The Importance of Paying Market-Related Remuneration Levels in the NPO Sector

npos skills recruitment Remuneration
Tuesday, 28 January, 2014 - 16:11

Nonprofit organisations should strive for better wages in order to attract the best skills, compete with their counterparts and also retain staff 

Averile Ryder Reward Specialists have processed salary, benefits and conditions of employment surveys and in addition has consulted to numerous public sector and profit organisations in human resources and reward across Pan Africa for over 18 years and has repeatedly witnessed that those organisations who have transparent, fair and defensible remuneration or reward strategies attract and retain the best available talent.  This always results in more effective, sustainable, economically and socially responsible and if relevant profitable organisations. Here in South Africa, across all industry sectors, organisations which emerge as successful and attract and retain the best talent, too name but a few, are Unilever, Microsoft, South African Breweries, South African Revenue Services, etc.

In our organisations we can begin to attract not only the right talent but also ensure that we get the ‘best bang for our buck’ by having a fair, defensible and sustainable reward strategies, policies and procedures in place.

I am also of the opinion that the more knowledgeable and informed the decision-makers in organisations are about remuneration and reward, results in more transparent, fair and defensible strategies, policies and procedures.     
   
The remaining contents of this article are therefore not only based on my research but is also aimed at increasing the knowledge bank of the key stakeholders and decision-makers in the organisation and for members of the Board and Board Committees in each country to ensure that they make informed decisions regarding attracting, retaining and motivating the organisation’s human capital.  

Organisations need to find a balance between paying too little, risking losing valuable employees, and paying too much and unwisely spending the organisation resources.
 
Elements of an Effective Total Rewards Strategy

  • The elements of an effective reward strategy should consist of the following:
  • Internal Equity – same pay for same work within the organisation;
  • External Equity – same pay for same work when compared to other participant organisations;
  • People Equity – Individual employee recognition; and
  • The organisation’s competitive market position.

The table below further describes these concepts:

Table: Elements of an Effective Total Rewards Strategy

Internal Equity External Equity People Equity The Organisation’s Competitive Market Position
 
Same pay for same work
Same pay for same work within comparator organisations  
Individual employee or team recognition
Organisations need to establish which job categories / skills are critical or core to their business and their competitive market pay position(s) for these and all other organisation. positions.
This includes having and / or developing:
  • Job descriptions for all job categories;
  • Placing positions in job families / level descriptors; and
  • Grading the relevant job categories and not the person.
“The market for any job category is where you lose your labour to or draw your labour from.”
 
The correct salary surveys therefore need to be targeted by the organisation for their relevant job categories.
This includes the following:
  • Performance Appraisals;
  • Short-Term Incentive Bonus Schemes, and
  • Retention Bonus Programmes
Competitive market positions include the following:
  • Lead payer
  • Lead / Match payer
  • Match Payer
  • Match / Lag Payer
  • Lag payer

External Competitiveness: Determining the Pay Level

An employer’s pay level helps determine its external competitiveness. Three policy alternatives exist: to lead competitors or comparators pay, to match it, or to lag below it. Variations may however exist, employers may tie pay to the organisation’s financial success through bonuses when profits are high, and which will result in pay leading that offered by comparator organisations. Another variation is to become an ‘employer of choice’ by emphasising the total return in addition to pay, such as employment security, training and development, the status of working for a highly respected employer or challenging projects. In practice, some employers use different policies for different divisions and or job categories.

How an organisation positions its pay relative to its comparators or competitors depends on three major factors:

  • Supply and demand for the relevant job categories;
  • The organisation’s financial vitality and in turn what the organisation can afford to pay; and
  • The strategic and operating objectives that the organisation has established.

The pay level has a twofold effect on pay objectives:

  • It directly affects the employers operating costs; and
  • It also directly affects the employer’s ability to attract and maintain a stable and qualified work force.

Consequently, the policies and practices related to external competitiveness are among the most critical in compensation management. It is my opinion that it is far more important to pay rates of pay according to the organisation’s competitors or comparators. The least important factors were the organisation’s financial position and ability to pay.

Failure to match pay of competitors or comparators causes employee dissatisfaction; limits an organisation’s ability to recruit and retain and ultimately will eventually oblige the organisation to pay prevailing rates. A number of researchers have however linked high rates of pay to ease of attraction, reduced vacancy rates and training time, and better quality employees. Research carried out also suggests that increasing pay levels reduces turnover and absenteeism. 

Costs associated with the loss and subsequent replacement of staff typically include the following:

  • Separation costs: These include the costs of separation and / or severance pay, the employee being disengaged prior to separation and the effect on other employees morale and turnover of any period of vacancy during the replacement research period;
  • Acquisition costs: These include the costs of recruitment, selection and placement, or alternatively the costs of promotion or transfer within the organisation;
  • Learning and induction costs: These include the costs of the new employee acquiring the necessary skills, knowledge and expertise to perform in his / her new position, the time required to adjust to the organisation and integrate into the work team. This also includes the time costs related to the current employees in the organisation needing to induct, train and provide the necessary handover to the new employee.

Additional costs, however, not easily measurable cost concerns is the accumulated knowledge, experience and training that staff ‘take with them’ when leaving the organisation. This would obviously vary by employee level and is most significant at senior staff and management level.

The table below also summarises the three competitive market positions in more detail:

Table: Summary of the Four Competitive Market Position 

Competitive market position Pay Level Methodology How the organisation will be viewed
To lead comparators for the entire financial year Equals the ‘upper quartile’ or 75th percentile market levels plus the projected increase for the following year
 
The 75 percent quartile is a figure which marks the level where 25 percent of the participating organisations’ pay more than, and 75 percent pay less than the indicated value.
The organisation starts the year ahead of its competition and remains there until the end of the year, when market rates catch up.  As a ‘lead payer’ organisation. As a ‘lead payer’ organisation.
 
The organisation will be in a position to attract experienced and high performing talent and attract that talent by paying higher than market remuneration packages.
To match comparators for the entire financial year Equals the ‘median quartile’ or 50th percentile market levels plus the projected increase for the following year.

The 50th quartile is a figure which marks the level where 50 percent of the participating organisations’ pay more, and 50 percent pay less than the indicated value

The organisation’s pay levels will be slight ahead of its competition during the first half of the year and ‘match’ the market during the second half As a ‘match’ payer.
 
The organisation will attempt to hire more qualified applicants than match organisations, but offer more training and development opportunities than lead organisations.
To lag comparators for the entire financial year  Equals the ‘lower quartile’ or 25th percentile market levels at the beginning of the year plus the projected increase for the following year. Equals the ‘lower quartile’ or 25th percentile market levels at the beginning of the year plus the projected increase for the following year.
 
The 25th quartile is a figure which marks the level where 75 percent of participating organisations’ pay more than, and 25 percent pay less than the indicated value.
 
The organisation’s pay levels will ‘lag’ the market during the first and second half of the year. As a ‘lag’ payer
 
The organisation will start losing its ability to attract top talent and employees with the necessary experience, knowledge and skills but may offer additional training and development opportunities as a means to attract and develop employees.

Averile Ryder is a founding member of Averile Ryder Reward Specialists. Should anyone reading this article need additional information or market-related remuneration levels within the nonprofit sector they can contact Averile Ryder on 011 453 0080 or 083 293 2037 or email her on averile@rewardspecialist.co.za

 

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