Like many people, we spent some time in January and February reflecting on our New Year’s resolutions (which of course included exercising more and eating healthier!). Reflecting on our ‘Revolutionising Reward’ event in November 2018 where we brought together executives to explore opportunities with the current reward model, a number of ‘to-dos’ should be front of mind as companies prepare for various management and remuneration committee planning activities.
1. Open the ‘black box’ and communicate how incentives are tracking
To provide greater transparency of potential incentive outcomes (both short and long term), interim updates to participants are a worthwhile, yet often under-utilised, engagement tool. In fact, feedback from our Pulse Survey November 2018 indicates improvements in the area of communication are needed.
Actively sharing the progress of an incentive may provide time to influence metrics, correct any relative under performance and refocus activities.
Provide STI Updates (typically measured annually) – depending on the metrics, short term incentive updates should be easily communicated through management dashboards and Board reporting of progress toward milestone achievements.
Provide LTI Updates (typically running 3-4 years) – our experience shows that there is a risk of the participant losing interest and undervaluing an LTI grant where the only communication they receive is the final vesting notification. To combat this risk, companies should consider annual updates on LTI performance measures (e.g., relative total shareholder return).
2. Identify opportunities for pay equity and fairness
For many companies pay equity is a challenging area, balancing the requirements of external compliance, employee engagement and importantly good business practices. At this time of year the Workplace Gender Equality Agency (WGEA) reporting can represent a “tick the box” compliance requirement. The information gathered through this process however can be used for much broader strategic purposes supporting initiatives such as workplace diversity and engagement.
The employee data gathered from the WGEA statutory reporting provides a rich body of information to understand broader pay equity and fairness across the workforce. Using a ‘like for like’ analysis companies can identify inequalities which may exist for a number of reasons both explainable (e.g., performance) and unexplainable (e.g., due to unconscious bias). The outputs provide important insights to help determine the required interventions.
Surprisingly, many top companies are still receiving unwanted attention over gender equality and pay gap issues, with over one quarter of ASX100 companies reportedly failing to cover gender pay equity in their remuneration policy¹. Our feedback supports this, with over one quarter of our Pulse Survey participants indicating pay equity was an opportunity for improvement in 2019.
¹Australiasian Centre for Corporate Responsibility – Gender Pay Equity And Australian Listed Companies July 2018
3. Provide greater insights using workforce analytics
As Boards and management tackle workforce challenges such as productivity, culture (cue recent Hayne Royal Commission findings!) and engagement, greater insights from data is required to understand the current state and also predict what may happen in the future. Key questions Boards and management are asking may include:
- Where is our talent coming from and going to?
- What is the state of our workforce culture? (e.g., employee satisfaction rating, external reputation such as SEEK reviews)
- How diverse is our current workforce (e.g., FTE versus contractor, demographic) and is it likely to change in the next twelve months?
- Are our pay systems fair and equitable? (e.g., determining the underlying gender pay gap)
- What is the current and projected reward costs? (e.g., remuneration, incentives and benefits)
So where do you start? Analysis, analysis and more analysis! Adopting a more sophisticated approach to people analytics is critical to understanding the true drivers of outcomes. For example, a simple remuneration assessment of gender won’t tell you what you really want to know about a pay gap and how to solve it. Harnessing the data and using analytical techniques (e.g., regression analysis) can identify characteristics which may impact an outcome. For example, gender pay equity may be impacted by job group, grade level, experience, performance.
Findings from the analysis can then be presented using tools such as periodic dashboards for management and Board to display key insights and take a step toward managing workforce challenges.
4. Run a tax ruler over incentive plan designs
This time of year represents an opportunity to review incentive plans and determine whether they remain “fit for purpose” for next financial year.
An important element often missed in the incentive design process is the tax outcome for participants. Poor planning can lead to a negative taxation impact, which in effect causes the reward to act as a disincentive. Risk considerations in the tax space include:
- Performance hurdles which can defer the taxing point
- Use of holding locks on resulting shares
- Grants to employees with substantial shareholdings
- Employee share trusts for plan administration
- Effective NED fee sacrifice for equity
- Participants who cease employment
With Boards and remuneration committees carrying the responsibility to ensure programs are contemporary as well as driving the right behaviours, an incentive review process is crucial to finding what is or isn’t working. The process and parameters of incentive design can be influenced by many factors. Learn more about designing an effective incentive structure in our article here.
Communicate to employees the likely outcomes of their ‘rewards’ while there is still time to maximise engagement.
Use Gender Equality Reporting as an opportunity to develop a sense of fairness through increased transparency and become an ‘employer of choice’.
Access the ‘big data’ to stay ahead of the game and enable proactive decision making based on real facts.
Consider the purpose of a reward in the context of your business and the individual to whom it relates – design it accordingly.
Don’t miss our next reward insight where we address some end of financial year planning activities including: remuneration report preparation, annual salary reviews, payroll health checks, fringe benefits compliance and employee share scheme reporting.
The Reward Practice insights are designed to provide the latest information and thinking from our consultants on remuneration trends and issues.