Salary Review Processes: Price Takers, Process Jockeys, and Ostriches

“A Fair Days Wages for a Fair Days Work” Thomas Carlyle

“It’s not the employer who pays the wages. Employers only handle the money. It’s the customer who pays the wages” Henry Ford

“No business which depends for existence on paying less than living wages to its workers has any right to continue….” Franklin D. Roosevelt

How should a responsible, large employer, decide how to set salaries for their staff each year? It’s a question that has nagged at me now for some time. Most of the discussions I think HR functions and senior management are consumed with are about process, tactics, and mechanics. The bigger questions are not something I have seen debated in a systematic and regular fashion. The question I have is “Are senior executives and HR leaders willingly blind to the broader social, political, and opportunity implications of labor costs?”

So, let me make my case a little more clearly. If you work for a Multi-National Company (MNC) and it’s this time of year, let me predict roughly how events will unfold between now and, say, March 2018:

Figure 1 – Generic Salary Review Process

My depiction I suspect will feel very familiar! The reward function does some great work to compile and analyze available salary survey data. They then moderate this based on overarching macro inflation and CPI data, before debating with senior management what might be affordable. This affordability discussion is typically an in-year conversation and relative to previous years (i.e. we gave 3% last year, is there evidence that we should do more or less this year). The other key constraint here is whether the firm, overall, has delivered its financial commitments to shareholders. If it hasn’t there is a greater case to do a little less, if it has exceeded expectations, perhaps a little more.

What follows is then an exercise in allocating the available incremental salary budget funds. Should sales get more than marketing, should operations get more than the functions? Then within those departments should those below the 50th percentile of the believed market get a bit more than those who are over?

But Tell Me There is More To It Than That?

I started this blog with a few quotes which I thought broadened the discussion on the salary setting process. Many of us are familiar with Carlyle’s quote…but what does it mean to be fair…and who decides? Ford’s quote seems to promote the idea of the corporation as a soulless, economic vessel, incapable of doing more than maximising investors returns, and FDR takes the 180 degree opposite view. My point here is, aren’t there broader questions about how an employer should think about labour costs? (here’s a clue…. I think there are!)

Figure 2 – High-Level Considerations Relative to Wages

In Figure 2, I’ve tried to list these out in a Maslow-thian format. Let me explain what I mean by each of these:

(a) Tactics/Process: This is what I illustrated in Figure 1. The annual process which essentially allows management to agree a salary budget which is defensible to employees, and shareholders. In a stable business (assuming it has worked before), where nothing has changed year-to-year, this should be an adequate process.

(b) Corporate Choices: Every company differentiates themselves a little from their immediate competitors; higher base, lower bonus…more stock, more vacation time. These tend to be reviewed once every 3-5 years and are sometimes linked to an identity the firm aspires to.

(c) Disruptive Competition: I worked with a business who suddenly found their talent being tempted away by a new upstart. We were slow to react. Consequently, we lost momentum and many of our top talent. I would argue that in this age where we are constantly talking about business disruption, shouldn’t we also be looking at disruption in our labour cost and pay models? I don’t see many companies doing this.

(d) Economic: This is an interesting area. Here I talk purely about the traditional economic considerations ANY company should think through. Are there parts of the portfolio where labour costs are making the business unviable? Are there others where a different pay model might make more sense? Has productivity improved or not? What is the available talent pool outside the company? What are the alternatives to existing labour in automation? My belief is that large businesses struggle to have a healthy discussion about these necessary questions. But whether we like it or not, isn’t it a part of the job to at least be aware of and balance these considerations with the other factors listed here? The ‘labour curves’ (see Figure 3) are likely to be very different depending on some of these factors and could change radically in 12 months. It seems to me we are somewhat (willingly) blind to the impact of these factors.

Figure 3 – Classic Economics Labour Curve (see link for Beveridge Curve Explanation)

(e) Political: I will concede I do see good reward functions looking at new government legislation (e.g. after the 2008-10 banking crisis) and adjusting pay practices accordingly. However, by political I would also include tax-efficient structures and pensions. These are the current examples of where pay practices have lagged government mandates.

(f) Social: Probably the most obvious one…but clearly social consciousness whether it be on so-called ‘fat cats’ pay through to bonuses or salary practices which seem out of step with society consensus, can be a major liability.

So, What’s My Point?

Well, my dear reader, I think my point is twofold: (1) I am concerned that many large MNC pay review processes have become a comfortable routine. One that makes executives and HR leaders complacent. One that again paints HR as a non-strategic business partner, but also; (2) am I missing something here? Is this something I’m losing sleep over unnecessarily? Perhaps all of this is happening in a systematic way, and I just can’t see it?

Friend(s)…….what is(are) your view(s)?

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