Fundamentals of Compensation Practices in the RO Theory

Speaker A I had the privilege and good fortune of working with Elliot since more or less since 1982.

Speaker B And when he the couple of years.

Speaker A Ago I was working at Cadillac Corporation and we were working on the values of a corporation coming to work with.

Speaker B Us and that at the point didn't get left us.

Speaker A So we're all bereft from that point.

Speaker B Of view but let's hope it sticks.

Speaker A And we can carry our work forward. And one of the areas that I've.

Speaker B Been particularly trying to get his work.

Speaker A Down on paper so that we can.

Speaker B All understand the basic of how he views compensation and how compensation fits with.

Speaker A Everything else in this total system. So I'm going to give you a.

Speaker B Very quick overview just to set context.

Speaker A For this panel in effect. And I also have written an extensive article on compensation that you will all get and consider it a draft, it's extensive on what I'm talking about now and any of you who have comments suggestions on this I would very much appreciate.

Speaker B The first question is what are we.

Speaker A Talking about when we're talking about compensation? And what we're really talking about is all the remuneration, this is the idea. All the remuneration that any individual receives for the work that they do in a managerial hierarchy. It varies to some extent in some corporations and in some countries where a certain benefit goes to all employees we don't include it in the calculation. But if there is a benefit that.

Speaker C Only goes to certain employees such as.

Speaker A A car to sales representatives where other people in the corporation do not get a car or the value of a car annually or every three years we would include the value of the car to the employee. It will change a little bit country to country but anything that goes to everyone exactly the same is usually not included in the calculation. But otherwise anything of value, any kind of remuneration for work. And there's some really funny things in some countries and as you know, in some countries you get 13 month salary, some you get 13.85 month salary. Well we're just talking about the total.

Speaker C Package of compensation and what requisite compensation.

Speaker A Is is a fair and a simple and a systematic way to compensate people for their work. And Elliot found in his studies over the years that there is apparently in society a way that is felt to be fair for being remunerated for your work and that is based on the accountability or the weight of responsibility in your role. And he studied that and developed something that I completely forgot to put in here.

Speaker B So the next position will be concluded. But what he found was that when he asked the question of people as to what they felt was their compensation for the level of work they were given to do no matter what country he answered in, no matter what industry he asked the question in the relationship to the answers came out to be the same. They found out that it made a pattern like this so that your people at one day, then three months, they were 50% of acts, 55% of acts here and 31% of X here. And from then on it doubled every time you crossed a boundary. So if X was the lowest point, the highest point of stratum two, and I'm assuming you all have sufficient background that I don't have to explain stratum two. And at the highest point of stratum two and the lowest point is stratum three is the breakpoint between stratum two and stratum three, that the breakpoint between three and four would be two x, between four and five would be four x, between five and six would be eight x and so on. It turned out to be, of course, a scattered diagram and numbers that but every time he did that, it didn't matter what currency he was talking about, what country he was in, what jobs he was talking about, they always made the same hobbyistic pattern.

Speaker A And that informed his work very early on. And we did a full day on compensation prior to the conference, and we were very fortunate to have Richard Brown in that day. And he was able to tell us some of the stories of the early work done there and then. That was how Elliot developed the theory, the concepts that fell out of doing that kind of research and work at Glacier.

Speaker C In establishing requisite compensation, there are five steps. And the thing I have to tell you about these five steps is that in doing requisite work, looking at compensation and assisting the organization in getting to pay, that is felt to be fair by all of the employees. It is the very last step that you do. And anytime you try to do it earlier, there will be some serious problems arise. And I don't know how many of you have ever had that experience of trying to get into compensation before. The organization you are working with has been requisitely structured, staffed by people capable of doing the roles and then having requisite management practices in place and operational. When you've done those things, that is the time that you can begin to look at really establishing requisite felt fair pay. And in doing it, there are five steps that I found to make it work. The first step, of course, is to determine the requisite level of work of every role in the organization. And it's not only the level of work and I think this is slide. Yeah, it's not only the level of work, it's page eleven. Not only the level of work, but the level of the band within the work stratum. So you know the role within a stratum and you must also establish the band within the stratum. And there are three work bands in each stratum. The ideal, best, hopeful way to do this is by time spanning roles. It's not always easy to time span. A lot of people have trouble with the concept, a lot of people have trouble with the execution. Nonetheless, I feel that practicing requisite consultants must have a skill of being able to time span. In many organizations, there are too many roles to time span every single role. So what you often do is time span, benchmark roles and then benchmark other roles against those roles. But you have to have this ability because every time you run into really difficult roles, you can always go back to time span to sort it out. And I'd be glad to give you my very strict version of how you do time span because I believe there is only one way to do time span and no other way to do it. And I just will digress a minute to say what that is. The only way you can do time span is ask the manager of the role what are the longest tasks he or she is assigning to the role. And it has to be a one on one discussion. It can't be a hypothetical task, it has to be a real task that's either in process now or the manager is going to assign to the role. Because time span is the manager's intention of the length of the longest task of the role. Are there any people here that do time spans regularly? Would you comment on that? Okay. Any disagreement there? Okay, you do both the time span.

Speaker D And the manager's time span and the incumbent's longest time span and do a calibration between the two, see how far off they are.

Speaker C Yeah, but that's carrying the work forward. I very often do that too. I almost always do it. I check the time span with the employee to see if that's the subordinate's understanding of what has been assigned to them. And then if they don't agree, I have the manager and the subordinate talk together because there is a problem between the two of them. But the time span of the role is still the manager's intention. Would you not agree? I mean, I absolutely believe in checking whenever you are able to. Historically, I find as much as a 50% difference all the way through the organization before you get the organization requisitely structured. So I think generally the consensus is that we do believe in time span. We do use time span to the extent that it's practical in using it, and we add other methods to it if we have to move faster. But we can always go back to the basic measurement. And as part of this, you gear the roles across the organization, which is all of course part of getting the organization requisitely structured. So that's the first step. And then of course, since as I mentioned before, the organization has to be requisitely structured, requisitely staffed, and management practices in place. All of that having been done, then you move on to looking at how you set the dollar amounts or whatever the currency amounts are. The currency amounts against this framework, and the way to do it is to check market comparables. And ideally, a good human resources department will have contacts in comparable organizations in their area, in their country, and share information back and forth. So you go and work with these folks, benchmark the role so that you're confident that you're talking about a stratum two role, because they won't necessarily have the vaguest idea what a stratum two role is, but you can figure out which one is a Stratum two row, which one is a Stratum three row, which one is a Stratum four row. And Elliot recommended that you benchmark about 30 to 50 roles ranging from stratum one to stratum four five. What you're really looking for is the highest amount paid at stratum two, which is the floor of stratum three. And that establishes your X when you benchmark it. Yeah.

Speaker D What are you looking at?

Speaker C Okay, you're looking at the highest salaries in your community, in your country, whatever that a stratum two row generally receives, and the lowest salary that a stratum three role generally receives. Fortunately, you can pretty well tell the difference between stratum two and stratum three roles. That's what you're after. So then your organization has to make a decision. Let's say recently we've been finding in larger cities that in the United States that seems to be running around $100,000 right now. And that's including everything that the employee gets except their benefits. The benefits would be an add on to that. The organization then decides, are they going to pay at market, below market, or above market? In St. Louis? I have one organization that intentionally pays 10% to 15% above market because they don't have a lot of employees and they want the very best employees they possibly can get. I have another organization in the same city that's in financial Services. Financial services is usually a more secure environment. Their longer employment may be less demanding hours. So their decision was to pay at 10% below market. So that's the organization's own decision where they want to be, but it should be a conscious decision. Finally, you calculate the work bands, and there are no overlaps on these work bands. And that's the financial calculations, and I have that on an Excel spreadsheet in a rough format has to be rounded out. Now, that's the compensation that is determined by the level of work within a Pay brand. Within a work band, there are elliot recommended having six Pay steps. So the net met of that is in a Stratum, you will have actually 18 different items. And I have an illustration here of stratum three on one of these pages with the numbers on the boundary so that you can see what that looks like, the Pay steps. It's one that says Stratum three. What number is it? Nine. Okay. The pay steps where a manager places an employee in a pay step is a result of the manager's judgment of the employee's personal effectiveness. So that is a different issue than setting the boundaries of the work bands in there. There are then six steps bounded in there, and the Excel spreadsheet I have shows all those steps, so I have all the numbers for all of that. But that is a judgment that the manager makes. The manager gives those judgments to his manager, the mor equal rates, all those judgments, so that one manager isn't being harsh with all his employees and judging what pay steps they go, and another one extremely easy. And Charlote implemented that system absolutely, completely, perfectly with Ellie's help at Roche. So if you want to talk to anyone about how does that really work? Does it work? Can it be done that way? There's the person to talk to. She has done it, and it was very successful at Roche.