A Tailored Approach for Future Compensation Strategies

Organizations should move toward more sophisticated pay strategies, and away from one-size-fits-all approaches. Historically, we have seen differentiation in compensation plans for sales teams and executives, but there is an opportunity to apply this concept more broadly across different functions and levels within organizations. This strategy can both drive performance and improve attraction and retention. 

In this post, we will dive into an example from a bank in Asia that is piloting the notion of "segmentation of pay" and explore how you can apply these principles in your organization.

Why Tailor the Pay Mix?

Different functions within an organization have varying demands, responsibilities, and market dynamics. A uniform pay strategy that works well for one group may not necessarily drive optimal results in another. For instance, a high proportion of variable pay may work wonders for sales teams, where performance is easily measurable and directly tied to business outcomes. However, this same pay mix may fall short when applied to compliance or middle-office functions, where employees often value stability and long-term security more than immediate performance-based rewards, and where outcomes are more team-based and less linked to overall organizational performance. 

Example: Segmentation of Pay in Action

This Asian bank is considering piloting a segmented pay mix strategy to cater to the distinct needs of its various business units and roles. The goal is to optimize both attraction and retention while maintaining or improving performance. By adjusting the fixed-to-variable pay ratio in targeted functions, the bank hopes to test whether altering the pay mix can lead to better results without negatively impacting performance.

Here is an example of how this bank is thinking about implementing pay segmentation across business units:

Business Unit / Function	Past 5 Years Pay Mix
Business Units	Significant Variable Pay
Middle Office /Compliance/Risk	Predominantly Fixed Pay with Team-based Variable Pay
Operations	Combination of Fixed and Variable Based on Maintaining Operational Standards

In the business units, such as Sales and Trading, the variable pay component will continue to be a major part of the compensation package. This is because performance in these roles is closely tied to business outcomes, and incentives are a clear driver of behavior. 

On the other hand, middle-office functions, such as compliance, will have a higher percentage of fixed pay. These roles often prioritize job security, stability, and longer-term rewards over immediate performance incentives, and team achievement over individual performance.

In operations, the idea is that the expected performance level is already high: For instance, the network must be up 99.5% of the time with the remaining 0.5% dedicated to planned maintenance. In these cases, there is no upside of performance; only downside. The plan is to provide the maximum incentive at the expected (high) level of performance, and to reduce it if the target is not met. 

The bank plans to adjust these ratios based on years of service and specific job roles, offering more tailored packages that fit the unique needs of these functions.

Why This Approach Matters for Rewards Professionals

This example underscores the importance of recognizing that different areas of an organization may need different pay mixes. Rewards professionals can adopt similar strategies by:

1. Analyzing the Role: Start by breaking down the key responsibilities and market expectations of various functions. Is performance easily measurable? How critical is short-term vs. long-term retention? Are results due to team or individual efforts?

2. Segmenting the Pay Mix: Like the bank, consider adjusting the fixed-to-variable ratio depending on the function. For roles where stability is critical (like compliance or risk management), a higher fixed pay component may improve retention without affecting performance.

3. Piloting and Measuring: Conduct pilot programs to gather data. Test adjusted pay mixes in specific areas for a set period, and closely monitor retention, attraction, and performance metrics. For example, the bank will be comparing employee turnover, engagement scores, and business outcomes to determine whether their segmented strategy is successful.

4. Adapting Over Time: Compensation strategies should be fluid, not static. As the bank’s example shows, pay can evolve over an employee’s career, with different strategies working better for employees at different stages. What works for a new hire might not work for a tenured employee. Adaptation is key.

Conclusion

The future of pay lies in recognizing that different parts of the organization have different needs, and therefore require different compensation strategies. As the example from this bank in Asia illustrates, segmentation of pay can be a powerful tool for organizations looking to improve both attraction and retention while maintaining strong performance.

Rewards professionals have the opportunity to adopt these principles in their own organizations. By tailoring pay strategies to specific functions, and running pilots to measure the impact, you can find the right balance between motivation, retention, and performance. The ultimate goal is to create a compensation structure that supports both the employee and the organization’s objectives.