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With as much debate that is surrounding the cloud of “fair remuneration”, one may ask how do you define fair remuneration?
What is the amount that is considered as fair remuneration and what factors do organisations need to take into account when determining this value?
In the absence of a formal definition, there will be many differing opinions as to what is considered fair remuneration.
The concept of fair remuneration has instigated considerable debate in the workplace as to defensible rationale for any variances when determining the levels of pay and what is also generally considered an acceptable “differentiation”.
Which factors determine the differentiations?
King IV (2016) states that remuneration that is, or is seen to be, unfair, excessive, or irresponsible can result in a decline in stakeholder confidence, which could threaten the sustainability of the organisation. Where such perceptions are systemic, the sustainability of the organisation could be jeopardised.
We can further quote the South African Labour Law, more specifically the Employment Equity Act [No. 55] that has also prescribed that no individual should be treated unfairly on the basis of race, gender, age, language and sexual orientation. Thus, Equal Pay for Work of Equal Value was also incorporated into labour law to address such discriminations.
Factors that could possibly justify differentiation in pay could be linked (and not limited) to:
• Length of service/tenure;
• Seniority/Level in organisational structure;
• Qualifications, ability, competence or potential above the minimum acceptable levels
• Performance;
• Temporary employment to gain experience and training;
• Scarcity of the skill;
• Market related value for the job; and
• Any other factor that is not unfairly discriminatory.
Internal Equity vs External Equity
When interpreting fair remuneration, it is important to consider internal and external equity concepts. The notion of internal versus external equity is effective and relevant when making pay decisions and is an immeasurable benefit that influences an organisation’s adoption of their unique Remuneration Policy.
Internal benchmarking is about equity and ensuring the pay curve within the company is acceptable. The pay curve should represent an exponential progression from the lowest grade to the highest i.e. the slope of the pay curve should reflect a gradual incline, as more complex levels of work evolve through to strategic levels. Wide pay ranges are typically also considered as part of an internal equity review, so that the organisation can articulate the reasons for the ranges.’ Disproportions in pay within an organisation (referred to as ‘internal inequity’) can pose significant threats to the success of the organisation as its employees are deemed to be the engine of the organisation that should be continually driving the organisation strategy to attain the main objectives.
In contrast, external benchmarking is about ensuring that the organisation is able to attract and retain employees and it is able to establish if the company is executing its remuneration strategy effectively (paying at its targeted percentile). But external benchmarking does not necessarily address whether the market is paying a living wage.
An important consideration when benchmarking will be to identify the industry in which the organisation may lose and or attract its key resources, particularly for scarcer jobs.
It is evident that certain jobs will be more portable than others, prompting a larger comparator group whereas niche jobs that are only found in a specific industry could be compared against a more representative comparator group.
King IV (2016) suggests that to embark on an external benchmark, an organisation must select an appropriate peer group from comparable organisations, with reference to organisation size, geographical location, business life cycle, revenue, profits, market capitalisation, geographical footprint, business model, and number of employees.
Importance of benchmarking
According to the figures derived from companies listed on the JSE, the following are the percentiles for the employee costs as a percentage of cost of sales:
- 25th Percentile 18%;
- 50th Percentile 29%; and
- 75th Percentile 41%.
It is quite evident that the employee costs make up a considerable percentage of the expenses of an organisation and this substantiates why an organisation should continually keep track of these costs to attract and retain the most suitable candidates. The success of any organisation is contingent on happy employees and organisations that recognise the impact that happy employees have on their performance will continually review their reward offering to ensure that they remain competitive.
Remuneration is one of the many ways to ensure that your employees remain satisfied. All these elements are intertwined and must be continually reviewed and updated accordingly. Frequently communicating issues around reward creates an atmosphere of transparency within the organisation and employees should be involved in processes, in order to assure that they feel valued and appreciated.
• Smangele Maphanga is sales manager and Afika Hangana is a client executive at 21st Century
