Reward and recognition and

Remcos
Recognition
• Recognition tends to be an afterthought, something to address after the “important
rewards”, such as base pay and incentives, have been implemented.
• Not nearly enough leadership time is spent on creating well-designed recognition
strategies and policies, and this is a dangerous area to neglect, given the latest research
linking it to financial performance and share price.
• Few organisations have established clear definitions for recognition plans.
• High-performing organisations understand the value placed on and received from
recognition plans, along with the role of human capital in an organisation’s success.
• Recognition plans are no longer allocated to an HR assistant, but are becoming critical
elements in a total reward system and in reinforcing employees’ commitment to
organisation objective
Definitions
• Incentive
• These plans reward specific results or criteria that are announced at the
beginning of the performance cycle
• The emphasis is more on the financial or tangible value earned than on the
psychological value of the achievement
Definitions cont.
• Recognition
• These plans reward employee contribution after the fact, for example, the
decision to acknowledge the contribution is made retrospectively.
• The emphasis is generally on the psychological value provided to the recipient
versus the financial value of the award
• Any discussion of an organisation’s reward system must include recognition
plans for at least two reasons:
• Recognition plans are now considered a component of current reward systems models.
• Recognition plans provide, in the reward system, an element that targets designed
organisational behaviours and cultural values and should not duplicate measures
included in the incentive plans.
Reward
• The term ‘reward’ applies to the award vehicles used in both
incentive and recognition plans for example cash and non cash or
shares
• Technically, bonuses are rewards and can be the result of either
incentive or recognition plans
Positioning reward in the total reward system

Business objectives and

desired culture

Total reward opportunity

Individual group

Remuneration-capability-
recognition-group
incentives
The business case for implementing a total
reward system
• Increase profits-research indicates a causal relationship between
employee attitudes, and profits
• Communication vehicle-organisation directs and energises employees
through its reward system
Design considerations
• Formal organisation recognition plans differ, and there are many
different types. There are however four main characteristics that can
be used for classification:
• Participants
• Criteria
• Nomination and selection process
• Awards
Participants
• Traditionally, recognition plans involved individuals at lower levels.
• There has been a shift towards teams and all levels.
• Another trend has been to recognise a work group or an entire
organisation.
• The emphasis on organisational objectives and the need for everyone to
feel part of the group has driven group-wide recognition plans.
• A balance needs to be created between individual and group, and this can
be done only if the recognition plan is incorporated into the total reward
system
Criteria
• The current trends for developing criteria for recognition plans are
much more strongly aligned with specific organisational strategies and
objectives than ever before.
• Just as competencies and performance have become part of the
remuneration plan, learning and results are now being reflected in the
recognition plan.
• Both hard and soft measures are being used in recognition plans, and
these multifactor-criteria options are being applied to teams or groups
Nomination and selection process
• The nomination and selection process has evolved from a
management-only process to one that includes peers and joint
(employee–management) selection committees.
• Employee education and empowerment provide additional value to
the organisation
Awards
• Awards can be classified into two main categories, namely: Symbols or utilities.
• Points.
• Symbols or utilities
Symbols or utilities are often “worth” more than the money because they last longer and have
some “trophy” value. Examples of utilities are sporting equipment, cameras, electronic
equipment and symbol examples are trophies and statues.
Points awards
There are many variations of points awards, and these range from:
Leaders and managers awarding points to employees.
Peers awarding points to colleagues.
Companies awarding “loyalty” points to customers
These points are “converted” to gifts or more of the product or service bought in the first place
Reward and recognition schemes: the lottery
• One of the most effective reward and recognition schemes ever introduced into Africa is
what is called the ‘lottery scheme’. The process can be described as follows:
• Eligibility-all employees except those who have been (AWOL)
• Criteria-using one factor
• Examples are: Airline – “on-time” landing and departure.
• Food chain – shrinkage reduction.
• Insurance – sales volume.
• Consulting organisation – quality.
• Manufacturing – safe operations
• Awards-cash bonuses
• If the organisation achieves the strike factor goal, then every employee receives a cash bonus that is nominal in
amount, say, R500.
• If the goal is achieved for six months in a row, and the employees have not been absent during this period, all
employees who are eligible then receive a lottery ticket which goes into a big drum for the draw of a significant
prize
Critical success factors
• The critical success factors to good scheme design involve at least
seven steps
• Forming and mandating the design scheme
• Securing measures, research information and current best practice
• Establishing the plan objectives, desired outcomes
• Creating the plan structure
• Determining the plan support requirements
• Selecting the reward vehicle
• Project planning the overall plan
Benchmarking findings
• When conducting research on best schemes, one often comes across the
following:
• The plan is aligned with the desired culture
• High level commitment by executives
• Participants can impact criteria
• Criteria are more objective than subjective
• Both individuals and teams are recognised
• Recipients re recognised in public before their peers
• Both behaviours and achievement are recognised
• Goals are clear and the plan is well communicated
• Management understand and use the plan
• Plan design and operation involve employees
Principles of recognition
• Emphasise success rather than failure.
• Deliver recognition and rewarding an open and publicized way
• Deliver recognition in a personal and honest manner.
• Avoid recognition that is over produced.
• Tailor your recognition and reward to the unique needs of the people involved
• Timing is crucial
• Strive for a clear, unambiguous and well-communicated connection between
accomplishments and rewards
• Recognise recognition
Rewarding high quality outputs
• Annual performance-related salary increments for employees
• Incentive bonus scheme
• Long service awards
Informal recognition
• It is not necessarily only cash or a gift that will have a long lasting
impression on the achiever, or their peers and colleagues, but various
informal though highly effective ways can be used to recognise
individual and team achievements
• A verbal thank you
• A thank you card
• A letter of recognition
• A congratulations card
• Achievements published in the news flash
Formal reward and recognition
• It is often appropriate to recognise and reward an outstanding
achievement or performance formally
• The exceptional efforts of people need to be recognised and
rewarded on an on going basis
• Section managers can reward performance of their subordinates in
accordance with guidelines and within budget
Advantages of monetary rewards
• Desirable
• Easy to administer and handle
• Understood by an employee
• Able to provide extra boost to a long term programme
Disadvantages of monetary rewards
• Have no trophy (lasting) value
• Are not exotic
• Cannot be enhanced
• Tend to become an expected reward
Remuneration committee
and governance
Executive remuneration
• Executive remuneration is more complex than meets the eye and a
strategic perspective on remuneration requires research that looks
beyond how much executives earn.
• This dichotomy of attraction, motivation and retention of good
executives versus tough corporate governance and media spotlights,
places remuneration decision-makers in a difficult position.
• An organisation’s ability to understand the “drivers” of remuneration
policy and CEO pay is therefore a critical component in determining its
present and future success in good remuneration governance
Drivers of remuneration
• Organisation size
• Organisation performance
• Executive specific factors
• Organisation structure
• Job specific factors
• Job complexity
• Strategy
Impact of pay policies on organisations
• Well-designed remuneration systems play a strategic role by promoting
organisational success in highly competitive markets
• Indeed, some go so far as to argue that there are strong links between
remuneration system design and organisational performance.
• There are many examples of pay systems that have gone wrong, and unhitching
from them is difficult.
• To alleviate this, more information is needed in understanding the impact of pay
policy changes on organisations.
• In its simplest form, remuneration policy has positive and negative effects on
organisations.
• There is solid evidence that remuneration decisions affect business performance.
Environmental context and remuneration
• The management of remuneration was once straightforward, with a
strong link between job level and pay.
• It is no longer that simple because of the pressures of knowledge
work, global competition, volatile financial markets, and shifting social
values on remuneration framework
Investor confidence
• Corporate image and governance have a large influence on the market price and perceived value of an
organisation.
• The collapse of Enron and other corporations has highlighted the need for good corporate governance
with regard to remuneration and CEO pay.
• Investors, analysts and stakeholders are nervous, and it can cost organisations dearly if they get the
slightest sniff of something untoward.
• Members of the committees making remuneration policy decisions are under the spotlight, and there’s
nothing more important than restoring investor confidence in the captains of the ships.
• In today’s best-performing companies, the role of the remuneration committee is vital.
• The committee is responsible for designing remuneration schemes that are understandable by its
employees, defensible to its stakeholders and strongly tied to meeting the business objectives.
• A well-designed incentive remuneration programme provides a sustainable, strategic advantage for an
organisation.
Remuneration frameworks and models
Remuneration element Purpose
Base salary Pays for overall job requirements, accountability, complexity of tasks, and diversity
of tasks
Short term incentive Variable component to reward contribution to annual business plan. The most
effective measures are revenue growth, earnings, earnings growth, and measures
of profitability. Some portion of this bonus is also contingent on individual
performance and division or group performance
Long term incentive Used to focus attention on longer-term strategic imperatives, as well as to identify
more closely with strategic goals, particularly increase in shareholder value. This
element is crucial in retaining employee
Benefits Provides special payments and programmes that may set the organisation apart
from others (may include items such as first-class air travel, organisation car,
enhanced medical care, and supplemental retirement programmes
Structure of executive pay
• Executive remuneration refers to the fixed pay, short-and long-term
incentives, and related benefits awarded to those who occupy the most
senior decision-making positions in our private and public- sector
enterprises.
• This normally includes the CEO and executives in the direct reporting
line.
• In the largest corporations, the executive group may include two or
even three levels below the CEO as the group that defines and
implements the broad business strategy of the organisation
Structure of executive pay cont.
• It needs to reflect the unique capabilities required for the leadership roles they fill, and
their individual worth and value in the executive labour market.
• It must recognise their individual contribution to the financial success and growth of their
respective organisations.
• It must take account of the uncertainty of employment in a business environment
increasingly characterised by shorter-term appointments and the impact of mergers and
acquisitions on executive tenure.
• More specifically, this very senior group of employees is accountable for safeguarding and
growing the funds that shareholders invest.
• In this respect, there is a growing expectation that their own remuneration will, in some
significant way, reflect the financial outcomes they provide for the enterprise owners
Structure of executive pay cont.
• The last 15 years have seen a significant shift in the mix of executive pay.
• Africa has largely followed the United States of America’s model of pay, with a
growing emphasis on short- and long-term incentive payments, and a
corresponding reduction in the proportion of fixed pay.
• Each component is typically expressed as a percentage of the total or aggregate
reward when describing the executive remuneration structure within an
organisation.
• The mix of fixed to variable, and within the variable components the mix of short-
and long-term incentives, will generally differ depending on the level of the
individual executive.
Key issues in executive pay determination
• Executive pay is a sensitive issue, particularly as companies issue their
annual reports complete with remuneration details of the top executives.
• There are three key issues that consistently surround public comment on
executive pay.
• First, do executives deserve the amounts they are paid?
• Secondly, are the variable components linked to appropriate measures of
performance?
• And finally, is the overall remuneration structured and determined in a way that is
defensible and credible to shareholders, the business media, and the community
in genera
Do executives deserve the amounts paid?
• There are many perspectives in this regard, and it is an area that is often exaggerated.
• The first concerns the essential issue of supply and demand.
• There is general agreement that there are unique competencies and skills required to succeed in
organisational leadership roles.
• This clearly means that the available talent pool is select and limited.
• Not only is this pool small, but various business situations require highly-specific skill sets.
• For example, the start-up phase of a business will require leadership capabilities and characteristics
different from dynamic growth, turnaround or divestiture stages.
• National organisations are very different from multinational organisations, listed from non-listed
etcetera.
• In the executive labour market, the bar for success has been set higher as a result of the growing
levels of competition following the rapid extension of global markets and ongoing deregulation of
industries (for example, utilities and telecommunications)
Is performance pay linked to appropriate
performance measures?
• There are strong and growing demands worldwide to make a significant
proportion of executive pay contingent on performance.
• But which performance measures ought to relate to executive reward?
• The majority of short-term (annual) incentive pay plans are based around
performance against traditional financial indices (for example, operating income,
earnings before interest and tax, operating profit after tax).
• Clearly, these are important in tracking an organisation’s success; however, they
tend to emphasise singular aspects of performance and ignore the capital invested
in the organisation.
• For this reason, a growing number of organisations use financial measures that
relate to capital investment, typically return on equity and return on capital
employed
Design, structure and determination of
executive pay
• The remuneration structure refers to the relationship between fixed pay and the performance-
based, variable components of pay.
• But an effective structure requires an equally effective design to ensure that variable pay is not
simply used or regarded as deferred pay.
• Poorly-designed plans may well have a structure that provides for a significant percentage of
variable pay, but in practice the issue is how much of an incentive will be awarded, rather than
whether or not any incentive payment at all has been earned.
• The implication is clear: executive pay plans need to have both a structure and design that
promotes the variability and performance-related nature of short- and long-term incentives.
• With regard to the determination of pay, there is always a concern from shareholders (and the
community in general) that directors and executives are in a position to influence their own
remuneration significantly.
• This is the reason for the widespread introduction of independent board remuneration
committees as an integral part of corporate governance.
Current trends and issues in linking executive
pay to performance
Short term incentives
• There has been a clear shift in the preferred style of short-term incentive (STI) plans adopted by
African companies over the past years.
• A major feature of this change has been a movement away from discretionary bonus plans which
determined by the board after the fact to target-based plans where specific performance
requirements and contingent reward outcomes are set in advance and after the financial year,
subject to having met the targets, payment is made.
• Discretionary bonus plans have lost favour because of their inherent subjectivity and uncertainty.
• Payments typically depended on the judgement of the board or CEO with few, if any, guidelines
defined for determining individual amounts.
• While the bonus may be received – and valued – as recognition for a job well done, there is
usually no link to specific achievements related to the recipient.
• As a result, bonus plans are increasingly viewed as weak in influencing future behaviour.
Factors resulting in negative publicity
• Competitive pressure: The increased emphasis on at-risk pay for senior executives has forced individual
companies to increase annual incentive opportunities to remain competitive in attracting and retaining
executive talent. In some instances this has led to significantly greater payments over time for constant
levels of performance.
• Timing mismatch: There is often a lag between the results achieved and public disclosure of incentive
payments. This sometimes leads to large incentives paid only being disclosed at a time when corporate
performance has deteriorated. This receives far more media attention than when modest payments are
disclosed at periods of enhanced corporate performance.
• Wrong measures: Incentives are sometimes linked to measures that were appropriate at the start of
the period, but not appropriate regarding critical aspects of the business results at the end of the year.
• Poor calibration: Formula-linked performance rewards are typically established within a framework of
expected outcomes. Incentive payments can reach levels well above the range of acceptable if the
results achieved are substantially beyond those initially contemplated. Typically, a major change in
expected financial performance is a result of extraneous factors, rather than executive actions, and this
increases shareholder (and general community) concerns about extraordinary incentive payments
Long term incentives
• Long-term incentives (LTIs) have been the growth element of South African executive
remuneration packages over the past 15 years.
• We have very much followed the United States of America’s lead in introducing LTIs to executives,
as well as in delivering this component through equity-based vehicles (shares and options).
• Some organisations without – or unwilling to provide – access to shares and options for executives
have used cash-based incentives; however, this is a very minor part of the overall South African
remuneration experience.
• Although there has been a constant progression in the value of equity-based LTIs provided by
major companies, there has also been a series of changes in the preferred form of equity used.
• Options have become the overwhelmingly preferred mechanism for the delivery for LTIs since the
mid-1990s.
• More recently there has been a growing use of restricted share allocations.
• This provides for the vesting of share grants to executives when specified performance hurdles are
met
Philosophy underlying executive
remuneration programmes
• A clear statement of philosophy involves high-level agreement on issues such
as:
• The relationship between fixed and variable pay.
• The extent to which variable pay relates to individual, business unit and corporate
performance.
• What performance indicators are used and how they are measured.
• How sustainable performance over the long term is rewarded.
• How total pay levels are benchmarked, and against which organisations.
• What expectations there are about share ownership by directors and executives.
• How this is managed (for example, performance-based share plans, share purchase
loan plans).
Why do we need a remuneration committee?
Governance
• Nonexecutive directors and remuneration committees are playing an increasingly important role
as companies focus on issues of corporate governance.
• Companies that fail to comply with the JSE listings requirements may face censure and possible
fines.
• Depending on the breach, an organisation could be suspended or have its listing terminated.
• Throughout the 1990s, especially with the emergence of a new economy, proponents of the
alleged virtues of shareholder value as the primary objective of companies largely drowned out
other voices.
• In just a few years since then, scandals have abounded, scoundrels are being rooted out, and the
hunt for the scapegoat is on.
• Rules and practices in remuneration and disclosure can facilitate or inhibit the effective operation
of governance
Restoring investor confidence
• On 2 December 2001, Enron Corporation, then the seventh-largest publicly-traded corporation
in the United States of America, declared bankruptcy.
• This bankruptcy, the largest in United States of America history at that time, sent shock waves
throughout the world.
• Thousands of Enron employees lost not only their jobs, but a significant part of their
retirement savings.
• Enron shareholders saw the value of their investment plummet.
• Hundreds, if not thousands, of businesses around the world were turned into Enron creditors
in bankruptcy courts and are likely to receive only a small portion of the dollars owed to them.
• Since the global financial crisis in 2008, some companies had substantially large bailouts from
governments and continued to award large incentives off the very low base.
• This has rocked investor confidence and there has been a proliferation in governance
frameworks in the attempt to improve governance
Non executive directors fees
• Setting a fair level of remuneration for nonexecutive directors (NEDs) is a challenge.
• This is often a case of the police, judge and jury being the same person.
• Being a matter for shareholders to vote on, the policy underlying the setting of fees needs to be clearly
determined, implemented and communicated.

Context and definition

• It may appear strange that one would have to define the concept of what a NED is.
• Given the need for flat, fast, nimble and flexible structures, the line has blurred a bit between the various
categories of director.
• It used to be easy – you were either executive (you have an office, employment contract and make daily
decisions in the organisation, and have a role in the daily running of the organisation), or nonexecutive (you
attend board meetings every so often and make longer-term decisions, do not have your own office, and so
on).
• But what if you are nonexecutive, and have an office at the organisation you serve and work, say, eight hours a
day, for, say, three to four days a week? Which set of principles should one use to set the pay level – those for
executives or those for NEDs?
Factors to consider when setting NED fees
• Some of the most important factors to consider when selecting and setting NED fees
are set out below.
• From an individual’s point of view: Reputation, track record, experience, specific knowledge
and skill, industry understanding, network reach
• Role played: Chairperson or committee member, main board, audit committee, remuneration
or HR committee, nominations and governance or other committees such as risk, career and
succession. Sometimes NEDs are even used to assist with the planning or execution of
projects. Lead independent directors (LIDs) also earn an additional fee in relation to their role.
• Organisation type: Organisation size – assets, turnover/sales, number of employees, market
capitalisation, complexity of work/industry – single or multiproduct or service, impact on
sector, industry, national economy or international impact (impact on one sector versus the
impact on the national economy is always debatable, as most would argue that they have a
wide sphere of impact and influence
A NED pay model
• There are very few pay models available for NED pay because up until now, it
has often been a personal negotiation between the CEO or chairperson and
the NED.
• With transparency comes the need for explaining why pay is different or the
same.
• For the most part the trend is typically for NEDs to all receive the same board
fee and then additional fees in relation to their involvement in committees,
serving as chairperson etcetera. Robust models considering the most
important factors have been developed, supported by remuneration
database
Structure of NED pay
• The structure of NED pay takes four main forms:
• Fees for attending meetings.
• Retainer paid, and frequency (for example, annually).
• Combination of fees and retainer.
• Earn your money (shares or bonus).
Remuneration committees
• Companies should appoint a remuneration committee (RemCo; plural: RemCos) or
other such appropriate board committee, consisting mainly of independent
nonexecutive directors, to make recommendations regarding executive and CEO pay.
• This committee must be chaired by an independent nonexecutive director. Boards
should preferably consist of a majority of nonexecutive members as well as several
independent-minded ones

There is no legal maximum or minimum in terms of size.

• Depending on the size and the complexity of the organisation, the range is from
three to seven members, with three or four being the most common.
• RemCos generally meet on average four times per year but can meet up to six times
per year
Selection criteria
• The following are guidelines that may be used when selecting RemCo members:
• Availability: The candidate’s ability to help your committee versus availability for service is an issue worth
considering.
• Reputation: Usually there is a trade-off between reputation and availability.
• Communication skills: It is sometimes dangerous to assume that because someone is a polished public speaker, he
or she will be an effective communicator.
• Experience: This usually cuts down the training time if the members have the right experience.
• Leverage: This refers to the ability of a director to expand the relationships of the board and provide additional
management expertise.
• Remuneration expertise: This is a desirable quality, which will reduce the need for training and enhance the quality
of deliberations by the committee
• Given this anatomy, RemCo members need to have a good appreciation of a host of things, the primary
ones being:
• The industry norms and external environment.
• Remuneration theory and practice.
• The organisation strategy and operations
Executive process
• To be successful, RemCo relies heavily on the executive management to prepare board
packs in advance for pre-reading.
• Too much or too little information wastes a lot of time. Often, executive management
expects RemCo to make vital decisions without giving them the full remuneration picture.
• The full picture should include information on:
• Guaranteed package, including what’s in and what’s out, such as benefit schemes.
• STIs – short-term incentives.
• LTIs – long-term incentives and/or shares.
• Retention arrangements. Any proposal submitted for RemCo’s consideration should include
information on where it fits and how it measures up relative to:
• Total earnings and total cost to organisation, and all the components of remuneration.
• Remuneration mix i.e. the ratio between fixed and variable pay
Possible solutions and the way foward
• There are many possible ways of resolving the frustration and conflict between
RemCos, boardsand executive management. Some of the more important ones
are:
• Well-defined Charter or Terms of Reference
• Well-trained RemCo members
• Comprehensive RemCo packs showing all the components of the remuneration structure,
the total cost and how the proposal will affect the total staff costs whilst benefiting the
organisation.
• A clear definition of the market and peer groups used for benchmarking purposes.
• A good anchor for the CEO’s package.
• RemCo has access to top remuneration experts for advice and to validate executive
proposals
• Codes of good practice assist with delineation of responsibilities
Critical success factors for good corporate
governance
• The following are pivotal to enforcing good corporate governance:
• Enhanced disclosure.
• Shareholder activism.
• Strong financial means.
• RemCo comprised of independent nonexecutive directors.Greater disclosure
would deter organisation directors from accepting excessive rewards.
According to the King III Report, levels of remuneration should be sufficient to
attract, retain and motivate executives of the quality required by the board.
So, there needs to be a balance between excessive rewards and the
responsibility of attracting the best to run the organisation
High level duties of RemCos
• Scope-creep and searching too deeply into the organisation
sometimes hamper the effectiveness of RemCos.
• RemCos have several high-level duties, which are the following:
• Adherence to good corporate procedural rules.
• Knowledge of the big picture.
• Decisions on how much remuneration is enough.
• Review of programmes from the shareholders’ perspective.
• Review of complex plans and programmes.
• Review of controversial plans and programmes
Where the CEO fits in
• The question here is: where do the most senior management (for example, the
CEO) fit into RemCo?
• How much influence do they have?
• World trends are as follows:
• RemCo is a subcommittee of the full board and is answerable to the full board.
• Typically, the chairperson controls board meetings, where RemCo’s recommendations are
considered and approved or not approved.
• The CEO attends RemCo by invitation.
• The CEO does not have a vote on RemCo.
• When RemCo discusses CEO pay, the CEO is excused.
• Typically, the company secretary taking the RemCo minutes would also be excused when
discussing the CEO’s pa