Are You Comparing Apples and Oranges?

Chuck Csizmar recently wrote an excellent post about the risk of global standardization.  Because rewards are viewed differently in different locations by both awarding managers and receiving employees, standardized rewards can lead to awkwardness and perceived unfairness.  In order to avoid inappropriate or unfair global rewards programs, Chuck advises companies to include local HR experts when designing global rewards programs.

Of course, non-standardized awards programs can also result in perceived unfairness as soon as employees in one location receive higher rewards than employees in other locations.  What is needed is a rewards strategy that accommodates local rewards but also offers a standard unit of measure, making it possible to compare rewards granted for similar work and performance.

One useful tool I’ve seen used for this is a global rewards index, which is a fancy name for a standardized proration factor applied to individual rewards.  To explain how it works, let’s say you currently use a performance increase matrix with various rewards ranges for different job levels and/or locations.  It might look something like this, assuming different rewards budgets for each location: 

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Of course, this is a simplified model since a performance increase matrix may also incorporate salary quartiles, leadership potential, or other attributes that influence rewards.  But the basic idea is that two people with the same level of performance for similar work in two locations are eligible for different rewards. 

There are various reasons why this happens.  For example, these may represent appropriate local rewards ranges for each location, or overall performance may be lower in one location. 

The problem is that if you try to compare a high performer in each location it looks… unfair.  At least, the person in Location B would probably think so.

So what if the rewards were indexed to a common standard? 

In this example, the target increase for someone who meets expectations in Location B is 1-3% and the target increase for someone who meets expectations in Location A is 3-4% but we index both targets to a common performance factor.  At the end of the day, everyone may receive different amounts of cash but the index represents a standard basis for comparison. 

We can even get fancy and include leadership qualities or potential:

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The exact details don’t matter so much because each company has its own methods for calculating budgets and evaluating individual, team and/or company performance.  What does matter is that once you’ve identified a method for calculating rewards for a global workforce, you also have a meaningful way to compare the rewards of workers with similar profiles in different locations.

Now let’s revisit our two geographically separated employees one more time and run it through the index.  Both met expectations and are therefore eligible for 100% of their targeted reward.  They still get the same amount of cash as in the first example but now we have a standard way to analyze and talk about it.

Indexed rewards are useful for multi-period analysis as well.  For example, if Joe received 4% last year and 2% this year, one might conclude worse performance, whereas lower budgets are the real culprit.  The index tells us he was at 150% both years.

In other words, indexing rewards lets you compare apples to apples instead of to oranges.

Laura Schroeder is a Compensation Strategist at Workday, headquartered in Pleasanton, CA.  She has more than twelve years of experience designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and is currently pursuing a certificate in Strategic Human Resources Practices at Cornell University.  Her articles and interviews on HCM topics have been published in the US, Europe and Asia.  She lives in Munich, Germany and enjoys cooking, reading, writing and spending time with friends and family.

Comments

[E. James (Jim) Brennan]

Indexing rewards also nicely handles the situation where Location A severely lags their local competitive market while Location B merely maintains a substantial local market lead. Relative figures have meaning only in terms of the base amounts.

[Chuck Csizmar]

I like the indexing approach, Laura. It's easier to explain pay increase differences to employees when the playing field is leveled. The employee file would say, for example 1.25% of target merit increase - focusing attention on performance vs. the vagaries of country-specific budget limitations.

To your knowledge are any global companies using such an index?

[Laura Schroeder]

Jim - thank you for that additional example. In fact, you've reminded me of another use for indexed rewards: Managers may tend to skew rewards toward lower-paid employees in an attempt to be fair. The performance index helps keep everyone level and in line with suggested guidelines.

Chuck - Yes, it's useful for communication and helps keep focus on the performance rather than the cash. Nicely put. I've worked with several global companies that index rewards, although they have unique methods for calculating budgets and targets.