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Effective Remuneration Strategy in a Group Structure

The question of what remuneration strategy to adopt in a group structure is one that continues to pose a challenge to many organizations, both multinationals and locals. Should employees be paid the same across operating companies (OpCos) or should they be paid according to their respective talent markets? How does the choice of pay strategy impact ability to transfer talent within OpCos? What should be the key factors and drivers of a group’s rewards strategy? 

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Organizations typically evolve into a group structure for many reasons such as consolidation of ownership in different companies; backward and/or forward integration; diversification; growth and expansion; specialization and competitive advantage and so on. As with the group structure/strategy, the business must continuously review and determine the optimal and sustainable remuneration strategy to support value creation for all stakeholders.

Adopting a strategic approach to group remuneration is at the heart of driving alignment, relevance and sustainability across the constituent OpCos, as well as promoting a high-performance culture. 

Alignment
Part of the strategic considerations in determining an effective group remuneration framework is alignment with group strategic objectives and aspirations. In other words, the remuneration framework should reflect group plans and what the OpCos are evolving into.

A number of businesses now realize that applying a same-pay approach does not necessarily yield the best results in the long run. Because the dynamics of each OpCo’s business — market, location, staff requirements, regulation, laws, etc. — may vary across in-country and international boundaries, adopting same pay within a group may not be the right thing to do.

While a same-pay approach can promote group spirit, achieving this ideal depends on how well the OpCos perform over time. Moreover, employees in better performing businesses may think they deserve more than others based on their contribution to the bottom line. In addition, businesses should remunerate according to the results that employees have control over and are responsible for driving.

Similarly, adopting same pay across OpCos may unduly expose the group to avoidable costs by importing certain pay policies/practices, such as gratuities, that are mandatory for one or two OpCos and applying the same policies/practices across the group in a bid to promote uniformity.

Talent Transfer Troubles
From our experience with local organizations, the need for seamless talent transfer across the group is one of the reasons why some businesses adopt the same pay for all OpCos. However, this should not be so. While the same grading system may apply across the group, pay does not have to be the same across board. Temporary transfers should be treated like secondments, with an additional allowance provided on an as-needed basis — for example, to encourage the moving staff or compensate for inconveniences such as relocation allowance. The secondee’s pay will, however, continue to be determined according to the structure of the original employer (the headquarters, HoldCo or another OpCo). For permanent transfers/localization, there is no issue if the employee is moving to a host company or country where pay is higher. In the case of the reverse, the approach will depend on whether the transferee is moving by choice or if it’s mandated by the employer. Where the latter applies, the employee’s current pay should be maintained but consciously managed over time in order to narrow any gaps between their peers on the same level. Some communication will be required to avoid excessive focus on perceived inequity that can undermine collaboration and productivity.

If the transfer is the employee’s choice, the pay implications, among others, should be extensively discussed to ensure that they understand the full ramifications of the decision. For international organizations, a robust international assignment policy should be adopted to address all related issues.

Materially different living conditions in regions/locations of operation might require a location-differential in pay such as a housing/hazard/inconvenience allowance. In KPMG’s “2015/16 HR & Reward Practices Survey,” it was found that “pay differentiation based on location is not common” in Nigeria: Only 28% of the 121 survey participants said they practice differentiation based on location within the country. Across international borders, cost of living adjustments, assignment and hazard/hardship allowances are some of the ways that similar differences in living conditions are mitigated.

Consider Localization
In terms of pay philosophy, some leading groups/global organizations adopt the same philosophy across businesses and locations. Ability to deliver on that philosophy, however, depends on business fundamentals and the environment. While the market anchor point may be the same groupwide, the makeup of each OpCo’s peer group may not necessarily be the same. According to the Society for Human Resource Management (SHRM) “…global compensation and benefits philosophy should be standardized in principle … and then localized in implementation” (Global Compensation & Benefits, SHRM). However, it is important to note that there are some multinationals that might adopt a differentiated pay philosophy within the group, depending on what aligns and works best for their business and people. In localizing pay philosophy or strategy, several factors — such as laws and regulations, market practice, local business strategy and competitive landscape, economic conditions, quality and supply of labor/talent, and so on — should be considered.

Communication Is Key
Whatever group remuneration Strategy is adopted, communication and employee buy-in are key.  No matter how elegant a group pay strategy is, if it is not well understood and accepted by employees, it can lead to demotivation and undermining of organizational goals and performance. Employees need to understand the reason behind the structure, the need to differentiate, the business’ view on performance, what is common and unique, alignment between the philosophy and business objectives and so on.  

Pieces of the Puzzle
The table below presents a snapshot of different group structures, location or spread and some common factors to consider in determining an effective group remuneration strategy:

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Overall, the issue of what group remuneration strategy to adopt is hardly a matter of what is convenient, the ability to move staff around easily or predicated on promoting group spirit. For an optimal decision, a wide array of factors — such as business and HR strategy, affordability, sustainability, talent market realities and laws and regulations — should be considered. The optimal strategy is the one that balances the key variables and effectively enhances the group’s ability to attract, retain and motivate top talent for superior performance.

About the Author

Boluwaji Apanpa is an associate director in the compensation and benefits practice at KPMG Nigeria.


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