Special Aspects of Reward Management

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Special Aspects of

Reward Management


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Boardroom Pay

Salary policy for directors is usually an indicationof corporate culture.

The press has always reacted badly to major payhikes in the boardroom

The way in which boards of directors are paidtends to reflect the pay philosophy of theorganization as a whole.

Some promote Performance-related pay downthrough the whole organization, while otherschoose to reinforce other values such as loyaltyand commitment


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Boards, especially in family companies where

remuneration does not come from basic salary

alone, do not always appreciate that the level

of their basic pay sets the ceiling below which

all other salaries generally have to fit.

Also potentially damaging are salary levels

which employees perceive as excessive inrelation to their own rewards


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Corporate governance

A UK company is owned by its shareholders,but the power and responsibility for almost alldecisions concerning its business operations

are devolved to its board of directors,including most decisions about pay.

In the UK (as in the USA) the board ofdirectors is a single or unitary structure,responsible for corporate governance as wellas business decision making.


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PAY MANAGEMENT PROCESSES IN UK

COMPANIES

In broad terms, the UK unitary board typically

manages its own pay along the following lines

Responsibility for the pay of the executive directors isdelegated to the remuneration committee

The pay of the non-executive directors is usually managedby the chairman, perhaps in conjunction with the chiefexecutive

The board as a whole votes on these pay

recommendations but no director is able to vote on his orher own pay

Shareholders have the opportunity annually to vote on theacceptability of the remuneration committees report


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The Greenbury and Hampel Report

A study group on directors remuneration chaired by Sir Richard

Greenbury was set up as a response to a growing concern

regarding pay of directors in the UK

The outcome of greenbury was a code of best practices divided

into five main areas (The remuneration committee, Disclosure,Approval, Remuneration Policy and Service Contracts)

The Hampel report which was published in 1998 laid the

foundation for pulling together the Cadbury and Greenbury

recommendations as well as give its own view on corporategovernance

The Hampel reports key principles fall along the areas of; the

level and make up of remuneration, procedure and disclosure.


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Board Remuneration Committees

This committee acts on behalf of the shareholders

It is required to be composed of a group of non-executive directors

The committee should consult the chairman and/orchief executive about their proposal and have accessto professional advice inside and outside the company

Sometimes it may also have to provide a check on

excessive boardroom greed It normally review and authorize pay recommendations

on an annual basis


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Executive directors pay

Basic salaries should be maintained at a level that allows

the company to compete effectively for good-calibre executives

Annual pay increases (if any) should be awarded in relation to

performance and an assessment of market competitiveness

The basis, targets and payments from executive incentive

schemes should serve the needs of the business

The balance between the elements of pay and benefits should

be maintained

Relationships between boardroom pay and that of employees ata more junior level should remain consistent

Directors contracts should be reviewed from time to time to

ensure they remain up to date and defensible


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Non-executive directors pay

Should provide a reasonable recompense forthe time and commitment a non-executivedirector contributes to board meetings

Should not be so large or so structured Many companies pay non-executive directors

purely in cash but now some allow or even

require their non- executive directors to takesome or all of their fees in the form of thecompanys shares.


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In Ethiopia, the National Bank of Ethiopia

licenses, supervises and regulates the

operations of banks and insurance companies

which are around 29 currently.

The banking industry is governed by

Proclamation No. 592/200, which includes

among other things: Shares and Register of Shares

Limitations on the Acquisition of Shares


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Shareholders Meetings

Limitations on Voting Rights

Appointment of Directors and Officers

Prohibitions Cessation of Banking Management Functions

Suspension and Removal by the National Bank

Maintenance of the Required Capital

Disclosure

Remunerations of Receiver


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Such a scheme emphasizes: 1) share price growth

2) loyalty to the company, 3) real earnings per

share growth, and 4) share capital stability or

reduction. Performance share schemes

Executives are provisionally awarded shares. The

release of the shares is subject to the companysperformance,


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Cond

Such a scheme emphasizes: 1) relative share price

and dividend performance, 2) loyalty to the

company, 3) value delivered to shareholders but

does not link directly to business performance. Deferred bonus schemes

Part of the executives annual bonus is deferred

for, say, three years


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Such a scheme is designed to reward: 1) annual

(sometimes personal) performance, and 2) loyalty

to the company.


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INDIVIDUAL REMUNERATION

PACKAGES

Known as cafeteria or flexible remuneration

packages.

The idea essentially is that employees should

be offered the chance to select how they wishto be paid in terms of cash and benefits

For executives in particular, the remuneration

packages are individually negotiated andtailored at the time of recruitment to a boardlevel appointment.


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In this case HR directors need to have: a willingness to tailor the remuneration package to fit

individual requirements;

a clear idea of which items of pay they are prepared

to negotiate on; the ability to cost out alternatives quickly;

a maximum total earnings cost they are prepared togo to, to get the executive they are after;

a prepared case to defend a package which otherdirectors or even shareholders may initially perceiveas an anomaly


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GUIDING PRINCIPLES FOR

BOARDROOM REMUNERATION

Executive pay systems can and should be used to helpattract and retain top executives of outstanding ability

Executive pay should foster a pay-for-performanceorientation and top management focus on sustainedperformance that results in increased value for theorganizations owners over the long term

Executive pay should be derived from an explicit payphilosophy and strategy consciously developed to

support the organizations business strategy,organizational structure and approach to humanresource management


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Executive pay should be tailored to theorganizations particular culture, managementstyle, institutional guidelines and competitive

environment; Executive pay systems should be consistent with

the organizations overall management process.

Executive pay design should consider the needs

of individual executives but not at the expense ofthe organizations underlying goals and

objectives.


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While the design of top-pay systems can becomplex, plans should be simple, easilyunderstood and clearly communicated.

Executive pay should be determined andmonitored in a manner that safeguards againstself-interest and avoids the appearance ofimpropriety.

Global organizations need executive pay advice

from global advisers that have appropriateexecutive pay expertise in the right parts of theworld.


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TYPES OF OVERSEAS EMPLOYMENT

The terms and conditions of employment whileabroad typically depend upon the nature of the

work and its likely duration

Feasibility studies to assess the potential market for the introduction or

development of the companys goods or services

method of payment is usually no more sophisticated than

a reimbursement of expenses


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Home Based Balance sheet (build-up) approach Is a build up approach that composes home based

salary, spendable income and the main allowances (likeRelocation allowance, Added responsibility allowance,Separation allowance, Hardship allowance, Cost-of-

living-allowance)

most commonly used expatriate remuneration method,

easy to communicate and transparent to the expatriate most appropriate method of pay for short- to medium-

term assignments,

EXPATRIATE . , Contd


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EXPATRIATE . , Contd

Market rate approach

The market rate is also preferred when the

assignment is likely to be long-term or permanent.

Advantages

administratively simpler than the balance sheet

rarely be applied if the employee is moving from ahigh- to a lower- paying country,

also discourages repatriation


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Pension; Care should be taken to ensure that

the expatriates final pension is never

adversely affected as a result of an overseas

assignment.

Car; cars are common perquisites for

expatriate staff of all grades.


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Less common benefits associated with expatriate assignments

Servants; although the employments ofservants may sound like a relic of a bygonecountry, there are still many countries in the

world where it represents affluence, power &status.

Club subscriptions: Club membership fees &subscriptions are usually paid for by an

expatriates employer if there is a goodbusiness case.


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Third Country Nationals (TCN)

It describes an employee, whose home country is

not that of his/her employer, who is expatriated

to third country. Concerning to payments there isno perfect TCN strategy.

Taxation; Countries & or companies may elect tosafeguard expatriate from fiscal penalization by

one of the following two methods.


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Tax protection ; when an expatriate is paid a

gross salary & working in a location where the

tax rates are low , the employer need make no

adjustment, but when the host country tax

rates are higher than the employee home

country, the difference is reimbursed, usuallyin the home country.


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Tax Equalization; the system of tax

equalization is more equitable than that of tax

protection & is therefore favored by

multinational with large number of overseas

employees. Thus, all staff is maintained on a

tax standard which reflects that of the homecountry.


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Net Payments

It ensures expatriate throughout the world of

fiscal equity & removes the onus of tax

administration from the employee in countries

which have no equivalent of the pay system.


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Acquisition

When one company takes over another andclearly established itself as a new owner

It is a purchase of one business or company by

another company or other business entity. Acquisition are divided in to private and

Public

Acquisition can be either friendly or hostile.

Friendly acquisitions occur when the target firmexpresses its agreement, whereas hostileacquisitions dont have the same agreement

I li ti f M&A d


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Implication of M&A on pay and

conditions of employment

In most M & A companies, more attention isgiven to cutting costs, and increasing revenues.And this leads to de-motivating managers andemployees

There are two extremes on pay and conditions ofemployment: Handsoff approach = leaving the acquired company

to run its own business in its own way and terms and

conditions Harmonized approach = merged entirely in to the

parent company in all terms and conditions ofemployment


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Continued .

Salary administration procedures

- Should standardization procedures operatethroughout the new group?

Bonus schemes- Should different arrangements for bonuses be

allowed to continue?

Profitsharing schemes

- What should be done about profit sharing, assuming ascheme exists in one or other or both of thecompanies?


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The thinking of the founders of the business willtypically based on;

1. Reward system from previous employers(bringing the staff hand book/salary policy);

2. Throwing out the bits of these that they founddemotivationg;

3. cheery picking from reward policies they haveknown or linked the sound of from otheremployers;

4. Selection of benefits(notably pension) providedon the basis that suits to a small high-poweredcadre but cant easily be extended to a morebalanced group of employees in a maturing

organizations;

cont


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cont.

5.Failure to understand the underlying pluralism of

employment-Where to Start

The objective of a reward system designed to

meet the needs of a business start-up are to;1. Attract and keep people anxious to make the

organization grow and flourish;

2. Reward the risk of coming into a new venturewith high rewards and generally a share in thebusiness if the risk pays off- for those who havereal control over development.

Cont.


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It is more difficult and probably unrealistic to

reward support and more junior staff on a

high-risk basis.

3. Provide a sensible basic salary that is

reasonably competitive with the market for

most staff and highly competitive if rare skills

have to be brought in.

4. Lock people in to give business stability.

Typically with share scheme for senior

executives and an all employees share

scheme or profit sharing for everyone else.


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3. Executive share options/employee share

schemes: should be capable of extension-again anarea for good professional advice.

4.Perforamcne rewards: need to relate to the

milestones in the business plan an be based onachievement of agreed objectives/performance

standards.

Reinforcing the culture of success

h f h f i i i


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Much of the success of a growing organizationdepends on close and effective teamwork.

Reward systems need to support this.This means that as organizations grow they have

much to gain from implementing.

1.Perormance rewards which reflect team as wellas individual achievement;

2.Consistent as far as possible harmonizedbenefits;

3. A beginning of a formal approach to settinginternal relativity so that a defensible 'peckingorder emerges.

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4.Effective performance management as part of the

way the business run;5.Management of the reward system by an

individual who is wise custodian of both policy

and implementation until the organization is large

enough to have a personnel/HR remuneration

professional to do the job.

The last is critical because, experience shows that

most of the mistakes made by new business in the

reward area are because the wrong personnel had

accountability for it.

Special Aspects of Reward Management

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