Pay is Not Peanut Butter (Part Two)

Michael Freire

Intro: In tough economic times, focused merit budget spend may not be enough to fund meaningful base pay investments.

“Investing in people can and should be as systematic as investing in any vital resource—using evidence-based, logical frameworks that optimize cost, risk, and return—but too often such people investments focus only on reducing costs or mimicking best practices.”

From John W. Boudreau, et al. Investing in People.

In Part One of this two-part article, I argued that tight base pay budgets call for investing where the ROI is best.

I ended Part One by promising to take up the funding topic. In tough economic times, focused merit budget spend may not be enough to fund meaningful base pay investments. This is especially so when a shift in talent priorities requires that monies be found to cover a multi-year period.

First, shake the tree

When I was a Plant Labor Relations Manager, and later a Plant HR Manager at the ‘old’ Kraft Foods in the US – back in the days before we were called “Business Partners” – we had a systematic process we followed to prepare for labor contract negotiations.

For those of you not familiar with the US labor environment, mandatory topics of collective bargaining include items like wages; overtime; bonuses; grievance procedures; safety and work practices; and, seniority -- as well as procedures for discharge, layoff, recall, or discipline. Labor contracts would also typically contain language about who can do what work, and often some aspects of how departments were to be crewed. With contracts in the US running multiple years, you infrequently had the chance to address areas of concern. You had to make negotiations count.

The first step in our contract negotiations preparations process – and I do not think that I am betraying any management secrets – was to do an assessment of our cash compensation. In addition to doing a labor market review, we would look internally at things like spend on overtime, shift differential, 6th/7th day pay, spot bonuses, allowances and so forth. Doing this particular assessment would let us shake the tree and collect whatever nuts that fall.

In a manufacturing plant setting, many times the nuts cracked open where they fell. When you ran the numbers, the opportunities often became obvious. It could be, for example, that a simple change in production line crewing or product planning practices would reduce overtime or 6th/7th day spend. This spend could then be reinvested elsewhere.

With your white-collar workforce, the monies are largely found in the nuts that do not crack open.

This is true whether they work at your plant, are part of your sales force, or sit in a corporate group. Often, the biggest nut is your labor market competitiveness discipline. If you are a Pharma company and need to invest in Health Economics and Market Access professionals, does it make sense to keep paying IT professionals at the 75th percentile? If you are an IT company and need to invest in SAP specialists, should you keep paying HR at the 75th percentile?

This is not to say that a particular profession is not important to a firm. Every profession is important if you have made the choice to employ them. However, in tough times you do not have the luxury to pay above market for one profession when another that is business critical is lagging. Arresting turnover in one department may create a risk for another. No doubt, this is a tough nut to crack. But, isn’t this why Comp&Ben professionals do internal equity and external market reviews?

Then, harvest the peanuts

Unless you live in a country where peanuts are harvested, you may not be aware they do not grow on trees. Peanuts are actually legumes and grow underground. Although there are indicators about the crop’s health, you do not know what you have until harvest. To ensure a healthy crop, you need to practice good plant care habits.

If you don’t practice good plant care habits, you risk wasting your investment and even damaging the soil.

The second step in the labor contract negotiations preparation process is much like the peanut harvest. It requires an educated guess about what lies below the surface, reading the leaves, and nipping bad habits in the bud. At the 'old' Kraft, our assessment about what lay below involved calculating the economic impact to the firm of its bad pay cost practices and habits.

For example, in a plant a bad practice might be an artificial restriction placed on what jobs can do what work. The cost of the practice might be having to pay overtime to have an employee cover a shift when an employee was absent rather than having an employee in another classification get upgraded and do the work on straight time.

With white collar employees, we are also searching for those artificial restrictions which are actually engrained bad practices. Management and HR may even be blind to them. They become difficult to uncover as the weeds of vested interests have begun to envelope them. Perhaps those off-cycle increases or spot awards that were delegated to line managers are not budgeted or controlled with the same discipline as merit budget spend. Worse, maybe they are even used to “make up” for small merit increases.

The result may be that a function’s share of the pay cost pie is disproportionate to both its headcount and business criticality. Upon investigating further, you may find that particular function also had a custom of paying certain groups above market. Or, perhaps their performance ratings were consistently richer than warranted. Even worse, perhaps that function’s jobs were overgraded with the consequences that brings.

In contrast, your business critical function may be experiencing a high rate of turnover because the spending rules favor the rich getting richer – or lets the game-players do their thing without consequences. Achievement of both the business strategy and vision are placed at risk.

The critical business functions (and talents) do not get the investment they need.

These bad habits are representative of some things we see in our day-to-day consulting practice. They are often the kind of self-funding opportunities which cannot be converted overnight. But, for the long-term sustainability of the business they cannot be ignored. The weeding needs to be done.

In conclusion

An evidence-based approach to assessing your actual pay costs can help you uncover monies that can be better invested elsewhere. As with prioritizing where to spend, committing to end certain practices or put tighter controls around others is not easy.

Making the strategic pay cost investment decisions are hard because people are not just another capital expense. Instilling market discipline and putting an end to bad habits are not easy because managers are people - and their instinct is to take care of the people who work for them. But, tough economic times require that everyone think about how to best sustain the business for the benefit of all of the people in the firm.

Michal Freire

Michael Freire is a seasoned Comp&Ben leader with more than thirty years of Human Resources experience including a decade of HR business partnering in manufacturing. He has worked with both Emerging and Developed Markets in EMEA and the Americas, and for twenty years has been accountable for delivering comp&ben solutions at the corporate, region and country levels at large multi-national companies.

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