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Market and Reward

Caught between Scylla and Charybdis

Author: Petr Kadlec

HR Forum, January 17, 2008

Growing salaries along with increasing personnel costs are issues that the majority of companies on the Czech market are trying to solve. After many years of steadily growing salaries we observe a workforce shortage in many professions, growing needs of companies, increasing confidence of trade unions and other influencing factors that cause a significant increase in salaries on the market in the Czech Republic.

Organizations react to the new situation in many different ways. Importing workforce from abroad is becoming normal practice in our economy. Many companies did not resist the and their personnel costs have become similar to companies in West Europe. However, the fact is that most organizations have begun striving for better internal processes, especially those concerning motivation, remuneration and long-term employee retention.

It is obvious that the external environment cannot easily be changed with better HR processes. On the other hand, with more effective HR processes, organizations can gain many competitive advantages on the job market and thus improve the external situation a bit. It is interesting to look at key elements that influence workforce motivation and that can improve the stakes on the job market.

Over-technologized remunerations systems.

„The need to make technical tools simpler and to improve managerial skills of people management and remuneration is the right way to significantly improve workforce motivation in many organizations on the Czech market. Today, improved workforce motivation does not mean that employees work better, but that they actually stay.“

First-class base salaries systems, well structured KPIs, sales force variable pay formulas, benefits structures and other technical tools help to manage motivation and an effective remuneration system. At the same time, however, we should be able to ask whether those sophisticated tools will do any good in the hands of managers with bad managerial skills. The lack of managerial skills of many managers results in low workforce motivation, which usually means employees leave the company as there are so many good offers on the job market. Unfortunately, companies respond to high turnover of employees by further improving the technical component of motivational systems and do only minor improvements in middle-management development. This phenomenon is quite obvious with many companies and surprisingly even though many HR experts talk about the importance of middle-management development and the need to motivate people well, only a few of them dedicate enough energy, time and money to do so.

It is interesting to perform a short self test of the remuneration system in your company. In the left column put 3 – 5 basic remuneration principles (e.g., calculation of yearly bonuses, base salary set up). In the right column put 3 – 5 basic managerial practices connected with workforce motivation management (e.g., giving constant feedback, regular coaching of employees). Then look at the list for half an hour and think how the motivation system would change if the remuneration system became simpler. How would the motivation change if managers improved their people management skills and approach, communication and coaching? Most of the time, with this easy technique we come to the conclusion that changes in the technical systems have only limited influence on the real workforce motivation, whereas people management changes it significantly. The need to make technical tools simpler and to improve managerial skills of people management and remuneration is the right way to significantly improve workforce motivation in many organizations on the Czech market. Today, improved workforce motivation does not mean that employees work better, but that they actually stay.

Under-valued seniority.

Respecting seniority is considered a negative in the Czech Republic, even though in many developed economies it is among the basic principles of rewards and long-term workforce motivation. During the period after the Velvet Revolution the situation here was that nobody had been in a profession for a long time, and, consequently, respecting seniority was difficult. But today the situation is quite different. Growing salaries and high workforce turnover creates a situation in which long-term motivated, loyal and experienced employees very often have lower salaries than employees that were newly hired from the market and work in the same position. I think it is needless to mention what kind of effect this has on the motivation of these reliable workers. Too often we hear remarks that to get a higher salary, it is enough to leave a company and be hired again by the same company.

It is often our experience that companies do not officially have a remuneration system regarding seniority. On the other hand, these same companies try to think of artificial ways to increase salaries of those who are loyal and experienced. Various increases above rewards maximums, artificially created higher positions and other new variable components. These are effects of formally disregarding seniority but in reality, companies are forced to regard it very strongly. The problem of such a solution is that companies put a lot of money into seniority, but do not gain any advantage from well-managed and planned workforce motivation and retention.

The question is whether it would not be appropriate to admit the importance of workforce motivation through valuing seniority and officially implementing it into remuneration and long-term motivation systems. Of course, it is impossible to implement an “age automat” or any other form of unmanageable salary increases with years of experience. It is much better to find a suitable system that combines seniority with long-term career growth, broadening the employee's role and to align it with a strict system of planning and HR review. Again, higher motivation of employees does not only mean higher performance but the fact that the employee will stay at your company.

The broader context of variable pay

A number of other aspects exist that can be considered in the context of today's unfortunate situation on the job market, but there is one that is significant. It is the broader context of variable pay. Generally speaking, a German employee has a very high base salary, very strict boss and a small bonus at the end of the year. On the contrary, a Czech employee has a low base salary, not such a strict boss and a high bonus. I am not arguing with the fact that a well-designed aggressive system of variable pay can produce miracles. On the other hand, the current Czech model ends up with management automatically paying 100 % of variable pay and in fact for the real variable pay uses only a small amount, often nothing.

In the past, this was only partially a problem. It was possible to get an employee for a low salary and the variable component of salary worked as an emergency release in the event of over fulfilling the personnel budget. Low efficiency of relatively high variable rewards can be seen only with lower performance, which in the environment with low personnel costs was not a big issue.

Today, the situation is quite different. The main problem is attracting and retaining employees in the first place and a solid base salary plays a big role in many professions. It plays a big role in Western economies and is also very important for many professions in the Czech Republic. It is now time to reconsider the variable pay policy in a number of companies. A system that provides a relatively high base salary increases respect and attractiveness on the job market. A system of variable pay that distributes lower amounts among employees, but is truly variably and which is accompanied by good work from middle management creates reasonable pressure on performance. All that works well. It is a normal way of rewards in developed countries with qualified but expensive workforce.

Petr Kadlec – Human Capital Advisory Services manager, Consulting division, Deloitte Advisory, s.r.o.

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