Why use an audited Salary Survey?

In recent years, salary surveys have been closely scrutinised – particularly if they do not meet stakeholder’s expectations and aren’t based on a credible methodology. Since the 1990’s, it has become common practice in the South African market for remuneration professionals and Remuneration Committees (REMCO’s)  to use salary surveys when  addressing remuneration policy in the company.

Salary surveys have become an important  tool for effective implementation  of remuneration policy as they provide metrics against which these policies can be tested. The REMCO’s role goes beyond merely determining the structure and levels of pay for employees.

The remuneration policy, determined by REMCO, should be:

• aligned with the overall strategy of the business
• structured to promote high levels of performance

A salary survey can assist by providing a benchmark against which the remuneration of individual employees can be assessed. Benchmarks provide an accurate depiction of the remuneration climate in the market.

This allows the REMCO to analyse, with confidence:

• whether or not they are rolling out their remuneration policy effectively OR
• if corrective measures are required in order to implement the strategy.

King III and other remuneration governing bodies provide us with guidelines for running a sustainable business and ensuring that policies within an organization are of a sound nature, and have advised that credible sources are used when making use of a salary survey. A reliable source – against which the policies can be tested – is needed in order to confidently communicate  that these remuneration guidelines have been adhered to. An audited salary survey provides the highest level of certainty that the benchmark  information used is of a credible nature.

The following have been put forward as some recommendations regarding remuneration policies:

• Companies should adopt remuneration policies and practices for executives that create value for the company over the long term. The policies and practices should be:
  • aligned with the company‘s strategy
  • reviewed regularly
  • linked to the executive‘s contribution to company performance
  • The REMCO should assist the board in its responsibility for setting and administering remuneration policies that are in the company‘s long-term interests. The committee considers and recommends remuneration policies for all levels in the company, but should be especially concerned with the remuneration of senior executives (including executive directors) and should also advise on the remuneration of non-executive directors.
  • The remuneration report should explain the policy on base pay, including the use of appropriate benchmarks. A policy to pay salaries on average at above the median requires special justification. It should also explain and justify any material payments that may be viewed as being ex gratia in nature.
  • Within the remuneration policy the board will state the principles for fixing individual remuneration for senior management. Non-executive directors’ remuneration will be fixed for the year and must be approved by special resolution by shareholders in a general meeting.

The focus up to this point has been on the theoretical reasons surrounding why one would use an audited salary survey. This section will focus on the practical issues that can be experienced by making use of a mathematical formula for ageing market data in a particular year versus using a live and audited survey.

Example:

Person A from Company X has a job grade of B3 which in the year 2000 paid an annual salary of R70 000 per annum.

• If a mathematical model making use of a 6% annual increase (the upper band of the South African Reserve Bank’s inflation target) is used, the salary this employee earns is R140 854 at the end of 2012.
• Similarly if an upper band plus 1% (7%) model is used, then this employee’s salary will be R157 653 at the end of 2012.
• If the actual inflation rate for each year was used as the factor by which the employee’s salary will increase each year, the employee earns R130 409 at the end of 2012.
• If we assume that the market moves in line with the CPI in South Africa, then a mathematical model based on the upper band of the South African Reserve Bank’s upper limit of their inflation target will cause this employee’s salary to be 8% higher than the market in 2012.
• If the upper band plus 1% (7%) model was used instead, this gap increases even further and results in the employee’s salary being 21% ahead of the market.

Table 1 summarizes these  results:

Table 1: Mathematical Models vs Inflation Based Models.

Table 1 is illustrated graphically below:

Mathematical Models vs Inflation Based Models.

The most important feature illustrated  is how the gap between reality and the mathematical models grows over time. This indicates that the risk of making use of a mathematical model increases over time and can cause a misalignment between a company’s remuneration strategy and the market. This misalignment is solely caused by the fictional benchmarks which have been generated by the mathematical models.

This illustrates the critical importance of using an audited salary survey in order to ensure that the metrics against which the company’s remuneration strategy is tested are in fact reflective of reality.

 Conclusion

• A company’s remuneration policy should be aligned with the overall strategy of the business. It should be set up in such a way that all stakeholders accept the terms of the policy.
• In order to attain the goals of the company , the implemented policy should drive the performance of the employees.
• An audited salary survey ensures that the company is implementing  its remuneration policy correctly. The audited survey provides remuneration professionals with accurate benchmarks against which their policy can be checked and allows for confident decision-making.
• In the example (Table 1 and Figure 1), the consequences of making use of incorrect benchmarks was illustrated. These consequences can have significant implications for a business’s policies and profitability.

Therefore great care should be taken when selecting a service provider for a salary survey. Ultimately, the quality of the inputs into a policy determines the quality of the results obtained by implementing the policy.

Written by: Chris Blair CEO B.Sc Chem. Eng., MBA – Leadership & Sustainability [email protected]