Integrating Compensation With Business Strategy

Updated: May 25 2002, 05:30am hrs
With traditional human resource processes like lending enhanced job challenges and increasing the level of autonomy to handle pressure-ridden projects being incorporated in mainstream compensation initiatives as non-monetary compensation, corporate India is gradually gearing up to the need of integrating compensation strategy with business performance and strategy.

To merge the two areas of business and employee pay , calculating compensation packages are now hopping beyond pure arithmetic. According to corporates and consultants compensation structuring today is all about building a performance centric enterprise and retain the premium talent to drive pro active business change. For us compensations is all about creating an enabling culture, where employees who want to stretch and walk that extra mile for the customer will be amply recognised and rewarded, says Mr.Prashant Ahir, executive vice president, Human Resources, Thermax Ltd.. This approach path according to Mr.Ahir will therefore be a part of the holistic building block that will enable Thermax in cruising towards its vision of creating a high performance organization, that offers sustainable solutions in energy and environment. What this also translates is that by and large our compensation structuring is not just about rewarding individual performance but patronising the criticality of the person who will trigger the business performance,says Mr.Ahir.

Informs Ms.Aparna Ballakur, Head HR, TriVium India, a 100 per cent subsidiary of TriVium Systems USAan an eCRM product company: Our business strategy and plans require that we are a high performance, nimble organization. The compensation strategy therefore makes an aggressive attempt to ensure just that. The need for corporate India to align compensation strategy with business strategy according to HR practitioners, is being initiated with the objective of consolidating a task force of talent that can sustain the organizations amidst the market pressures and economic perils. Explains Prof.P.Vijayakumar,faculty, department of personnel management and industrial relations, Tata Institute of Social Sciences, To create a competitive advantage amidst the chequered times, an organisation needs to understand what makes it distinct from its competitor and evolve compensation system to reinforce that.

Holistic approach
At Thermax, any initiatives in compensation is all about communicating that they are competitive and contemporary in comprehending the linkages that compensation has with employee needs across layers. Says Mr.Ahir: Our compensation structure attempts to respond to different needs of employees at various stages in life. For instance, the younger generation looks for more cash in hand. And thats the tale their salary structures will reveal,says Mr.Ahir. At the middle level, it takes a different tack. The company here focuses on retention schemes and status enhancing benefits. And in senior levels in addition to these benefits there are also post retirement benefits.

According to Mr.Ahir, the way Thermax has deployed the system is by benchmarking its compensation with a select group of companies in the engineering industry. Through a structural revision, we have undertaken a major initiative to reach a target competitive position in the industry. The initiative will be carried through this year to reach closer to this competitive position, explains Mr.Ahir.

The various components in employee pay that the company has evolved to effectively implement the initiative encompasses the monthly pa and allowances, bi-annual incentive pay out, annual allowances and separation benefits. Alongwith this we also have the variable pay and we are enhancing its components to cement the linkages with performance,informs Mr.Ahir.

The key to all the mutually-knit initiatives, according to Mr.Ahir is to retain high performers, and utilise this retention initiative to merge compensation with business strategy. And this is how the company deploys it: As the initial step we have embarked on a selective pattern in compensation revisions during the structural corrections that was undertaken to ring fence the premium performers,says Mr.Ahir. According to him based on certain dimensions such as criticality of competencies, skill replicability, retention worthiness and so on, we have evaluated each person and have differentiated sharply in their salary revisions. Moreover, the company is also working on a scheme of long term incentives for the most critical people based on the principles similar to ESOPs.

Elaborating on how the Thermaxs implementation of compensation strategy across layers is aligned to the business strategy, Mr.Ahir reasons:the companys management is making deliberate interventions to re-inforce a high performance culture in the company to meet its goal of growth and profitability on a sustained basis.

According to Mr.Ahir through such studied structuring of employee compensation, the companys message is on the wall: there is no room for satisfactory underperformance any more. And here comes the time to shift from the mindset of titles and entitlements to commitments and delivery. The moral to watch out from the Thermax example according to the consultants being that integrating compensation to business strategy can be actualized by identifying the strategic direction of the business, the employee culture the establishment is looking to enforce, and then decipher a compensation dynamics that can address all of that from an employers perspective.

Opines Mr.Vijayakumar: this in effect implies that organizations should allow their business strategies to lead the reward systems.

Linking compensation to business performance

Whats performance in the contemporary corporate context Professionals doing a good job For us understanding performance goes miles beyond that, remarks Ms.Ballakur. At TriVium India, performance is all about translating individual high performance to accelerate the collective corporate performance.

Says Ms.Ballakur:compensation initiatives ensures that high performance means significant rewards and is in line with our drive to build a performance driven organization.

In sync with this strategy, the company is implementing a compensation structure across the organization that ensures external parity with the best paying companies in the industry segment. At the same time the reward systems will ensure that compensation is strongly linked to holistic performance,says Ms.Ballakur.

According to the company, this means the various components in pay will be interaligned to significantly contribute value to the companys competitive business sustenance. Our pay components incorporate base pay, flexible pay, performance linked bonuses and stock options (both joining & performance),informs Ms.Ballakur.

Flexible pay, for instance is cafeteria style plan where the company offers the employee the option of structuring a part of their compensation. The employee can choose from a set of categories. This helps the employee increase the take-home salary, by optimizing the tax liability. Alongwith this tool at TriVium, the compensation strategy is focused on high rewards for consistently high performance. For example a high performer at TriVium would have a base salary among the best in the industry. In addition, the performance linked bonus system, ensures that high performers earn sizeable bonuses and performance stock options. All this reinforces the high performance in line with business strategy culture that we are building,justifies Ms.Ballakur.

And the company reasons that there is a dual fold objective that this structure tries to accomplish: Firstly it tries to attract and retain the high performers and secondly make these performers the change drivers to attain scalability in the business enterprise.

Explains Ms.Ballakur: Our employee retention strategy is a combination of work, work environment,opportunity and compensation. A combination of better than industry base compensation, significant performance linked compensation and a very attractive performance based stock options is our mantra. This according to Ms.Ballakur, ensures that high performance means significant rewards and is in line to triggering the business forward.

Challenging task
A section of management consultants believe that the biggest challenge in any such integration initiatives lies in the fact that companies today are operating in a fast changing business environment. In such an environment organisations often change their business strategies for growth and development. Many intended strategies are not realized by organisations and emergent strategies are the order of the day, says Mr.Vijayakumar.

Aligning compensation strategies with business strategies in such a scenario, according to Mr.Vijayakumar is a major challenge organisations confront today. The other challenge that consultants outline being that all the compensation strategies may not be able to completely articulate a strategic business direction for the long term. Says Mr.David Richard of Talent Review, an organization that specializes in creating business specific compensation systems: Most companies structure compensation in line with the short term business strategy. And creating a compensation plan that can demonstrate a strategic long term business direction is often an onerous battle.

The reason that Mr.Richard explains is that in a scenario where the pressures in business keep mounting by the day, creating a compensation structure ith the long term directions may end beinginsensitive to the market realities. And Mr.Richard is of the opinion that unless compensations cannot tackle this problem and create a wholesome initiative it would be incomplete to say that compensations are tied to business strategy. However, Mr.Vijayakumar outlines a way forward: It is very important in this context that HR function,which generally handle compensation in most of the organisations need to have an integrated linkage with business to positively contribute to business strategies. This calls for a thorough understanding of business by the HR professionals.They should also know the outcome of the interaction between the technology-human interface and how these both can be optimised by developing appropriate compensation strategies. According to him, there is no one best way but what the current scenario calls for is a configurational approach to compensation strategy if it has to be aligned to business strategies.

A point that Ms. Ratna Korde from Profile Search agrees: HR professionals should be more rounded and should become thinkers in the long term so as to marry compensation and business strategy in creating a productive blue print for the business.