Why is The Market often leading when it comes to packages?

Most senior HR leaders know the drill: every three years or so the packages of the top team and the senior managers have to be calibrated. Most listed companies use the same advisors, and the compensation strategy and the structure of the packages are very comparable. The most important element: the comparison to “The Market”. The most important data point: the median of the market. Many companies want to pay a fixed salary (for well performing employees who have grown into the position) around the median of the market. Variable pay: above the market for superior performance.

Three questions I have around “The median of the market”.

  1. Are the preferences of the people at the top comparable? Preferences of individual people differ. Preferences are influenced by nationality, experience, gender and many other factors. What you often hear is: “If we do not follow the market with our remuneration practice, we will not be able be attract and retain the right level of people”. This is very difficult to check, if there is no insight in preferences. The assumption is: if you are working in a senior position of a listed company, money is an important engagement driver. This assumption of often untested, and generalizing is not very helpful. Many people for example, also in senior positions, have no great appetite to live and work outside their country of origin. Or maybe they have the appetite, but their partner might have a nice job. General trends cannot be translated to facts on individual level.
  2. Is the proposition of the different companies comparable?
    You can compare the hard data of companies (revenue, profit, number of people, geographical spread etc.). For the attractiveness of companies as employer for senior leaders, other elements come into play as well. The purpose. The position in society. The attractiveness of the services or products. The evolution stage. The talent pipeline. In determining “The market” to which a company should be compared, these other elements are difficult to take into account.
  3. Where do the value of the network and the value of the internal experience appear in the equation?
    Recent research by Gallup shows, that the most productive employees have 10+ years experience in the company, do a job that matches well with their capabilities (“innate talents”) and are engaged in their work. The supportive behavior of the boss is an important driver of the engagement. In general: the value of people is sometimes higher for the company where they are working than in another company. It will take years before internal network and the tacit knowledge of people who switch companies is back at the old level.

All in all: some reasons to reconsider the current practice. It can pay off if organizations determine their own policies. Take into account what others are doing, but map your own course, following your own moral compass.

The book “30 years in HR” is available as free e-book via iTunes.


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