Many Countries, One Compensation System

Multinationals are quickly moving to global compensation systems for their top employees. Fifty-six percent of multinational corporations plan to shift to a more centralized compensation structure during the next two years, up from 42 percent in 2004, according to a 2006 survey of 275 companies by Watson Wyatt Worldwide.

    Most companies, regardless of home country, are addressing long-term incentive design in a homogeneous manner, using similar vehicles and delivering equivalent values to employees across geographies regardless of local market practices, according to a new study by Mercer Human Resource Consulting.

    Among U.S.-based multinationals, 63 percent use the same long-term incentive vehicles and 59 percent use the same grant values across all global locations. Multinationals based in Canada and Europe are even more likely to apply the same vehicles and values across all geographies.

    At Direct Energy, a North American company with more than $6 billion in annual revenue and 5,200 employees, compensation for the top 100 employees is determined by parent company Centrica, the U.K.-based energy giant with annual revenue of $22 billion. Centrica’s board of directors shapes the pay programs; approvals and adjustments are managed through the company’s global compensation system.

    With its workforce split evenly between the U.S. and Canada, Direct Energy controls compensation for the 1,800 employees directly below the top 100, but models the plans and payout formulas on the Centrica program. In this sense, the global plan established by the parent extends to almost half of the Direct Energy workforce.

    Within the second workforce segment, metrics are adjusted to have less emphasis on financial goals and more emphasis on personal and group goals such as customer satisfaction improvements. Payouts range from 4 percent to 40 percent of base pay.

    Employees below the second segment do not participate in Direct Energy’s variable pay plans. In aggregate terms, the company blends into the survey landscape, with unremarkable merit increases averaging 3.3 percent in 2006 and variable pay averaging 12 percent of payroll for employees included in the company’s incentive plans.

    “The overall philosophy is to reward people for high performance and to drive corporate goals through the compensation program,” says Terry Fox, director of HR operations.

    “Overall, we do not want to be a market leader in pay; we want to be at the market for base pay and above the market for variable pay.”

    Direct Energy uses SuccessFactors’ talent management software to automate reviews and allocate merit increases. End-of-the-year performance reviews are managed online and yield payouts in March. In the meantime, information on high performers flows into a succession planning process that occurs in June. Midyear performance reviews feed back into goal-setting for each employee.

    “With the goals and performance ratings online and clear communications about what will drive bonus payments, every employee can practically calculate their own payout,” Fox says.

    All salary budgets are managed online, so if a manager uses increases averaging only 2.8 percent instead of the budgeted 3.3 percent, Fox knows in real time exactly how much money can be pulled over to another unit where market conditions may require above-average spending.

Workforce Management, October 23, 2006, p. 28 — Subscribe Now!