourages corporate transparency
• Skill-based pay refers to a pay system in which pay increases are linked to the number or depth of skills an
employee acquires and applies and it is a means of developing broader and deeper skills among the
workforce.
• Such increases are in addition to, and not in lieu of, general pay increases employees may receive.
• The pay increases are usually tied to three types of skills:
❑ horizontal skills
❑ vertical skills
❑ depth skills

DIFFERENCE FROM TRADITIONAL PAY
SYSTEMS
• Skill-based pay is a person-based and not a job-based,
system.
• It rewards (and therefore emphasizes) a broad range of
skills which makes the employee multi-skilled and therefore
flexible.
• It positively encourages skills development.
• A skill-based pay system may not necessarily reflect how
well the skill is used, as this falls within the performance
component of pay.
• The system needs to be underpinned by opportunities for
training which is critical to the success of the system.

CONCLUSION
•Key points
•Summary
•Questions

DR CHARLES COTTER’S CONTACT DETAILS AND SOCIAL MEDIA PRESENCE
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