RETCO changes reward strategy

RETCO is a communications network company supplying services to the public sector. It is a not-for-profit organization, owned by its public service clients who are charged for the company’s services. The company also receives government grants towards its services. The services provided include web mail, web hosting, video-conferencing and wireless roaming, and high-capacity data transfer. It employs around 130 staff based mainly in its headquarters in the south-west of the UK but also has some staff in a London office. RETCO’s staff are largely professional telecommunications engineers but there is also a range of support functions such as finance, marketing and general administration. In general, the company is seen as a good place to work with lots of autonomy and interesting work for the professional staff. While staff complain that salary levels are not commensurate with other private sector firms, turnover of staff is lower than average and the benefits package is generally generous when compared to those of the company’s private sector competitors.

RETCO’s public sector background means that it recruits many of its staff from the public sector organizations it serves, and its terms and conditions tend to follow those in the public sector. There is a nine-band salary structure with fairly narrow pay ranges in each grade. There is a minimum for each band, a target point in the range and a maximum. New employees are normally appointed at the minimum of the band and are reviewed after a year. It is intended that staff move fairly quickly to the target salary, but exceptional performance can be rewarded through increases up to the maximum. In addition, one-off bonuses can be paid to those who have reached the top of their band. Staff can join a public sector-defined benefit pension scheme and annual leave is generous by comparison to its private sector competitors. Similarly, the sick pay scheme follows public sector arrangements. The roles were subjected to a job evaluation exercise (using a civil service job evaluation scheme) several years ago, but since then there has been considerable change in roles and the job evaluation has rather fallen into disuse.

Grading structure

The company had in the past a policy of benchmarking annually against external pay data, using a basket of comparator organizations. The pay levels were then set by reference to the median market rate data plus 5 per cent in order to set the target rate. Pay ranges were set around this target rate, but the system of pay benchmarking has now fallen into disuse.

RETCO grading structure

Band	Job example	Min.	Target	Max.
1	Admin. support	Ј15,660	Ј16,480	Ј17,305
2	Admin. officer	Ј17,255	Ј18,155	Ј19,065
3	Marketing officer	Ј19,250	Ј20,255	Ј21,270
4	Service desk member	Ј20,580	Ј22,245	Ј23,360
5	PA to CEO	Ј24,495	Ј26,480	Ј27,805
6	Technical specialist, contracts manager	Ј29,380	Ј31,755	Ј33,345
7	Management accountant, project manager	Ј34,055	Ј37,850	39,745
8	Head of IT and corporate infrastructure	Ј42,395	Ј47,120	Ј49,475
9	Director	Ј59,790	Ј66,450	Ј69,775

Changing business context

The organization is now subject to a changing business context for its activities. The reductions in public spending introduced as part of the UK government’s austerity policies mean that RETCO’s clients have less money to spend on its services and pay levels have been frozen for two years, mirroring pay restraint among its client organizations. Some of its clients are now looking for cheaper private sector alternatives for the supply of its services. The company is now becoming subject to market competition for its services, while previously its market was more or less guaranteed, and it is changing its business strategy from one of purely servicing guaranteed contracts to creating new markets for its services. This means that a more private sector model of business organization is being adopted to compete in the new market.

Review of reward system

As part of a general review of the company’s business strategy, a consultant was engaged to review the reward system – both to benchmark the pay levels for the nine salary bands and to make recommendations on how the entire reward package might be changed. The consultant noted a number of issues that needed to be addressed:

1    While the company has a nine-band salary structure, this appears to be a rather hierarchical structure for an organization of only 130 employees. There is little promotion from one band to another and little flexibility to reward individuals. The band ranges also appear rather arbitrary and in general are fairly narrow, allowing little scope for employee progression. Information on the populations of each pay band reveals that bands 1–3 have very few incumbents. Bands 1 and 3 currently have no incumbents and band 2 has only two.

2    There is a large gap (over £10,000) between the maximum of band 8 and the minimum of band 9. Unless the gap is justified by genuine market differentials between the two bands (which would suggest that band 9 roles are significantly greater than band 8 roles), this might indicate that either there is a need for an extra band or the two band ranges need to be widened.

3    The distribution of staff within the pay bands also indicates some issues. In band 4 only 7 per cent of staff are paid above target while in band 9 there are 78 per cent paid above target. In bands 5–7 there are 65 per cent who have reached target and in band 8 there are 51 per cent. It is not clear whether these differences between bands are due to market pay pressures, whether staff in the lower graded roles have shorter service (and hence have yet to reach the target salary) or whether a higher proportion of senior band staff are deemed to be exceptional performers. This could indicate potential equity issues but may also indicate that the maximum is being used to address external market demands rather than exceptional performance. This could be a particular issue if there was a gender difference between the staff on the maximum and those below target.

4    At present, the company does little to monitor recruitment and resignation patterns so has no real understanding of where its labour market competitors might be. It is reported that most staff come from its client public sector organizations and hence they expect a similar reward package to that in their previous employment. But there is also anecdotal evidence that staff resigning tend to move to RETCO’s private sector competitor firms which do not offer such generous benefits. The company needs to ensure its pay benchmarking exercises take account of these two separate markets – where staff are joining from and where staff are moving to.

5    The benefits structure is considerably more generous than the private sector competitor firms offer and hence more costly. In particular, it is unusual for a small company such as RETCO to provide a defined benefit pension plan. If RETCO is looking to strip out costs, it may wish to review the benefits on offer, although clearly many of these will be contractual and difficult to simply withdraw.

6    After a pay benchmarking exercise by the consultant, comparing salary levels for similar job responsibilities and job size in comparable organizations through salary survey data and a job pricing exercise with a small number of competitor firms, it is found that RETCO’s salaries are generally in line with the market for lower band roles but significantly behind those of the private sector comparators for mid-range and senior roles.

The consultant’s recommendations

After due deliberation, the consultant presented a report making the following recommendations:

RETCO needs to change its salary banding system to better provide for flexibility to reward staff and to better reflect the non-hierarchical organizational structure that will be needed to face future challenges. The nine-band structure should be reduced to just four bands with much wider salary ranges within each band. The current pay differential between the minimum and maximum of each band varies between 10.5 per cent at the lower level and 16.7 per cent in the higher bands. The range of pay that is covered by the structure results in pay gaps between the maximum of each band and the minimum of the band above for each band from band 4 upwards. There may be advantages in narrow salary bands, such as clearly defined pay relativities, good control of pay growth and being relatively easy to communicate to employees. Such structures, however, can create rigidity, be prone to grade drift (as the only way of getting a pay increase is to be promoted or be upgraded), be difficult to relate to external market differences between different types of staff, and provide less scope to reward individual performance.

RETCO should move away from a rigid adherence to its policy of setting salaries at the median plus 5 per cent and introduce a more flexible approach. The current arrangement gives little scope to reflect changing business and economic conditions such as affordability. As long as the pay structure is flexible enough to accommodate specific market pressures and individual performance differences, it is usually sufficient to compare with mid-market salaries.

Current RETCO reward policy envisages an annual full market analysis of salary levels. This is generally unusual and most organizations set their structures in line with the market data and then update each year in line with general labour market trends, the general level of pay increases for similar organizations in the same industry, inflation levels and ability to pay.

If market concerns about particular roles or groups of roles emerge, these should be dealt with through the use of job families. While part of the same salary band, salary levels for the affected staff can be dealt with separately. An alternative is to pay a ‘market supplement’ for roles that appear difficult to recruit externally, although such supplements need to be regularly reviewed to ensure they are justified.

Progression through the salary band should be related to rigorous reviews of individual performance and a transparent system of performance management.

One-off bonuses should continue but the criteria for these must be clearly set out and communicated to staff.

The benefits package should be reviewed to consider potential cost savings. If RETCO wishes to continue to provide what are seen as popular parts of the reward package for staff, then it should consider the implementation of a ‘total remuneration’ approach so that the cost of any above-market benefits are offset against salary levels. Employees need to be made aware of the overall cost of their reward package through annual benefit statements.

Given that it appears that the professional staff at RETCO seem to be more than satisfied with their work, the company should consider adopting a ‘total reward’ approach where the non-financial rewards on offer from the company are made more explicit to potential recruits and existing staff.

Source: author

Questions

Q1. After considering the consultants’ suggestions, explore the pros and cons of introducing greater pay-band width in the light of a tightening financial market (with potentially less ability for the employer to increase financial rewards).