Organizations are changing how they pay people. In the US, 86% of finance leaders revealed that they had changed their compensation models to reflect hybrid working since the pandemic started. The findings were part of a major survey by Sage of finance leaders.
There is also a growing importance placed on diversity, equity, inclusion and belonging. CFOs are being tasked with increasing responsibility around equity. 94% of US respondents said they were at least moderately responsible for equity initiatives.
It has meant that finance leaders have become increasingly interested in the workforce, and the finances around hiring decisions.
Paul Burrin, Sage commented: “It’s vital that CFOs show a willingness to address the challenge by partnering with HR, who can support the organization to understand if there is any pay disparity.”
Find the missing information
However, to get that understanding requires data. Burrin continued: “Sage’s research, ‘HR in the moment’, found that 94% of business leaders had access to some form of People data, but 62% of HR leaders say they’re unable to use the data to spot trends and make business-related decisions.”
Burrin argues that a global HR management solution with integrated payroll and finance should provide the data in a format that can guide decision-making. He adds “Reward and compensation planning tools can be used to compare pay across the organization and take actions to resolve pay gaps, address unfairness, and ensure that high performance is recognised.”
Once that it is done, it is not the end of the analysis. HR must help finance leaders to understand why the inequalities exist. Is it due to bias or something else? Whatever the cause, actions must be taken beyond rebalancing pay. Training or coaching is one approach. Burrin notes: “Leadership must ensure future pay recommendations and policies resolve pay equity issues by focusing on merit and performance, and that any persistent challenges to the contrary are managed appropriately.”
Finance and HR leaders can study the numbers but what really counts is whether employees are satisfied. Employee listening can ensure an understanding of pay equity. HR leaders can then take action and feedback to the whole business how they have addressed the issues. Employee listening without action and subsequent communication is worthless.
Pay is about more than cash
There are several ways that compensation has changed over the last two years. Some, 46%, in the US have added additional no-monetary benefits during the pandemic. They have been aided in this with the launch with the new benefits administration solutions over the last few years
For many, this has meant changes related to the geographic locations of employees. According to Sage research, 39% of US finance leaders say they have removed compensation differences based on geographic location, but 50% have added them.
When US tech companies first mooted the idea that salaries would change if employees chose to work remotely from cheaper geographic locations, there was an outcry. However, it seems from the recent research from Sage that many organizations across different industries have already made the change or are considering it.
The Society for Human Resource Management (SHRM) has looked at the different practices of geographic pay differentials. It found approaches to the challenge varied. The majority adopted a pay scale by city, such as London weighting. However, with many employees quitting cities and cutting back the frequency of their commutes for a cheaper cost of living, this approach comes into question.
Is geographic pay the right approach to compensation?
Whether this is the best approach for organizations is the wrong question. Finance leaders are now responsible for making compensation equitable, cost-effective and attractive to employees. These are the questions that finance leaders need to ask.
- How will the compensation strategy impact the firm’s ability to attract and retain the best talent?
- What tools does a CFO need to address pay equity?
- What is the best approach to compensation for the business?
They also need to take into consideration whether the current global approach to compensation is best for their business in the long term.
- If wages are purely location-based, does that reflect accurately on the skills of each individual? Could better-qualified individuals seek high salaries from competitors?
- Just because people choose to locate themselves in a “cheaper” location, the place of work must also remain a factor.
- Organizations also need to be wary of discrimination, religion, age, disability, gender and racial discrimination.
Each organization, or at least each sector, may have different approaches. For example, in hospitality, a firm will need to draw from the local population where positions are location-based. The local economics may mean that wages in one location are lower than in another as revenues are also lower. Software firms will need to consider skills and cultural fit carefully.
The challenge comes for those organizations that are hybrid. They require both employees based in a specific location but they also require certain skills. Wage structures are becoming more complex. The growing calls for transparency of pay between employees, especially in terms of gender equity is also a factor.
CFOs must consider many factors, but perhaps it is time for a new industry standard that pays based on criteria such as skill and performance, as well as location.
What should finance leaders do?
Ultimately the benefits that organizations deliver to employees is changing. Afonso et al identified four approaches to compensation.
- Follow the market (market benefits)
- Offer individuals choice (flexible benefits)
- Align with the company strategy or “what” the company aims to achieve (Strategic benefits)
- Align with the company identity or “who” the company aims to be (Identity benefits)
They proposed that organizations design benefits programs that match the desired identity of the organization, whether that is one with family values, innovative or a responsible corporation, the approach is different in each case. The authors concluded: “the essential point is that the benefits provided will service their strategic intent when they are perceived as credible representations of the organizational identity being pursued.”
HR leaders also have a part to play, as Burrin says: “HR can help finance leaders and the c-suite find the cause and address any pay inequity through detailed analysis, actionable insights, and recommendations to line managers as to how to manage performance, recognition and rewards, while putting in checks and balances to ensure future pay rewards are fair and drive to clear and measurable goals.
The responses highlighted in The Redefined CFO report by Sage reveal a strong need for close partnership between finance and HR departments. After all, HR professionals strive to protect both organizations and their workers, a balance that CFOs are increasingly required to assess.
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