Workforce Segmentation: Back to the Future? Duncan Brown Director, Reward Services

Segmentation: what do we mean? Decentralisation? Differentiation? Discrimination?

Segmentation: a brief personal history By rank/class By business unit/department By geography By performance By job family By generation Started at vauxhall there were different loos. Then international companies – job for acct frim to intro a pan european pay structure.Then central govt it was devolution of pay and breaking national pay structures. But that only raised issues of should there e more feedom and variation in depts – one study at every level they don’t give us enough freedon from above but don’t trust the people down below. Then (over) in an oil company see the pendulum swing from highly cent to totally decent but then couldn’t move around so used a framework to help us to consider rt balance. More recntly job families used by around 35% orgs to get better mkt fit. Some question if discrim inatory eg barrister. But job families as in government can be lateral unfiying eg lawyesr in govt, as well as divisive. Most recently looking at age factors

Some segmentation dilemmas Local authority: department head says he can’t afford to offer Council’s flexible working policies. Local authority: should we remain within national agreements? Local authority: should we remove market supplements in the current economic climate? Uk plc: should we bring our IT function back into the corporate pay and grading structure? Foundation NHS Trust: should we come out of AfC for hard-to-recruit staff groups, or for all staff? PLC: should we offer corporate car and benefits policies to a new joint venture in a different labour market?

Major Bank: Decentralise Start with a grand plan Adopted a ‘classical’ approach to strategy development Top down, heavily planned and very rational Ordered and rigid The centre has all the answers What the offer should comprise Who should get what What individuals’ pay adjustments should be Focus on pay Pay to get people in Pay to keep people Pay to increase performance Result sheep dip package design reward done to you broad brush decision-making

Resulting reward strategy Design Spend much more time talking to people Plan for initiatives to adapt in their implementation Incorporate inherent flexibility Aim for locally owned change Introduce comprehensive flexible benefits package Decision making Pay decisions made where the information is No centrally dictated pay adjustments or matrices Local decisions, central framework

Or maybe re-centralise: UK FS company Initially carried out an EPR and found: starting salaries tended to be higher for men part-timers got lower performance scores than full-timers and men tended to be more likely to receive ad-hoc payments. Actions in response: Training recruiters and line managers to ensure only pay higher starting salaries when objectively justified. Starting salaries signed off by divisional directors, candidates’ previous salaries checked with their employers. Ensuring contribution, not service-related pay progression Improving/extending EPR data and analysis

Changes in base pay structures Emphasis on high performance Differentiated market pressures Job flexibility Emphasis on costs Low inflation Equal pay

Job family approaches are increasingly common Around a quarter of organisations use them for evaluation/pay/career management purposes Range is from 2-40; average is 5-8 Complete mixture in terms of basis of definition Key Issue 1: The design reflects the main purpose in using them: clarify career progression reflect market pay variations Key Issue 2: Managing the balance Key Issue 3: Balancing the number of “vertical” levels/grades with the number of horizontal levels/families Key issue 4: equal pay Too Many Too Few insufficient market flexibility lack of local ownership why do it? expensive to set up complex to administer/maintain greater internal barriers/walls

The mix in reward policies and practices in one firm Policy issues e.g. market stance. LTI Senior manager arrangements. Pension Job evaluation system. Pay structure. Performance appraisal. Recognition awards Pay rates for all staff recruited locally. Bonus schemes below grade x Operated at Centre Designed Locally/ Unit Designed at Centre Operated Locally/Unit

Where are the different aspects of reward managed in your organisation? Reward Area Pay strategy and policy goals; Job evaluation; Market definition and stance; Grade structure; Pay budgets; Pay increases; Bonus; Pay administration; Training/support processes; Pensions; Performance appraisal; Salary surveys. Operated at centre Developed at centre Developed locally Operated locally

Rewards need to match the organisation structure Centralised, ‘Tight’ Business Strategy based on integration and synergies. Predominantly internal growth. Structure Centralised HR All managers/staff on corporate contracts. Generally long service. Career orientation. Career and succession planning emphasis Diversified ‘Loose’ Financially-oriented growth strategy. Growth by acquisition. Decentralised, small corporate office. Business-based contracts. Greater emphasis on external recruitment. Business-based HR and development.

Countervailing pressures to segment and to unify Technology Globalisation Equal pay Cost Diverse workforce External market pressures Local business/customer ‘fit’ The Choice society

The pros and cons Common Segmented Goods Reinforces ‘one emloyer’ Supports mobility Efficient Good market/business fit Local ownership Flexible Bads Inflexible Lack local ownership Lacks market fit Divisive Lack of local capability Expensive/complex

Building the balance

Achieving the right balance At the organisational level and in business strategy: “An appropriate balance lies at the heart of effective management” . Prof Kets de Vries, ‘The Neurotic Organisation’ “We want to be big and small, global and local” HSBC “Organisations need to be ambidextrous” Prof O’Reilly & Tushman “The successful organisations combine the hard and soft, the support and the stretch, the yin and the yang”. Prof Sumantra Ghoshal Marketing: the McRice Burger, Intel and HSBC – tailored global campaigns “Advertisers are simultaneously exhibiting both the global reach and the local resonance of the brand…globalisation is associated with the new dynamism of relocalisation” Jackson and Andrews In HR and rewards.

Trying to get the best of both worlds in reward Unit specific rewards Good market alignment Local ownership Flexible Restricts mobility Limited local expertise Less efficient to administer Highly uniform rewards Reinforces one firm behaviour Supports mobility Efficient to run Fair for similar jobs Inflexible Lacks market fit Loss of ownership Intermediate -Flexible and efficient Best of both worlds -Overly complex and confusing -Loss of responsibility/control

Reward Principles in one firm Strategy-driven - Use rewards more effectively to create strategic differentiation Pay-for-performance Provide incentive Reward high performance Variable cost flexibility Market-aligned Recruit Retain Total rewards Create engagement Enhance appeal and value Provide personal choice One firm Fair, non-discriminatory treatment Prevent internal barriers Open and honest - Adult/adult relationships - Promote understanding

The one-firm principle We use a one-firm approach, wherever possible: We have a firm-wide benefits package We will work towards common terms and conditions such as overtime and TOIL. We will consider and manage the relationships of the rewards for people with common skills and roles across the firm, such as support staff. We will have consistent eligibility criteria for variable pay across the firm and some consistency in its structuring. We recognise that we operate in some very distinct and divergent labour markets, and also the value of reinforcing team and business unit identity.

A “Mid Atlantic” Approach in a Scandinavian multinational “Our philosophy is to provide market competitive rewards to our employees worldwide through a flexible structure, addressing the needs for personalisation, empowerment and commitment”. Integrated Compensation Planning and Review System. Country pay values based on global methodology but local market data. Global stock target/values. Benefits principles eg DC pension, but cognisant of local practice

Example of the reward policy balance: a major oil company 1. Top 1500 Common bands, but local market pay ranges; Common incentive approach (North America and ROW); Local benefits but common approach for international staff cadre; Executive development. 2. Senior Managers (next 4000) Common bands with job evaluation, local ranges; Locally designed incentives to meet specific criteria; Local benefits but common approach for international staff; Executive development for high potential/international staff. 3. Other Staff Core principles; Local management;

The balance in HR roles and responsibilities in one employer Types of Employees Level of HR Staff Senior Management Managers and Professionals Staff HR at Corporate HQ Design, operation and control of pay Guidance via principles and advice. Agree to and audit actual systems. Guidance via principles HR at Regional HQ Administer pay Design pay systems Operate for HQ employees Advise and audit for country employees Agree to and audit actual systems HR at Country Operating Level Operate and administer for local staff Design systems, operate and administer

Total rewards can contribute to that balance Can act as ‘fog’ and ‘glue’ By providing a common framework within which necessary variations between different parts of the organisation can operate. By allowing irrespective of organisation structure for the ultimate level of segmentation: individual choice.

Conclusions on the common/segmented reward balance “Organisations are finding it essential to introduce a balance between the standardisation of corporate practice – to communicate a common strategy and provide corporate ‘glue’ – while at the same time being responsive to the needs for differences in terms of cultures, values and market practice”. Professor Stephen Perkins

Reward strategy is all about managing the balance Organisation needs Business Strategy/ Needs External Pressures Market Equal Pay Legislation Internal Employee/TU Needs/ Expectations Reward Strategy Long Term Aims Scale of Impact Immediate Demands Ease of Entry/Change Local Needs

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