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Who Earns What In Organizations And Why?

Reward is a sensitive topic. When you start talking about people’s paychecks, everyone  pays attention.  Today economic and social developments along with various organizational factors, play a role in the question of, who earns what in organizations and why. Therefore, remuneration is currently a relevant issue for employers. This article briefly outlines organizations’ challenges in the area of rewards and discuss some emerging reward trends.

Reward as a Social Dialogue

The economic decline since 2020 indicates that employers are looking critically at personnel costs and for ways to reduce them. Sometimes this results in wage freezes or positions being declared as redundant which results in a reduction of the size of the workforce. There are also more creative solutions, such as alternative forms of remuneration, like cost reimbursements, meal vouchers or a phone plan, which makes the payroll more efficient and lead to lower personnel costs.

Additionally, remuneration has become a social issue. The conversation surrounding remuneration of (top) executives in public organizations is a current example. The pay of executives and other high-ranking employees in the public sector has come under the microscope due to the disclosure of alleged exorbitant salaries and the public outcry and outrage about this.

The (imposed) measure of lowering wage costs by 12.5% is also causing a great deal of controversy in organizations who have a public duty. Although it is not entirely clear yet how this measure will be implemented in practice, it will also affect the remuneration in private organizations. If salaries in government or semi-government organizations decrease, this may also lead to a correction in private sector rewards. After all, why pay more than market standards, especially if the public sector makes up about a quarter of the total labor market.

Shortages in the Labor Market

On the other hand, many organizations face a huge need for qualified personnel. We have seen a significant migration of talent as a result of the COVID-19 pandemic, especially in the hospitality industry but also in healthcare and education. We have seen for years that employees search elsewhere because of better working conditions and for development and growth opportunities. In addition, other countries have an enormous demand for labor in these sectors. So there are plenty of opportunities and possibilities elsewhere. In this case, the grass is really greener on the other side.

Performance and Reward

Organizational factors also influence remuneration. In principle, a salary is linked to the complexity of the employee’s tasks. The work someone does and the knowledge and skills required for it, determines the salary one should receive. Besides the fact that rewards are a medium of exchange for the work done, remuneration is also an instrument to attract and retain talented employees and to stimulate good performance.

Remuneration linked to performance has been a complex issue for years. Employees often feel that this appraisal process is unfair. This feeling is justified, as research shows that only 20% of rewards can be directly linked to the actual performance. The other 80% is l dependent on factors that are often beyond the control of the employee, such as an employee’s gender and/or whether or not the supervisor likes the employee. Not fair and objective at all. It is not without reason that more and more organizations are abandoning traditional performance appraisal methods and opt for a more future-oriented approach with a focus on growth, development and more frequent feedback moments.

Changing Employee Expectations

Apart from the described challenges for organizations as a result of economic and social developments and organizational factors, there are also emerging rewards trends. Employee expectations are changing with regards to remuneration. Gone are the days when all employees were looking for an employer for life that mainly offers job security. The new generations that have entered the labor market in recent years and those that will continue to do so are not only looking for a stable income. Work is a source of inspiration, development, appreciation and meaning for this group of employees.

It remains of unchanged importance that the income of a person should be good and fair  and in proportion to the nature of the work and common for the labor market. However, this alone is not enough. New generations of employees are also looking for flexible  working hours, training and development opportunities and ways to contribute to solving social challenges through their work. Due to staff shortages in certain sectors like hospitality, healthcare, education and IT, the position of talent in the labor market is strong. This allows talent to choose where they want to work. To what extent organizations are able to meet employees’ expectations and needs is pivotal when choosing a (new) employer.

Rewards in 2022

Deloitte research identifies a number of critical factors that successful reward programs in organizations must meet. First of all, organizations should investigate what the needs of (potential) employees exactly are with regard to remuneration. Step two is to incorporate these needs into reward structures as much as possible. In addition, it makes sense for organizations to combine traditional, material forms of rewards with other employment conditions like training and education, programs aimed at health and well-being, working from home and flexible working hours in the remuneration package.

Finally, the aforementioned research shows that a “best fit” approach is more effective than a “best practice” approach. Customization and flexibility are keywords in a “best fit” approach. Compensation should be tailored to employee’s individual needs and adaptable as person’s needs change. These needs can differ per life stage, and an effective reward structure can adapt to this.

In the light of discussed economic and social developments as well as the changing expectations of employees, organizations are forced to take a closer look at their reward strategy. A holistic view on rewards is essential to ensure that the decision about who earns what in an organization is in line with the organizational strategy, the expectations of (potential) talent and the complex organizational context. 

This blog is a translation of the Antiliaans Dagblad article Wie verdient wat en waarom? by Christel Cornelisse - de Vries