Special Aspects of Reward Management

Boardroom Pay
Salary policy for directors is usually an indication of corporate culture. The press has always reacted badly to major pay hikes in the boardroom The way in which boards of directors are paid tends to reflect the pay philosophy of the organization as a whole. Some promote Performance-related pay down through the whole organization, while others choose to reinforce other values such as loyalty and commitment

Contd
Boards, especially in family companies where remuneration does not come from basic salary alone, do not always appreciate that the level of their basic pay sets the ceiling below which all other salaries generally have to fit. Also potentially damaging are salary levels which employees perceive as excessive in relation to their own rewards

Corporate governance
A UK company is owned by its shareholders, but the power and responsibility for almost all decisions concerning its business operations are devolved to its board of directors, including most decisions about pay. In the UK (as in the USA) the board of directors is a single or unitary structure, responsible for corporate governance as well as business decision making.

PAY MANAGEMENT PROCESSES IN UK COMPANIES

In broad terms, the UK unitary board typically manages its own pay along the following lines
Responsibility for the pay of the executive directors is delegated to the remuneration committee The pay of the non-executive directors is usually managed by the chairman, perhaps in conjunction with the chief executive The board as a whole votes on these pay recommendations but no director is able to vote on his or her own pay Shareholders have the opportunity annually to vote on the acceptability of the remuneration committees report

The Greenbury and Hampel Report

A study group on directors remuneration chaired by Sir Richard Greenbury was set up as a response to a growing concern regarding pay of directors in the UK The outcome of greenbury was a code of best practices divided into five main areas (The remuneration committee, Disclosure, Approval, Remuneration Policy and Service Contracts) The Hampel report which was published in 1998 laid the foundation for pulling together the Cadbury and Greenbury recommendations as well as give its own view on corporate governance The Hampel reports key principles fall along the areas of; the level and make up of remuneration, procedure and disclosure.

Board Remuneration Committees

This committee acts on behalf of the shareholders It is required to be composed of a group of nonexecutive directors The committee should consult the chairman and/or chief executive about their proposal and have access to professional advice inside and outside the company Sometimes it may also have to provide a check on excessive boardroom greed It normally review and authorize pay recommendations on an annual basis

Executive directors pay

Basic salaries should be maintained at a level that allows the company to compete effectively for good-calibre executives Annual pay increases (if any) should be awarded in relation to performance and an assessment of market competitiveness The basis, targets and payments from executive incentive schemes should serve the needs of the business The balance between the elements of pay and benefits should be maintained Relationships between boardroom pay and that of employees at a more junior level should remain consistent Directors contracts should be reviewed from time to time to ensure they remain up to date and defensible

Non-executive directors pay

Should provide a reasonable recompense for the time and commitment a non-executive director contributes to board meetings Should not be so large or so structured Many companies pay non-executive directors purely in cash but now some allow or even require their non- executive directors to take some or all of their fees in the form of the companys shares.

OUTSIDE THE UK
In Germany, for example, new legislation effective for all accounting years starting after 31 December 2005 the Vorstands-Offenlegungs- gesetz (VorstOG) substantially increased the level of detail required from listed companies concerning the individual executive pay arrangements and their contracts. legislation widening the obligation to disclose directors pay arrangements was adopted in France in 2005 The United States, however, has taken a step further by introducing a new disclosure section for the 2007 proxy filings the Compensation Discussion and Analysis (CD&A). In this section, listed companies are required to provide a much clearer and more detailed narrative concerning the objectives of their executive compensation programmes

Contd
In Ethiopia, the National Bank of Ethiopia licenses, supervises and regulates the operations of banks and insurance companies which are around 29 currently. The banking industry is governed by Proclamation No. 592/200, which includes among other things:
Shares and Register of Shares Limitations on the Acquisition of Shares

Contd
Shareholders Meetings Limitations on Voting Rights Appointment of Directors and Officers Prohibitions Cessation of Banking Management Functions Suspension and Removal by the National Bank Maintenance of the Required Capital Disclosure Remunerations of Receiver

Basic salary differentials

Differentials in basic salary exist in the UK between directors in different functions and between the board as a whole and the chief executive. Differences between directors by function are normally market related based on survey and other evidence of competitive remuneration practice. The majority of major UK employers operate executive incentive schemes and the payments involved continue to grow as a proportion of basic salary If basic salaries are set competitively, there will be less temptation to fudge the incentive payments in lean years.

ENSURING LONG-TERM COMMITMENT

Share options, performance shares or deferred bonuses are the three main ways in which remuneration policy can provide messages on the need for loyalty and commitment to the organization Share option schemes
Options are awarded to executives that may be exercised if long-term performance conditions are met.

Contd
Such a scheme emphasizes: 1) share price growth 2) loyalty to the company, 3) real earnings per share growth, and 4) share capital stability or reduction.

Performance share schemes

Executives are provisionally awarded shares. The release of the shares is subject to the companys performance,

Cond
Such a scheme emphasizes: 1) relative share price and dividend performance, 2) loyalty to the company, 3) value delivered to share- holders but does not link directly to business performance.

Deferred bonus schemes

Part of the executives annual bonus is deferred for, say, three years

Contd
Such a scheme is designed to reward: 1) annual (sometimes personal) performance, and 2) loyalty to the company.

INDIVIDUAL REMUNERATION PACKAGES

Known as cafeteria or flexible remuneration packages. The idea essentially is that employees should be offered the chance to select how they wish to be paid in terms of cash and benefits For executives in particular, the remuneration packages are individually negotiated and tailored at the time of recruitment to a board level appointment.

Contd
In some cases the demand may not be for a package which is only nationally competitive, but for a globally competitive one, especially at the top of major multinationals. There are a number of reasons for this:
Directors, perhaps comfortable in post somewhere else and approached by executive search consultants, often feel they are in a good position to negotiate major improvements for themselves as an incentive to move People are more aware than ever of market rates for top executives and see a move as an opportunity to catch up to a more realistic level. Directors may employ their own specialist remuneration and sometimes pension advisers to make sure they get a good deal Being an effective director generally goes with having an ambitious and assertive personality it is unreal to expect such people not to be shrewd negotiators and to look after their own interests

Contd
In this case HR directors need to have:
a willingness to tailor the remuneration package to fit individual requirements; a clear idea of which items of pay they are prepared to negotiate on; the ability to cost out alternatives quickly; a maximum total earnings cost they are prepared to go to, to get the executive they are after; a prepared case to defend a package which other directors or even shareholders may initially perceive as an anomaly

GUIDING PRINCIPLES FOR BOARDROOM REMUNERATION

Executive pay systems can and should be used to help attract and retain top executives of outstanding ability Executive pay should foster a pay-for-performance orientation and top management focus on sustained performance that results in increased value for the organizations owners over the long term Executive pay should be derived from an explicit pay philosophy and strategy consciously developed to support the organizations business strategy, organizational structure and approach to human resource management

Contd
Executive pay should be tailored to the organizations particular culture, management style, institutional guidelines and competitive environment; Executive pay systems should be consistent with the organizations overall management process. Executive pay design should consider the needs of individual executives but not at the expense of the organizations underlying goals and objectives.

Contd
While the design of top-pay systems can be complex, plans should be simple, easily understood and clearly communicated. Executive pay should be determined and monitored in a manner that safeguards against self-interest and avoids the appearance of impropriety. Global organizations need executive pay advice from global advisers that have appropriate executive pay expertise in the right parts of the world.

International Remuneration

Introduction
Internationalization of the market place has prompted a number of situations where remuneration must be considered on an international basis. The subject of international remuneration meant expatriate remuneration in the past, today it can mean a range of situations that needs to be addressed and managed in a variety of ways. Managing an increasing number of nationalities, from both developed and less developed countries, at different stages of their careers, highlights the difficulty of imposing a single remuneration system across the overseas workforce

TYPES OF OVERSEAS EMPLOYMENT The terms and conditions of employment while abroad typically depend upon the nature of the work and its likely duration Feasibility studies
to assess the potential market for the introduction or development of the companys goods or services method of payment is usually no more sophisticated than a reimbursement of expenses

TYPES OF OVERSEAS.

Commuter assignments
Is a short spanned stay example: travel to the work location on a Monday morning (or Sunday evening!) and return home on the Friday evening without detriment to the work or themselves. response to the growing unwillingness of employees to disrupt their families for the sake of a full expatriate assignment; the organization does not wish to enter into the cost or commitment of a full expatriate assignment

TYPES OF OVERSEAS. Contract work Recruitment of contract staff for specific projects Food and accommodation are often provided on site, in which case there might be no local currency payment Short-term assignments Definition varies from company to company but often refers to a period that does not exceed six months Such situations might describe the presence of headquarters staff in the offices of a subsidiary when newly acquired or when such staff are sent in to address poor business results at one of their overseas locations

TYPES OF OVERSEAS.

Expatriate status
Is working out of the country of origin or employment for a relatively longer period Employing local nationals is usually much cheaper and has distinct local political advantages by comparison with expatriation. but many organizations mix the local workforce with at least some management from their headquarters. payroll would tend to be dependent upon who wants the manager there and the anticipated duration of the posting If the individual concerned is employed by the host country company rather than the parent company and the source of remuneration is local, it is generally accepted that the employees status is a secondee and not an assignee.

EXPATRIATE REMUNERATION

Of those types of overseas employment described above, the one that most obviously prompts special treatment of the employee is the expatriate assignment, How much expatriates are paid depends upon their job and status, personal commitments, the territory to which they are assigned and other variables

EXPATRIATE . , Contd Multinational companies agree that: the aim of the expatriate remuneration policy is to ensure that individuals are neither better nor worse off as a result of their overseas duty.

Three main expatriate remuneration systems balance sheet or build-up (home based); local market rate (host based); hybrid (usually a combination of home and host-based pay systems).

EXPATRIATE . , Contd

Home Based Balance sheet (build-up) approach

Is a build up approach that composes home based salary, spendable income and the main allowances (like Relocation allowance, Added responsibility allowance, Separation allowance, Hardship allowance, Cost-ofliving-allowance)
most commonly used expatriate remuneration method, easy to communicate and transparent to the expatriate most appropriate method of pay for short- to mediumterm assignments,

EXPATRIATE . , Contd

Market rate approach The market rate is also preferred when the assignment is likely to be long-term or permanent.

Advantages administratively simpler than the balance sheet rarely be applied if the employee is moving from a high- to a lower- paying country, also discourages repatriation

EXPATRIATE . , Contd

Hybrid approach compromise between a home-based balance sheet and the market rate

Main benefits associated with expatriate assignments

Main benefits associated with expatriate assignments

Housing Allowance Utilities Pension Car Allowance Education Expense Health Insurance Holidays

Main benefits associated with expatriate assignments

Housing allowance; sometimes paid and are built into the balance sheet method of remuneration but it is more common to be treated as separate item.
Utilities; most companies accept that it is their responsibility to make utility available to their employees abroad.

Cont
Pension; Care should be taken to ensure that the expatriates final pension is never adversely affected as a result of an overseas assignment. Car; cars are common perquisites for expatriate staff of all grades.

Cont
Education expense; most companies will pay for the children of expatriates to be educated in the host country.
Health Insurance; it is essential that all overseas personnel are adequately covered for private treatment by health insurances.

Holidays
Annual Leave; Holiday entitlement is usually in line with or slightly above home country practices, 25 or 30 working days being the norm.
Public holidays; Host Country practice is usually followed with respect to public holiday.

Cont
Home Leave; If a norm had to be quoted, it would probably be a fair generalization to suggest that company will pay for expatriates and their families to fly back to their home country once per year.

Less common benefits associated with expatriate assignments

Servants Club Subscriptions Rest & Recuperation Taxation

Less common benefits associated with expatriate assignments

Servants; although the employments of servants may sound like a relic of a bygone country, there are still many countries in the world where it represents affluence, power & status. Club subscriptions: Club membership fees & subscriptions are usually paid for by an expatriates employer if there is a good business case.

Cont
Rest & recuperation; is usually a feature of remuneration package for an expatriate in a high hardship territory.

Third Country Nationals (TCN)

It describes an employee, whose home country is not that of his/her employer, who is expatriated to third country. Concerning to payments there is no perfect TCN strategy.
Taxation; Countries & or companies may elect to safeguard expatriate from fiscal penalization by one of the following two methods.

Cont
Tax protection ; when an expatriate is paid a gross salary & working in a location where the tax rates are low , the employer need make no adjustment, but when the host country tax rates are higher than the employee home country, the difference is reimbursed, usually in the home country.

Cont
Tax Equalization; the system of tax equalization is more equitable than that of tax protection & is therefore favored by multinational with large number of overseas employees. Thus, all staff is maintained on a tax standard which reflects that of the home country.

Net Payments
It ensures expatriate throughout the world of fiscal equity & removes the onus of tax administration from the employee in countries which have no equivalent of the pay system.

Merger & Acquisition (M&A)

Definition
The main idea of Merger and Acquisition is to get the benefit of one plus one equals three, Synergy. The key principle behind these definition is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies.

Merger
Combination of two companies to form a new company Merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated

Types of Merger
Horizontal Merger two companies that are in direct competition and share the same product lines and markets Vertical Merger A customer and company or a supplier and company Market extension Merger two companies that sell the same products in different market Product extension Merger two companies selling different but related products in the same market Conglomeration two companies that have no common business areas

Acquisition
When one company takes over another and clearly established itself as a new owner It is a purchase of one business or company by another company or other business entity. Acquisition are divided in to private and Public Acquisition can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement, whereas hostile acquisitions dont have the same agreement

Implication of M&A on pay and conditions of employment

In most M & A companies, more attention is given to cutting costs, and increasing revenues. And this leads to de-motivating managers and employees There are two extremes on pay and conditions of employment:
Hands off approach = leaving the acquired company to run its own business in its own way and terms and conditions Harmonized approach = merged entirely in to the parent company in all terms and conditions of employment

Continued
Between the two extremes, there is a measure of choice. In some cases it is only the pension scheme that is merged and in other all other benefits are harmonized too. In order to make decisions on conditions of payment, preparing check-list can be considered

M&A Check-list
Points raised before deciding on payments and conditions of employment On Executive rewards What should be the approach to executive remuneration? Remuneration of the chief executive and other key members of the top team is agreed in advance On Salary Structure After setting the issues of executives and other key members, the attention turns to management and other employees. To what extent, if at all, should a common salary structure be introduced? To answer this question, information is needed on existing salary structure, organization structure, grades, methods of job evaluation, policies etc What are the advantages and disadvantages of merging salary structures?

Continued .
If salary structure have to be merged, how should this be done? There are four choices, a full job evaluation exercise, the arbitrary slotting of jobs into the new structure using existing job descriptions, a compromise between (a) and (b) and using this as an opportunity to adopt a new structure When the merger takes place, should action be limited to the creation of a common grade structure, defining benefit level at allowing different salary scales to reflect regional or separately negotiated variations in rates?

Continued .
- What should be done about staff whose grade or salary range is changed as a result of merging pay structures?
General salary reviews

- Should general salary reviews be centralized and take place simultaneously in all locations? Performance management - How should performance management be tackled in the new situation? There are two central questions to consider * To what extent are there well-established and effective performance management policies and process * What is the capability of executives and mangers to manage performance effectively

Continued .
Salary administration procedures - Should standardization procedures operate throughout the new group? Bonus schemes - Should different arrangements for bonuses be allowed to continue? Profit sharing schemes - What should be done about profit sharing, assuming a scheme exists in one or other or both of the companies?

Continued .

Pension schemes What should be the approach to pension arrangements? Other benefits To what extent should employee benefits be harmonized, for example: company cars, free petrol, life insurance, sick pay, private medical insurance, leave entitlements, discount facilities etc. Trade Unions or staff associations If a trade union or staff association has negotiating rights, how should they be involved? Communication Strategy What should be the approach to employee communications?

PART IV-Reward Policies for New and Start-up Organizations

Key Characters tics and Influences

Start-up organizations originate with

entrepreneurs, either; Individuals, or small group Designing reward systems for new organizations is often fraught with difficulties. Most new organizations start with a small group of top executives who introduce their pervious experience into the system

Cont..
The thinking of the founders of the business will typically based on; 1. Reward system from previous employers (bringing the staff hand book/salary policy); 2. Throwing out the bits of these that they found demotivationg; 3. cheery picking from reward policies they have known or linked the sound of from other employers; 4. Selection of benefits(notably pension) provided on the basis that suits to a small high-powered cadre but cant easily be extended to a more balanced group of employees in a maturing organizations;

cont.
5.Failure to understand the underlying pluralism of employmentWhere to Start The objective of a reward system designed to meet the needs of a business start-up are to; 1. Attract and keep people anxious to make the organization grow and flourish; 2. Reward the risk of coming into a new venture with high rewards and generally a share in the business if the risk pays off- for those who have real control over development.

Cont. It is more difficult and probably unrealistic to reward support and more junior staff on a high-risk basis. 3. Provide a sensible basic salary that is reasonably competitive with the market for most staff and highly competitive if rare skills have to be brought in. 4. Lock people in to give business stability. Typically with share scheme for senior executives and an all employees share scheme or profit sharing for everyone else.

Cont

5. Minimized overheads by keeping benefits to a decent basic core until there is some fat in the system or where competitive pressure indicates additions to the various benefits. 6. Pay out bonuses or provide non-cash rewards. (have a party when key milestones in the business plan are successfully achieved) 7.Recognize that in the early days office accommodation may be at best basic and demonstrate willingness to improve (can have significant effect on the way the company is perceived.

Preparing for Growth

What ever the basic components of the reward system in a start-up they should be developed with an eye to appropriateness in a large organization. Particular attention will be needed In these areas; 1.Pension: schemes for small partnership/group of professionals self-employed will not be easily adapt to cover 140 to 200 employees. professional advice will be needed to achieve this. 2.Pay relativities: starting on a spot basis is logical, but internal relativities should always be defensible as the organization grows.

Cont

3. Executive share options/employee share schemes: should be capable of extension-again an area for good professional advice. 4.Perforamcne rewards: need to relate to the milestones in the business plan an be based on achievement of agreed objectives/performance standards.

Reinforcing the culture of success

Much of the success of a growing organization depends on close and effective teamwork. Reward systems need to support this. This means that as organizations grow they have much to gain from implementing. 1.Perormance rewards which reflect team as well as individual achievement; 2.Consistent as far as possible harmonized benefits; 3. A beginning of a formal approach to setting internal relativity so that a defensible 'pecking order emerges.

Cont.

4.Effective performance management as part of the way the business run; 5.Management of the reward system by an individual who is wise custodian of both policy and implementation until the organization is large enough to have a personnel/HR remuneration professional to do the job. The last is critical because, experience shows that most of the mistakes made by new business in the reward area are because the wrong personnel had accountability for it.