2007 Professional Development Workshop: Felt-Fair-Pay - Compensation Session 1

Speaker A The topic is of our presentation. Our day long working together actually is requisite compensation. I worked with Elliot over a period of 20 years and it's not on.

Speaker B Something around. Thank you.

Speaker A I think will have to take a chair from there. Good. And I think there's still a lot of more work to be done in requisite compensation, but the group that I have gathered together has been working very deeply on the application of requisite compensation. So what I'd like to do today is I would like to start the presentation by going through the basics of requisite compensation. And then there are a number of people going to present on the application. So what I'd like to do is have each of them tell you a little bit about themselves and about what they're planning to present. And then I'd like each of you to tell us a little bit about yourselves and your interest, in particular interest in requisite compensation, what you'd like to achieve from spending the day with us.

Speaker B So let's get started.

Speaker A How about Charlote Bargrave? Prior to that, I was a senior HR professional in the pharmaceutical industry, and that's where I met Elliot Tan and Nancy, given all of the change that was going on at the time, we decided to take a look at requisite and had a very comprehensive project, including compensation. Even went to the probably somewhat radical step of eliminating sales incentives. Thank you. Sandy Cardello. I don't think I need that. No, but you need it for the camera. It's the camera. My cheerleader voice. Sandy Cardello, First National, Nebraska. I've been working with Nancy for seven years now. Yes, 2000, and have had a number of different roles in the organization and am currently working assisting the president of our organization, putting together the holding company positions. And my talk today will be about what I'm going to call the prerequisites of things that you need to do in terms of getting managers ready to even begin to have the compensation conversations, because they want to go there first.

Speaker B But they don't get to voice here. I think before we even talk about compensation, as I said to Nancy, we wanted to reframe the context to talk about enterprise performance measurement and enterprise performance management. And what Kenneth and I will talk about and Ken will take a role for a second, is really looking at how do you value the corporation in terms of economically, what is each level worth? How do you put numbers around that? How do you value the human capital, what would you pay for the business and how do you start looking at wasted compensation across all levels? We also just finished probably the most current research in the world on CEO to Neo Pay Differentials, which has just been shared with all the top institutional investors in the world. And they've asked us to kind of come back and share with them again. So we'll be looking at structure, pay differentials, current research that we've just completed, et cetera, to continue forcing it away, and then, as I said, how to link that to shareholder value. So, Kenneth, do you want anything you want to add? Well, since I'm new here, just introduce myself. I'm Ken Stewart. I'm an actuary by training with a background for most of the last 25 years in mergers and acquisitions, international corporate development and enterprise risk management. That's sort of my morning job. And my afternoon and evening job is working with people like Mark and Nancy in applying some of the insights out of global business development and corporate finance to work on matching enterprise structure and pay and making them work together as part of a functioning hybrid.

Speaker A Sabrina Hamilton. Good morning. I'm Sabrina Hamilton. I'm vice president of Global Novice International, a multinational company that was divested from Monsanto back in 1991. I'm here with my president, and what I want to show you today is basically how to develop a compensation structure. And you can do it globally all over the world. Pretty simplistic once you decide what your structure is for your organization to be able to manage a pay structure without having to spend hundreds of thousands of dollars on compensation consultants. And I apologize if there are any of you in the room, but I can show you how to do it and do it internally, and it will last you over a good amount of time, and it's a very fair, very easy way to manage compensation globally. Thank you, Sabrina. So I hope that gives you a quick overview of what we're planning to do. We've got a pretty deep background here, as you can see, and compensation. So I think that the questions you have, you can either ask us as we go along or save them for afterwards. And we can have some continuing discussions because it's a field we can all learn on a continuing basis about, I guess. Does this work this way, passing it around? Good. So let's just have a very quick introduction from each of you so that everyone knows who else is in the room, what kind of resources are here, and what your particular interests are with regard to compensation. Thad?

Speaker B Thad Simons, president of Novice International. I'm an attorney by background. I've been in this job now for about five years. As Nancy said, we started with Requisite about 15 years ago, working with her and at times with Elliot directly. And of course, it's never ending process. As the organization changes and grows, so does the management structure have to change and grow. And that's why I'm here, to learn more about that.

Speaker A Thank you. Allison. Good morning, Allison. O'Neill. I'm affiliated with First National, Nebraska, and simply here to learn from all of you and all of these people. Good, ken and I'll let you pass it around the table.

Speaker B You did say short, very short.

Speaker A Otherwise.

Speaker B That'S because it was about 15 years ago, I had the privilege of serving on the executive of Accord and we looked at each other and said, who do we want to learn with? And Elliot Jack's name came up right top. And that's how we developed a significant cadre of interest around Toronto. Had then the opportunity of facilitating, I should say coordinating some of the events that Elliot presented. Worked with Nancy and Catherine on a project here in Toronto with Ontario Power and have had my own consulting firm for the last 30 years. And once, you know requisite, you can't go back to anything else. And yet I have not had any in depth experience on the requisite, on the requisite pay teeth. So I'm really keenly interested in the experience in this room and in the presentations. That's not a model for shortness. I will try and take that into consideration. Jim Mcmarer with First National Bank of Omaha. I as well, I'm fairly new to requisite organizational theory. I've only been working with it for now about four and a half years. I'm here to learn, I am here to absorb the information and take it back and try and implement more of these concepts across the bank as a whole. My name is Jonathan spatzel. I'm the president of an industrial distributor here in Canada. We have about 100 employees and we're on a quest right now to redesign the organization on process terms, which gives us the answer for what we need to do, but it's not giving us all the answers for how we need to be structured. So I'm looking to fill in those pieces.

Speaker A Sheila Dean from People Fit Australasia with Barry Dean. We have our own practice, deep experience in managerial practices, but requisite compensation is one system that we need to deepen our knowledge and understand it. So we're here to.

Speaker B Morning, Peter Taylor, I'm Deputy MD of BIOS in Europe. And interestingly, our work involves working with individuals and organisations using the concept of levels of work framework. And increasingly we're finding that there's more interest in some of our clients in working with them, following their use of peer consultants. So they've had people like Watson, Wyatt and Hay, and what they're interested in is working with us to say, well, how does that fit with levels of work? So it's an increasing area for us and one of interest for us. Hence my interest in the session today.

Speaker A Thank you.

Speaker B Good morning, I'm Richard Sale, I'm from Cyprus. I run my own business there, which is designing, developing and distributing computer based and internet delivered assessment, including capability assessment. According to Ro, I do no work in compensation whatsoever, but my global associates do. So I'm here to learn. I have a long military background, which of course also makes me interested in this because we never felt we're being properly compensated. My name is Desi Fabio. I come from Brazil. I'm a medical doctor. My personal needs need me to attract. I work with systemic thinking consultancy for families and business and in the last year, this year excuse I make in contact with this system, I become amazed how congruent is this system of Elliot Jacks with the system's way of thinking and I'm here to learn more about that.

Speaker A My name is Katie Hunter and I've just joined CVRD Inco and we'll be heading up the global practice on compensation and benefits and I'm new to Ro and just here to learn like everyone else.

Speaker B My name is Renato Contagion. I'm from Brazil, from CVRD. The one that recently bought CVRD Inco. And I'm here to learn like everybody here this methodology. I'm Jerry Cranus, I'm the CEO of the Levinson Institute just outside of Boston and been working with requisite organization for about 20 years and have had a few attempts at requisite compensation. Not any of them have been terribly successful so I want to see what's gone on in the field since then. My name is Tom Mench from Seattle, Washington and most recently been in healthcare environment trying to do requisite leadership and lean production redesign and went out on my own and I'm just here because I'm just curious what this is. I've heard about it for years and have no idea how it would really be done in the real world, so to speak.

Speaker A Thank.

Speaker B Hi there, philip Hunter, I'm the newest member of Core International, a small consulting firm right here in Toronto based on requisite practices. My background is in industrial organizational psychology so I'm really looking forward to that whole integration and really looking forward to today as well.

Speaker A Good morning.

Speaker B My name is Lindel Neff, and like my colleagues, I'm with CVRD Inco. Limited except I work up in the.

Speaker A Great North in Sudbury, Ontario and I'm.

Speaker B Looking forward to the session because I haven't figured out requisite compensation yet.

Speaker A Good morning, I'm Marie Christine Taylor, come from Sweden and I work with the Swedish government and I'm mainly in this session to learn more about compensation. Psychologist. My company is Deletestress.com and I work as a consultant and executive coach in helping people get over stress and I think learning as much as I can about the financial end of things is the best thing I can do and that's why I'm here.

Speaker B Good morning. My name is Rolf Lundgren, also from Sweden. I'm within National Road Authority where I'm director of strategic planning and head of organizational development. Been working with these kind of ideas for many years and also run a consultancy company. So interesting to see what you've done. Good morning, my name is Paulo Cantoriks, I come from Argentina where I run a consulting practice. I've been working with a requisite organization since 1992 where with Elliot and Jerry Cranes, we run a whole project in a steel manufacturing company in Argentina and about twelve years ago I began consulting with companies in Argentina and Latin America. In that project I referred before we devised a compensation system based on Elliott's principles. And since then I have also the opportunity to develop some systems in other companies. So I'm eager here to learn and also to exchange some experiences. Good morning, I'm Dan Smith, I'm from Philadelphia, and I'm obligated to say how you doing. I've been working in this broad arena for a number of years and have worked with Elliot to implement stratified compensation in the utility environment. Looking forward to learning more about how that practice is going. My name is Richard Brown, I'm from the UK. I'm long interested in this particular area of work because Wilfred Brown happened to be my father. So I've actually seen compensation systems of this type actually in use. Glass, in fact, used to use salary progression curves with slide rules, in fact, and they paid nearly all their employees on this particular basis, which I think is the only example I know of in the UK of it actually being used. So I'm interested to hear about how it's developed since then.

Speaker A Hi, I'm Connie Schoots, I'm here with my colleagues from SpainA and we're here to learn about basic concepts of record compensation, and I'm really looking forward to it. Hi, I'm Terry Howells, I'm here with my colleagues Jonathan and Connie's, and we're just always looking to learn about anything that will make us effective and efficient in the organization.

Speaker B I'm Hal Soles from Buenos Aires, Argentina. I consult in Argentina and other countries in Latin America. I have been involved in compensation systems twice. Once in a very large government organization, and another one in a small company only twice, because it's one of the hardest parts in an organization improvement plans to get at. And Elliot says himself, he says compensation should come at last and it does require special conditions. And I'm very interested in what Nancy Cardillo said about the conditions for implementing requisite compensation. Of these two terms I did it. The first one in the large organization had very mixed results because it was an extremely complex organization. And the other one, which was a small company, the results were absolutely fantastic. They sort of multiply and expand over all the areas of the organization. And lastly, I think one of the benefits of learning this theme, having it clear in mind, is seeing by reflex how awfully dysfunctional and destructive are many systems that are all over the workplace, anywhere. Like Elias said, this is a cancer that's heating up our society.

Speaker A It.

Speaker B I'm Jamafis, from Belgium, europe. I'm managing partner of Bridges for Choice, a consulting firm. I read Elliot Jake's book around 30 years ago, but I only started to work with it some three years ago in organizational development projects. And what I'm particularly interested in is the relationship between compensation and changing compensation systems so that they can support organizational change.

Speaker A Hi. I'm Malcolm Hunter and I'm actually with bank of Montreal. And I think you work with Anne Stevens, who started up our group. So we're requisite based, not totally requisite, but I'm an organization design effectiveness and we bump into compensation all the time. So when we go into design, I work with the corporate groups. It's always we have these specialties I've got to pay them, I've got to pay them. How can you make the job or the structure so that I can get the people I need and keep them? Thank you very much. Back up to you. Thanks a lot. And I think you just joined us. Would you just give us a quick overview of your background and why you're here or what you'd like to get out of? Yeah, I just retired from the army after 26 years of active duty, and the army asked me to come back and work as a civilian for the army, doing redesign initiatives on the institutional side, which is the non combat structure. I am new to this business and studying with Dr. Stephen Clement, who co authored executive leadership with Mr. Jacques and my name is Liz Wilson. Thank you very much. Well, you can see there's a varied background in the room and a lot of different experience, and we hope you'll share your experiences with us as well. As we go through the day and perhaps in a lively discussion toward the end of the day. I would like to start with an overview of requisite organization. And I put this together as a result of 20 years of working on what is requisite compensation. And I know it's not perfect, but we're getting there. So I am going to, at the end of the session, pass out to you a comprehensive article that I have written on the topic which follows the discussion that we're having now. And I'm certainly open to suggestions for improving this article. It's a draft form article. So first let's start by looking at what is requisite compensation. Have come up with this definition of compensation as being a fair and systematic system that provides internal and external pay equity. There are both aspects to it. And what does it consist of? As I worked with Elliot, he felt that it was all the compensation that anybody received except for benefits that went to all employees. So if there were benefits that only went to certain employees, such as a car that went to salespeople, that would be included in the compensation of the salespeople, or certainly that part of the compensation where the salespeople used the car for themselves. So in all of this there's a certain amount of discretion, but where it was unique to a role, it was added to the compensation, incentives were added to the compensation. Is there any questions about what total compensation consists of in the sense that we're talking about it here? Because whenever I say pay or compensation, I am talking about the total remuneration someone receives for their work.

Speaker B Yes, it includes, for example, health insurance payment by the business.

Speaker A If all employees receive the same amount of contribution toward their health insurance at the time that this was developed, it was not included because it was a general benefit for all employees. If some employees had extra insurance, then that would be included as additional compensation for them, but something that everyone gets the contribution in the United States, for example, towards Social Security is not considered in looking at the total gross compensation. This, as we all have found, is in the process of changing because at the time that Elliot was doing all of his work, we had a Social Security system in this country. It is going away. What does that mean to us? Many people had very comfortable and substantial retirement plans. Those are disappearing. So the components will change, but the relationship between and you'll see that in particular with Sabrina's presentation, because the components of total compensation in various countries around the world vary greatly. But we look at the total compensation. Yes.

Speaker B Then I think it's always been one of the most difficult points of knowing what are the different components of compensation, which are the ones you count. And of course, that becomes very important once you go global because the structure of compensation in different places is very different. But just staying in the US for a minute, it's very well to say everyone participates in the Social Security system for some level of retirement benefits. But how does Elliot or the theory apply additional retirement benefits from a pension plan for a One K plan? Because those are all driven by driven off of your earnings. So the amount the company is putting into those plans is different based upon your level of earnings. It yes. So what is the answer to that?

Speaker A You can ask me if I'll sit right next door to you. I'll let her answer, but let me help her out with this. I think in other countries, places like Brazil for know things, social welfare benefits, meal tickets, those are all parts of Remuneration. So you would count those things. And I think the answer is yes to pension contributions because those are directly related to compensation. So all over the world I count all those things when coming up with the total compensation number. And I think the answer is these things are changing and a certain amount of discretion has to be used. There's no absolute answer here. This was more of a general answer.

Speaker B Perhaps the concept that we used to apply is that benefits in lieu of money. So anything that you could value as money, I think that can be part of total compensation.

Speaker A Yeah. You're all familiar with this next slide, I think, so I'm not going to spend time on it, but it's absolutely essential to be dealing with this and have your organization requisitely structured as the starting point for actually anything in Requisite work. And I just included this slide in here in case there was anyone in the room that didn't have a particularly deep background in requisite organization. Historically, a system of grades began to take the place of valuable compensation. And it began to be the situation where grades drove the amount of compensation rather than people being paid for the level of work of the role they were doing. In fact, I think it's safe to say that today in most organizations, there is not a concept of the fact that pay needs to be differential relative to the differential complexity in levels of work. And that's what we are trying to bring into the workplace. That basic compensation. But first you have to understand the differential levels of work. When I began my career and I worked in General Electric, I worked in At T, I worked in Macy's, so I had a managerial career in some very large organizations. And they typically had 10, 12, 14 layers in the organization. So people were just piled on people. And the way they dealt with it IBM, same thing. The way they dealt with it was to reorganize a restructure every two years, because most people, one way or the other were in a bad situation because they didn't have a value adding manager. But if they knew that they were going to move into a new role two years from now, they could say, well, they could just sort of sit back and say, well, I can stand this because a year from June I'm going to get a new assignment. And then in the 70s, as we began to have to downsize and couldn't have that kind of waste in organizations, we began to run into really some serious problems because there was no theoretical base or framework or logical way that people knew of to structure organizations. And each organization became restructured in an ad hoc way. I remember working with the head of technology for IBM because I was in technology consulting for many years. And he said to me, it was the first time we had to downsize at IBM. And he said, I don't know which of my people I want to give a death sentence to. And I said, what? And he said yes. He said, IBM employees. Because they all have been employees for life. He said, typically live from one to two years after retirement. Think of the changes that have happened. And that was in the 80s, that was in the early 80s when I was working with him. So think of the changes that have taken place in 25 years. And all of us, I hope, are trying to bring about a lot more changes to make organizations a lot more humane. Again, this is something you're all familiar with, but until these kinds of problems on the left are overcome and you don't have that kind of jam up that we all lived with in the, you cannot implement requisite organization. Well, you can make some stabs toward it, but you can't do it properly. We need to have it just right, and it doesn't work well where there's a gap either in setting up requisite structure. Welcome. Hi, Gavin. Bring your chairs up to a table if you like. Take your is there another do we have chairs? Good. I'd like to just take a minute to have Catherine introduce herself, because I'd like to call on her as a resource, too, during this. Me? No, he needs it on this thing. Just use that. That's okay. Introduce myself. Most of you, certainly some of you know who I am. I'm very glad to be here. I was here two years ago, so your faces are familiar. I know very few of your names, but I am interested in getting to know who you are and what you're doing. Nancy, you tell them who I am. Well, Catherine is Elliot's long term colleague and wife widow, we're sorry to say. Well, right. But I'm very interested to be here and to learn who you are and see what you're doing. All right, so back to establishing a requisite compensation system. In order to establish a requisite compensation system, you have to establish work bands within the strata of the wells. That is the first step, and there are a number of ways of doing that. The correct and absolute way is to time span a role that will tell you not only which strata the role belongs in, but whether the work is a low, mid or high in that stratum. Now, what I have found in some organizations is either they are so big that they don't have an opportunity to time span their roles, all of their roles. So what we attempt to do is time span key roles and compare the roles to those key roles, and then we sit and gear roles across the entire organization so that every role in the organization is placed in a work band within a stratum. This is the first step in establishing requisite organization. A lot of work is involved in that step. Have any of you been involved in doing that? I know Fab has done it a number of times. Is there anything that you would like to add to saying about the process of doing that? What worked, what didn't work, what the problems were? Anybody like to give us some background or contribution on that's?

Speaker B Good. I would just underscore the experience that you pointed to Nancy of. Without requisite structure to start with, the compensation discussions become confused and actually probably damaging to the enterprise. The other issue that comes up is the difference between evaluating roles and implementing a system relying on the incumbent versus the incumbent's manager in MIM plus one. Because very often at the stages we're concerned with compensation systems, the people who are in the roles are not always well placed and are a poor reference point to evaluate and have set decisions. So the issue of a requisite organization to start with and then relying on high level, not low level to sort through the roles is critical. Good.

Speaker A Jared, you want to add something?

Speaker B Well, actually there are several issues. There are some roles that are just very difficult to time span planning roles, some finance roles, and that's just a fact of life that I've learned to live with. Elliot and I used to have long debates about rolling historical accountabilities as a way to get at it. The second is that.

Speaker A When you get.

Speaker B A group of managers into a gearing session and they know eventually it's going to deal with compensation, the political nature of that session is just sometimes overwhelming and hard to counter. And my experience is you do have to start with the senior executive and go through with the senior executive his thinking and fortify his courage to maintain an honest discussion about the basis of the complexity of the role.

Speaker A Yeah, I'd like to underscore that fortify his or her courage because it does take courage. Harold, do you want to add something?

Speaker B One of the difficulties I have found when the organization, the structure is nonrequisite is that you go to the boss to roll and it turns out that this supposed boss is not truly assigning tasks. So at the beginning I got terribly bogged down and I could spend 2 hours with a manager, which is awfully much, without getting any real information. And another comment is jerry just said some roles are difficult to time span. What I found is that you can do some in 15 minutes and do it well, and others may take days, so it's difficult to predict the time that it's going to take you.

Speaker A Anybody else want to add anything? Pablo?

Speaker B Sometimes problems that appear is in the gearing process where the manager, once removed, the one level up, doesn't know very well about the structure. That particularly happens in large organizations where you got to have some other inputs in order to have a proper gearing.

Speaker A Do you want to think because you had a lot of experience in Ontario Hydro? Is this three, four? Okay. I really don't want to take over your session, Nancy, and you know very well that you know me well enough to know I won't let them. Good, good. Don't let me do that. My first comment is who are you interviewing for the time span that you were talking about? Time span is the measure of a human intention. It is the basic building block of Elliot Jack's work. If you do not know the difference between an extant time span and a newly designed organization with newly designed roles, time span, you're already doing something other than Elliot Jack's requisite organization. So I could not tell in the room what your time span was. I know what Nancy's time spans, I know what she's talking about. But the question. Is. Do you know what you're talking about when you talk about time span? Because the time spanning of an extant current role is significantly different from the time span of a newly created role that follows the work. So that's it. And I think we could have a full day session on time span. And I think that might be a very good thing to consider for next year, because the next conference, because it is a complex topic, but it is the building block without it. You are building on science, not rock. Yeah. In my experience, and I'd like Catherine to add this, there is only one way to time span a role, and that is to time span from the top down, from the CEO working down. And the time span is only found by discussing the intention of the tasks assigned to a role by the manager of that role. That is the only time span measure that exists, because it only exists in the mind of the manager. And you don't time span what people think their role is the role incumbent. I sometimes will check it with the role incumbent because there'll often be a lot of misunderstanding. But the time span of the role is the longest task that the manager actually is assigning to the role. And it cannot be a hypothetical task, it must be a real task existing in the manager's mind. That's sort of a very quick and I see Catherine shaking her heart in agreement. Time span is a very large topic, but it is an absolute measure. Yes.

Speaker B In our organization, we're at the crucial moment where although our staff, by and large are not unhappy with the compensation, as far as I can tell, but I'm entirely unhappy with the rules. So I'd like to compensate fairly for the rules, but not for the rules that exist. I don't want them to exist anymore. They're all going to change. So I understand it's get the rules right, then compensate, but I'm not quite sure then I understand there's a difference between the extant rules and the new roles that don't exist, but I'm not quite sure how to do that. Figure out what the new roles should.

Speaker A Be, insight into that presentation. Which is exactly why we added that. So that we weren't just talking about felt fair pay per se, we were talking about the kinds of difficult steps and time consuming steps. There's nothing easy about this. There's nothing quick. It's not a quick fix. It's setting up your organization properly, requisitely and humanely, and it takes time. And Sandy will give you some insights into the aspects of that. I think we could spend a week on this topic easily taking each one of these pieces apart. I think it would be good to do them on the session in the future. That would be important. Good. Somewhere along here. Here we go. The second step in establishing requisite compensation. Once you have gotten your organization requisitely structured and you have placed roles within a work band, within a stratum is to dipstick your local market. And in the case of novice, they have employees in 72 countries. So again, these are time consuming issues and not easy things to do. But many companies are going to typically look at what the salary structure is in their community or communities. Elliot said to check 30 to 50 typical roles in companies similar to yours in your area and particularly pay attention to the roles in two and three because what you're searching for is the breakpoint. The highest salary that is felt to be fair at stratum two and the lowest salary that would be the low salary for stratum three. Now, where this came from, I don't know, maybe Richard can have more on this one because this is where that piece of information came from, what we all call the hockey stick. A great deal of research was done about salaries and salaries made the same pattern wherever they were looked at. The highest salary paid at two became the basic number upon which to put a salary structure. The breakpoint between one and two was 55% of that number and the lowest salary at stratum one was 33% of that number. And from the time that you establish that X, the numbers double each time you move in a stratum. And it came from a scattered diagram of people answering the question what total compensation do you feel would be fair for the level of work you're being given to do today? Regardless of whether you've got more capability or not? That's irrelevant. What do you feel is fair? And wherever this question was asked, the diagram followed the same hockey stick pattern. And that's where this theory or proposition came from. And after I wrote this article, I said to myself, when did I forget? I forgot. The basic piece is the next version of that will include the hockey school. So here are the pieces in implementing determine the requisite level of work, establish market comparables for the industry. Then decide if your organization is going to pay at above or below what that X seemed to be for your community. So for example, in one community, one organization I work with pays below that X because they're looking at their competition for employees. And the other places that employees are working demand excessively long hours and they do not. And they feel that they can pay just below what would seem to be the absolute X for their organization. This is a conscious decision that can be made. Other organizations I have decide they're going to pay somewhat above the X. They don't have a lot of employees. They want all their employees to be top notch and quality employees. They don't want to run the risk of them being stolen away by competitors. So they set their basic X a little above what they found in their community. So that is a policy decision that the organization can make. There are ramifications to that decision. Then I said determine X and then calculate work bands and pay steps based on the requisite Felt Fair pay multipliers. Now, we have worked out why am I going backwards here's just a digress. Here are some of the data sources that we have used within communities to find out what the salaries are in communities, what the compensation currently is in the communities. Most human resources professionals have contacts in other organizations and they usually will share information because people want to work toward Felt Fair reasonable pay and need to share this information. The information can come from recruiters, can come from job applicants, it can come from exit interviews. And it's something that we found interesting in work that Mark was doing. The manager of that open to hire role knew what he had to pay to get the right employee so the human resources person can talk with the managers. What do you think is being paid now, again, just to get a fix on what the salaries are currently in organizations? I personally have found that X has moved up much more rapidly than any increases in cost of living or inflation in the last four or five years. And I'm thinking Sabrina is shaking her head in agreement and I'm thinking it's because of pensions going away. I think that's one of the reasons and the worry about Social Security not being there 20 or 30 years from now. And so X value is going up faster than it had been so in the previous five years. And then we have the wonderful area of compensation consultants and surveys, and I'm not going into that one, Mark is, because Mark was put in the position where he had to make some recommendations and he couldn't get data other than that. And with The Wizardry of Kenneth Stewart managed to come up with some reasonable assumptions to use on that basis and then kept testing them. So, anybody else have any ideas about where you might get that information about what is currently being paid in your area? I think that covers a lot of them. It's not easy to do, but it certainly can be done.

Speaker B By the way, the Internet has just lots of information.

Speaker A But I would submit that you're going to have the same problem on the Internet that you have with any compensation survey. Right, you're right. I put that under compensation survey and we'll do some talking about what the serious, serious problems with that information is. But on the other hand, the server is, so you've got to take a look at it. The other thing that I found, and this was just yes, Ken here's our super expert in this area.

Speaker B I'd just like to make a comment about data pollution or data noise when they're using self reported information. For example, if you go on the It Canada website. You'll be invited every year to participate in an annual salary survey. I'm an actuary by training. I've been an actuary since 1976. Every year, the Canadian Institute of Actuaries does a salary survey of its members, by its members. And I can tell you from having been in management with Actuaries reporting to me, we're always suspicious of those surveys because they reported results by years since fellowship. And whether you worked in an institutional setting or in a consulting setting, which wasn't really very conducive to examining the complexity of the work that you were doing, it was more like the graduated seniority system for teachers or unionized employees. It had no meaning in terms of work context, and the data was always suspect from the point of view of the employer because it was self reported by those whose reasonably anticipated motive would be to get more compensation through the reporting mechanism.

Speaker A I'd like to ask Ken a question. One of the other data points that I use is you can get the statements, like, through the Conference Board of people. You can look at Conference Board information and get the relative relationship to the top five positions in a company. You can use the regression formulas to tie it back to sales. Now, that doesn't necessarily tell you how those companies performed, just their sales, the revenue. But that's just another data point. And so I sometimes will use that data just to check back to my requisite structure, to see if I'm falling about in line based on sales. So how do you feel about that as one more data point?

Speaker B At the risk of seeming trailish, I would never use sales or revenue to regress on anything, because what you're missing is the fundamental difference between business models and between high margin businesses versus low margin businesses. How would you use sales revenue, for example, to differentiate between Target, sometimes called Target of Paris or Walmart on the one hand, versus or Dell Computer, all low margin organizations, versus Neiman Marcus or Gucci or Chanel? So I've always been suspicious of the argument by the Pay delivery consultants, which is the slightly pejorative name that Mark and I like to give to the compensation consulting industry. And with all due respect to anyone from that August field, or maybe in the room, regression on something that is economically meaningless as an analysis point isn't very helpful. I think you have to go to what Nancy said is the best source, and that's an informed discussion with your peers in your community, in your industry, in your sector, if possible. And the Conference Board may be able to give you good data if you diligence behind what you're getting.

Speaker A And I think that's true. I think that we've done a lot of recruiting in the past 18 months. We've hired over 160 people. And that's why you have to use a lot of different data points to check, because then you know, if you're getting people off the street, what they're asking for, you know, when they come in the door. But we're privately held and our owners don't know and don't care about requisite compensation. When they're trying to decide what to pay the C suite, they want some data from somewhere. So you got to be able to show them something. It doesn't mean that that's an absolute, because our structure is our structure. It is just good to be able to have something to show them. And the data is just as bad as you go. If you go out to the Internet, to some of these other compensation consultants, you spend a few thousand dollars for a book that tells you literally nothing. But our Japanese owners want some kind of data. So when you're recruiting, to me, that's one of the best resources because we've talked to 160 people. We hired 160. We've talked to probably 300 people. So we know what people are getting paid all over the world. You have to use different resources, but in the end, you've got to trust your own structure. I think that's the best way you can look at specialty chemical data. We pay with the specialty chemical industry, but there are a lot of different things that you have to do. You've got to be able to validate your system when you're working with owners who are wanting some data. Thank you both. Here we've put together the chart where we have X at about 100,000 total gross compensation for the highest paid twos, lowest paid threes. And in a smaller city, that X might look more like 85,000. So there is some differential for the location and also some for yeah, just to give you an idea. And fortunately, one of the people in the CFO of one of our organizations put all of this information in a chart for us and Excel spreadsheet. And any of you who want that Excel spreadsheet, you're more than welcome to have it. The next thing that you have to do is to divide each of those paid brands, work bands, into six pay steps. And the pay steps have a totally different use. The manager judges which of the six pay steps within a work band that an employee is working at the time of merit increase. And I'm not going to discuss that at length because Charlote is she was able to implement that absolutely in Roche. And she can talk to, or we'll be talking to, about how managers judged which pay step within a work brand. An employee was paid placed based on their judgment of their personal effectiveness in the time period under consideration, which is always almost typically a year. But the Excel spreadsheet, we have calculates for any given X point your work bands and your pay steps. So any of you who'd like me to send that spreadsheet, I'd be glad to send it to you. You can just give me your card and I'll email it to you. It's rough, it's rough, it's not absolute and you have to smooth out the whole thing. But it's a wonderful starting point and Ken and Mark have 27 variations of it because once you have that to start working with, it's easy to manipulate it so that it works best for your organizations. In choosing a pay step to put someone in, the manager judges how well the person has been working in the period under consideration. And they judge it by asking themselves is this person working like someone working at the top half of the work band or the bottom half? And then they ask themselves are they working like someone at the top of the top half, the bottom of the top half, or somewhere in the middle? And interestingly enough, managers can answer that quite easily and quite quickly. Now two different things have happened in setting them and then the manager equilibrates those judgments. That is all part of the requisite process to ensure fairness and equity for employees. And again, Charlote will talk to you more about this. But this would be a typical chart of people that have been placed in here by their different managers and the mor would equilibrate those judgments to see if one manager is not being too harsh on the employee, another manager too lenient. And then the mor and all the subordinate managers would get together and discuss those rankings before merit pay is discussed with the individual employee. There's a couple of things to consider here. What do you do with an employee who is not fully capable of the role they're in, but because of a conscious compromise you don't have anybody else to put in that role? What do you do? Do you pay them within the pay band or do not? And generally speaking, the recommendation is that you do not because at the earliest opportunity you will seek to put this person in a role and in a work band that matches their capability. And if you are overpaying them because you're also asking them to be overemployed, you're going to have difficulty when you get them in a role that's suitable for them. All these are judgment calls, but that would be the requisite solution. What do you do when you promote someone? Well, typically you're promoting them into the next stratum. So you're going to have to bring them up to the value of the work of the role within a reasonable amount of time. And that may require or enable a ten to 25% increase in salary. One of the things that I have found as one of my hobby horses is that women have been paid lower than the role that they're in. Then they get promoted to another role and even a ten or 25% increase does not bring them up anywhere near in line with the felt fair pay for the new role they're being put in. So they continue to be penalized because they've always been underbaid. And I see a few nodding heads around the room. And for fairness, we are best to not have that happen. Elliot said that most organizations talk about increasing the entire salary scale in line with cost of living increases. And it is not possible for organizations to keep up with cost of living increases. The whole scale of the salary or the compensation should move up when the earnings index for your industry in your area or your country moves for some reason. And that can be tracked in any number of ways. And this is totally separate from merit increases. And this is what enables the people who are at the top of the range to get increases over time, because the entire salary range moves up. So what we're really trying to do with requisite compensation is have the level of work equal to the complexity, the current actual capability of the individual in the role, and for them to be paid without fair pay. And the result for the organization will be enhanced productivity, profitability, and a healthy organization. So that is a very quick overview of the basics of requisite theory with regard to compensation. And I have here for you this paper that I have written that covers this all in depth. And if any of you find errors or things that I didn't consider, please let me know. Because all I'm trying to do is channel out of it in here and get it all down in one piece that people can read and have as a basis from which to do their thinking and their working. Yes, I want to know about the impact.

Speaker B I want to know more about the impact of for example, if you don't have a very amount of such specialists in the area or in the country, and you need to pay an extra for it because of the scarcity of resources. Worse will be the impact of the entire Requisite organization structure if you pay one individual more or above the strata for this special situation.

Speaker A Perfect question. Thank you, because I didn't cover it. The question was how do you handle scarcity? If you need a particular specialty, let's say an SAP specialist, someone can come into your organization and implement SAP in short supply, people of the proper level, you may have to pay them a premium to have them to be able to hire. And certainly Ken and Mark can talk to that because they have been dealing with that situation. There is an increasing shortage of engineers in this country, for example, and particularly technology based engineering specialists. What you do is you do not let it skew your requisite salary scale. You give them a premium over and above whatever that scale is. And the premium might be 30% of what the normal salary would be. It can be a very substantial number, 50% of what it would be. Think of cobra. I don't know how many of you had experience with trying to hire a Cobra programmer in 1999. There simply were not enough to go around, and they were making 50% or 75% above what the level, or 100% at times above the value of the level of work they were doing, the complexity of the work. There was a scarcity. Well, what one does is hire the person, let them know what that premium above the normal salary of the organization is, and let them know that their salary will continue that way as long as there is that scarcity. But when that scarcity goes away, generally you don't take the salary away. Sometimes you do, but generally you don't. But they don't get any increases. It just over time, as you have these earnings index increases, it will move up to lower back at parity. Now, very often the jobs also go away. I mean, I don't see too many of those highly paid cobo programmers around. They're going to be needed again. But that's another story. But you are always dealing with this scarcity, and you have to pay what you have to pay to get the person there. But you don't let it skew your basic salary range. It's a red circled rate or whatever you want to call it. It's an exception. Fine. And the person should be aware of that fact that it's an exception and that when that scarcity goes away, there will be some discussions and something different will happen. Yes, please.

Speaker B There's a point that I think is quite important to help your presentation here, that you might make some comments on where you're looking at the compensation over the levels, the outcomes that you had there. No, that one. Now, what you're seeing here are the results of managerial judgments of performance effectiveness. And here's a link now between the pay outcomes felt fair pay supposedly, and the managerial judgment, the managerial judgment of performance. So if I'm a manager, one removed or a CEO, I can look across the compensation changes and I can see whether my I can get some clues as to whether my managers are actually judging performance reasonably. Differential pay. So I'm looking for differentials. If in a team of people, perhaps 30 people, the salary bill, overall salary bill has gone up by 5% and everybody's getting 5%, then I'm suspicious about differential pay.

Speaker A Yes. And there's an interesting point here too, if I remember correctly, Charlote, and you can address this when you're presenting and she's going to present next when we'll take a short break, stretch break between now and then. But at Roche, there was a number in one of these steps. It was a number. It was not a spread at Roche. Correct. It was a spread. Okay, because there is a spread, and you'll see a slide on this or a visual in my paper, but there's a number at each one of these, and there's about 4% in here in each of these. So there's a number on each one of these and not an overlap. Looking at salary ranges per grade. The range per grade depends on the.

Speaker B Situation, of course, but the range per.

Speaker A Grade at that time was about 13 or 15. Again, non overlapping ranges. When you look at the entire strata, you probably get closer to what most of us are used to as range spray. It spreads for a grade, the 50 and 60% spreads.

Speaker B We have strata. We have pay bands within work bands.

Speaker A Work bands.

Speaker B Okay. Just to get the language.

Speaker A The language is work.

Speaker B We have strata. We have work bands within strata. We have pay scales, pay steps within work bands?

Speaker A Yes.

Speaker B And then we have a range of available pay within that work band. A person then can earn through their own performance some level of monthly pay between the bottom and the top of their pay ban. Okay. They've got a nod.

Speaker A Yeah.

Speaker B Okay. I did a project once at a nuclear power plant and they prided themselves on reducing their levels of management from 22 to 14 was a point of some concern. Their perception was that the pay band was the quote, level of work. Common mistake.

Speaker A Yeah.

Speaker B My question here is, as far as I can see, you have 18 pay bands per stratum, is that correct?

Speaker A Yes.

Speaker B Each of which is a differential pay range.

Speaker A Yes. But based on the managers, the six one is the level of complexity of the work.

Speaker B Got it.

Speaker A That's the work band. And the next one is the manager's judgment of where the person is working.

Speaker B The work they're assigned to do, or the work they're performing at.

Speaker A Their current actual capability.

Speaker B So they are placed in band based on the manager's assessment of their performance judgment. Judgment of performance. Personal effectiveness. Not the work they're assigned to do.

Speaker A Not in statement of the work they were assigned. Give that to Catherine Gotcha.

Speaker B Oh, sure. Thank you for the clarification. It's just a helpful anchor.

Speaker A It's really important. And I like to use current applied capability for the CAC. That's how it's written, it's current applied capability. So my judgment is how well you have done in achieving the results of all the resources I've given you and your use of judgment and discretion over the last twelve months, if that's what it is. And that judgment is a statement that is made here the manager, Arbor, there Lewis. And the Equilibration, as someone over there was talking about, is whether or not Arbor and Lewis are using about the same kinds of judgments in terms of applied capability or whether Lewis is harder on his people. And Arbor is kind of a pushover. And to answer your question, Dan, your grades, if you choose to do your grades that way at Stratum, one would only be 16 1718 or 11, 12, 13. You've only got three grades there within this is manager's judgment of someone's current applied capability, the complexity of the work, of the role, level of work available. See, what we have found is that.

Speaker B It'S very important not to judge the person's effectiveness enroll in relationship to what you assign that person. Because if you have someone who is less effective in role it makes no sense to assign that person more than, you know he or she is capable of doing. So when you're making the judgment of effectiveness in role, you have to make a complex judgment irrespective of what that person has actually been assigned. It's not whether he accomplished it or.

Speaker A Not, but is the aggregate value that.

Speaker B That person contributed in role consistent with someone who is midpoint in what you expect of the role.

Speaker A And that is a hypothetical.

Speaker B It's the range of value you expect someone to be able to deliver from the role and that's the hardest part in order to get everyone to understand what that means the same way across the organization.

Speaker A It's the reason why you cannot do this until you actually understand the work in every role and outcome. If I leave you with no other thought, it's that the organization must be requisitely structured and requisitely staffed and requisite practices in place before you approach the compensation issue. Mark.

Speaker B The only comment I wanted to pass on having just returned from the world at work with 2000 supposed compensation professionals in the world as one of the key points up here is really the issue of differential work, justifies differential pay. Except most of those professionals don't understand that in the most current book that they've just published their pay grades are all overlapping and the differentials between their midpoints in many cases aren't much more than about ten or 15%. And they're putting this out as best practice because they're disconnected from the work. And so I think a lot of folks will have problems trying to deal with the current principles and practices in the compensation world because the compensation folks are primarily are not clear on the work. Secondly, the job evaluation systems are totally bust above about mid three and so that also comes out through a lot of the stuff. So to an overlapping pay, bands that don't work, the job evaluation systems that are basically broken much of what's being fostered there isn't providing much help, I think, to folks trying to I think the guiding principle here is that if you're making the work to the pay, it's only differential work. But that's the starting point. If you don't understand the differential work, then you can't get a differential pay little thing, too, we found. Is that so I'm just linking this back to Nancy's slide on grades, which was a critical slide because in the books that these folks are putting out on grades, they're talking about how to set up a pay structure. And they're primarily suggesting a pay structure based on grades where it's a pay delivery mechanism. To deliver pay. It's a mechanism to deliver pay relative to maybe seniority or tenure that has nothing to do with the work. And that seems to be a fundamental flaw that seems to be, after so many years, so set up as to what they're doing. So I just wanted to make that link to your grades point, because that's fundamentally missing. The question is if I understood well this system didn't address the seniority of the function of the road development. And we know frequently people are very concerned emotionally about don't be recognized about their seniority. So I want to be more clarified about how the seniority is included, because my previous understanding is that pay bands.

Speaker A Including seniority, the question was, where does seniority, the issue of seniority, come into compensation? And I would say that seniority is one of the reasons that we ended up with 1214 1618 levels in organizations. Requisite compensation and requisite structuring and requisite staffing is not about seniority and it is about putting the work of a complexity in a work band and a strata in the organization. Putting a person of the capability to do the role in the role and seniority does not enter into it except as it might affect skill, knowledge and experience and the ability to do the role better. Which naturally means people are going to hit the top of their band or.

Speaker B To perform at a higher level than.

Speaker A But I'm in financial services and we deal with this all the time. One of the questions that I ask the manager is in terms of assessing the value of the seniority, the work that you're trying to do, what does all that experience mean? And I'll address it a little bit more with my presentation because I'm trying to get to the clarity. But what you want to understand is what do they mean by all of that experience? It can be one year times ten, six months times two, but what is actually the seniority's relationship to the work that needs to get done? And otherwise it's lazy thinking. I need a degree and I need ten years of seniority. And what does that mean, sir? Very respectfully in terms of the level of work that needs to get done, what does experience bring them? And if you can get them to go back to that and really begin to articulate, then you will overcome the excuse that they're giving you. It's lazy thinking as far as I'm concerned. It's not quite as simple as that. In American countries, we have to be mindful of in this room, unless you have to look at the culture in the region where you're doing business. And this was a terrible problem for us, and it took forever for us to break through that. And it starts with Reeducating retraining your management on the ground. Because if the manager buys into requisite and understands complexity in the role time span of the work, once they finally get it, then their people will trust it more. When we completed our gearing session recently, and I was hoping they had talked about this when this came up, but years ago, 15 years ago, it was almost a bloodbath. We had two vice presidents that threatened. They wanted to go outside and fight fisticuff. They wanted to go fight. Then the Gary says, am I kidding? They threatened to beat each other out. And the last time we did, Gary just recently in the room with people all over the world, it was the best session we ever had. Because now people have seen it work. They see it to be fair, we talked openly about dad, kept coming back to time span. Time span, time span. Before the day was over, they got it. And then they go back into the world areas and they explain it. And then when the people trust it and they see that they're being paid competitively and even above market for above market performance of the company, then they trust the system. But it took us some years to get away from seniority in Latin America.

Speaker B We also have a very young organization.

Speaker A In terms of age now, not only.

Speaker B In terms of age, in terms of seniority right now. So if you start out with a very young organization in terms of seniority, because what happened after the bloodbath is most of the people who were causing the problems aren't with us anymore. So we went through a major restructuring of the organization, and we got rid of most of the seniority.

Speaker A Don't say that.

Speaker B So now, although not everyone is young in years and not even young in experience, because we brought in people who were experienced into jobs that was actually we were looking for in hiring into the organization. So they came with and as Andy was saying, they came in. What does the seniority mean? So we looking for people with certain knowledge and skills and experience to come into the organization, but didn't come into our organization. Because what you're talking about in terms of seniority is generally an internal equity issue. It's not what the marketplace is dealing with. And so by bringing people in from outside and creating new organization, then we don't currently have so much of that problem anymore. If we stay static in our hiring, in ten years from now, long after me, somebody else will face this issue again. That's the nature of organizations. They will again get to that point. If we continue to grow at the pace we've grown in the past five years, we'll continue to outpace that problem. So it really depends. Each organization has to look at where they are in the process. But I do agree, Sabrina, there are cultural aspects, too in Asia. It's just like in Latin America. There's a certain expectation that pay goes with age.

Speaker A I really appreciate all of your contribution and participation here because I think it is wonderful to share all the collective experience that we have in this room. Let's just have one last comment right now from Jerry and then we'll take a ten minute stand up break. And we'll take a break after the next presentation as well, so they can get moving around a little bit.

Speaker B I found a particular way in which seniority raises its ugly head in the US.

Speaker A And that is in a number of.

Speaker B Industries, but particularly the utilities that are controlled, where the people in level one roles are often making compensation, which is seniority based. That is well above what you would expect for an honest value for X and in terms of zero point 31 X or 00:55 X. And what that has forced these companies to do is start cheating and pushing up on X so that people will have an incentive to go from being a chief technician up to a supervisor. Because there's no incentive to be a supervisor if you made much more money. And that's been a very pernicious effect on companies that.

Speaker A Have caved to union.

Speaker B And union seniority over a number of decades.

Speaker A It's been a real problem. Thank you.

Speaker B This is the dangerous of coal because automatic cost of living increases, which was very common in Brazil in the past with inflation, meant that it was very easy for your pay scale to get out of line with the market. Because you're going out to hire for that job didn't mean that people on the market were being paid. So your pay scale could be simply out of line. And Europe, in some countries, like in Belgium, where we have an office, they have an automatic cost of living increase. By law, you can easily get yourself out of line with the market. So I don't quite agree with this point about you just carry across because everyone has a 2%. You don't take consideration merit increases. We do take it in consideration. If everyone in Belgium got 2% increase, there may be no merit increases budget available because we have to always go back and test against what the market maybe on the street the new jobs wouldn't be getting that much more compensation increase. So I think it's very careful with any kind of colas.

Speaker A Let's come back at 20 after ten if that gives.