remuneration management system in public sector

Belgrade, April 2014

Methodology and implementation

Igor Lazarević, Aventin Partners

Djevdjelijska 55, 11000 Belgrade; +381 62 227 045

www.aventinpartners.com; [email protected] 2

Structure of presentation

Section I:

Introduction to RMS

Section II:

Analysis of remuneration structure

Section III:

Proposed principles for RMS in public sector

1. Introduction to RMS

2. Regulatory framework for RMS

1. Structure of money remunerations

2. Structuring basic salaries

3. Structuring allowances

4. Structuring other personal expenses

5. Structuring taxes and contributions

6. Structuring bonuses

1. Essentials of RMS development

2. Managing basic salaries

3. Managing bonuses


Section I




Overview of RMS

Section I / part 1 – Introduction to RSM

RMS is a complex system that affect both

financial performance and quality of

human resource management




Short introduction to RMS

» What is Remuneration Management System (RMS)

› System of managing amount and structure of all money remunerations (global sense)

› System of managing amount and structure of money remuneration for employees, i.e. salary mass (specific sense)

» Basicly, RMS is methodologicaly approach made to resolve 2 critical business goals:

› To improve satisfaction of employees

› To improve efficiency of organization

» What are the benefits:

› Better motivation of employees

› Better HR management (incl. career management)

› Improved cost efficiency

Section I / part 1 – Introduction to RSM

If implemented well, organization can benefit from

RMS




Regulatory framework for RMS

Section I / part 2 – Regulatory framework

RMS is regulated system…

Constitution and laws

GENERAL

� Constitution of the Republic of Serbia

� Labor Law

� Law on Pension and Disability Insurance

� Law on Tax Contributions for Pension and Disability Insurance for Particular Categories of Insurant

� Employment and Unemployment Insurance Law

STATE INSTITUTIONS

� Law on Salaries in Government Agencies and Public Services

OTHER LAWS

Decrees Collective Agreements

Other

� Various decrees made by Serbian Government

� General Collective Agreement

� Specific Collective Agreement

� Individual Collective Agreement

� Employment contracts

� Managerial employment contracts

� Rules on HR management

� Other specific legislative




Framework for defining RMS

Section I / part 2 – Regulatory framework

… with significant space for adoption and

flexibility Precisely defined

Only limits defined

Not strictly defined

� Structure of money compensation (remuneration)

� Payroll deadlines

� Rates and basis for taxes and contributions

� Obligations for insurance and other allowances

� Limits for various allowances – within Labor Law

� Limits for other personal expenses – within Labor Law

� Limits for bonuses – within Collective Agreements

� Calculation of basic salaries (incl. structure of coefficients)

� Bonus schemes and evaluation principles

� Management of variable part of salaries


Section II




Structure of money remunerations -basics

» Money remuneration packages consists of 5 elements: basic salary, allowances, other personal expenses, taxes and contributions, and bonuses

» There are 3 types of structuring:

Section II / part 1 – Structure of remuneration packages

Money remuneration

packages can be structured in 3

ways

Basic salary

Allowances

Other personal expenses

Taxes and contributions

Bonuses

Basic salary

Allowances



Bonuses

Basic salary

Allowances



Bonuses

Net / gross Fixed / variable Direct / indirect

Net

Oth

er

Variable

Indirect

Direct

Fix

ed




Structuring basic salaries

» Basic salaries are the main part of total remuneration package for employees. Consequently, structuring of basic salaries must rely on RSM principles

» There are 2 models for structuring of basic salaries:

› “Fixed” basic salaries, determined by system of coefficients

› “Negotiable” basic salaries, determines by negotiations

» In both cases, basis salary is calculated as a product of: a) number of coefficients, and b) value of one coefficient

› In “fixed” model, it is calculated directly

› In “negotiable” model, it is calculated indirectly, through flexible calculation of number of coefficients

» At the moment, government bodies use “fixed” model of structuring of basic salaries

Section II / part 2 – Structuring basic salaries

Basic salaries can be based on

coefficients (fixed model)

and discretion of employer

(negotiable model)




Structuring basic salaries – illustration

» Determined by: a) system of coefficients (payment groups), and b) negotiation results

» In ALIMS there are 16 payment groups at the moment, with no payment sub-groups

» In “negotiation” model basic salary and value of one coefficient are known…

» … so, we are calculating number of coefficients indirectly (basic salary / value of coefficient)

» Determined by: a) management attitudes, and b) collective negotiations

» Basically, it is used for indexation of the real salaries and annual salary increase for all employees

Section II / part 2 – Structuring basic salaries

Coefficients and its values are two building

blocks of basic salaries

Basic salaryNumber of coefficients

Value of one coefficient= x




Structuring allowances

» Allowances refers to different types of bounties related to gained right from the employment as well as to other indemnifications related to wages

» Basically, management of allowances is limited because of 2 main reasons:

› For the most parts of allowances limits are strictly defined by law

› Level and structure of all allowances is regulated by setting up the wage system in organization. It can not be changed in short term.

» All allowances are comprised of 2 parts:

› Salary increments

› Salary indemnifications (basic and other indemnifications)

» For tax purposes, all allowances are “equalized with salaries”, which means that they have same tax treatment as salaries

Section II / part 3 – Structuring allowances

Allowances are strictly defined by law, so it can not be managed

directly




Structuring allowances – illustration

Section II / part 3 – Structuring allowances

There are 2 types of

allowances –salary

increments & salary

indemnifications




Structuring other personal expenses

» Other personal expenses refers to money paid to employees related to various indemnifications and aid by employer

» Other personal expenses are not linked with salaries and employers are not obliged to pay these amount to employees

» Even employer is free to calculate these expenses, management of other personal expenses is limited mainly due to limits defined by usual (standard) business practice

» All other personal expenses are comprised of 2 parts:

› Cost reimbursements

› Other receipts

» Oppositely to allowances, other personal expenses are not included in employment tax basis (“tax free” expenses)

Section II / part 4 – Structuring other personal expenses

Other expenses depend on

employer’s will and are „tax

free“




Structuring other personal expenses –illustration

Section II / part 4 – Structuring other personal expenses

There are 2 types of other

personal expenses – cost reimbursements

and other receips




Structuring taxes & contributions

Section II / part 5 – Structuring taxes and contributions

Taxes & contributions

are distributed between

employer and employee




Structuring bonuses

» Bonuses represents part of the money remuneration directly related to quality of work and motivation of employees, as well as teams that employees are involved in

» As such, managing bonuses is one of the most reliable instrument for stimulations (motivation) of employees…

» … and key precondition for successful motivation and effective evaluation

» Following key issues should be considered, in order to enforce efficient bonus policy:

› Which basis shall we use?

› In which time intervals shall we evaluate and reward employees?

› Which bonus spread shall we use?

› Should we use negative stimulations?

Section II / part 6 – Structuring bonuses

Bonus management is a most reliable instrument for motivation of

employees and their evaluation




Structuring bonuses - illustration

Section II / part 6 – Structuring bonuses

There are 2 questions:: (1)

how to determine basis and (2) how to determine % of

stimulation

» Determined by existing wage system defined within Specific Collective Agreement from 2005

» Key dilemmas:

› What to use as a basis (basic, net or gross salary)?

› Which amount to use (single month, yearly average, etc.)?

» Determined by actual Specific Collective Agreement from 2005

» According to this:

› Basic salary is used as a basis

› Amount (monthly or average) is not precisely defined

› Limits can be +-20% or more

Bonuses and stimulations

Basis %

of stimulation = x


Section III




Basic requirements & criteria for RMS development

» Basic requirements for RMS development:

› Justness, in order to establish socially responsible management system

› Transparent & clear, in order to be accessible and controlled by employees

› Well structured & coherent, in order to be easy understandable

› Flexible, in order to facilitate employee’s and organizational development

› Integrated in management information system (MIS)

» RMS should materialize (basic criteria for RMS development):

› … level of responsibility and relevancy in business process streams (hierarchy)

› … acquired degree of formal and additional education (education)

› … cumulated experience, expertise and know-how (experience)

› … working conditions special working requirements (working environment)

› … contribution to organizational results (results)

› … and other personal contributions and characteristics (other criteria)

» Beside this, RMS should be suitable for remuneration of special structures of employees in public sector (managers, assessors, etc.)

Section III / part 1 – Essentials of RMS development in ALIMS

RMS management is

based on principles




RSM in practice

Section III / part 1 – Essentials of RMS development in ALIMS

What can be managed?

(1)Basic salaries

(2) Bonuses and incentives

Unmanageable

Unmanageable

Limited possibilities

Not applicable




Section III / Part 2




Managing basic salaries – framework

Section III / part 2 – Managing basic salaries

Management of basic salaries is

based on management of

coefficient number

» As an essence of basic salary system, it is made to reflect differences among employee’s status and their performances

» Consequently, it is best instrument for managing basic salaries in short and long term

» Determined by Minimum Basic Salary Agreement

» Consequently, it can not be used as an instrument for managing basic salaries in short term

Basic salaryNumber of coefficients

Value of one coefficient= x




Models for managing basic salaries

4 models of managing basic

salaries:

(1) Arbirtrary model

(2) 1-line payment system

(3) 2-line payment system

(4) Mixed model


CriteriaArbitrary model

Structured model Mixed model1-line payment

system2-lines payment

system

Flexibility High Low Average High

Justness Questionable Average High High

Transparency & clearness Low Average High High

Structure & coherence Low High High Average

Determination of single salary Negotiable Systematically Systematically Mixed

Criteria for salary classifying Not defined Strictly defined Strictly defined Strictly defined

Integration in MIS Average High High High

Recommended for SME’s Medium and big enterprises and public sector

Notes: green color refers to good practice, red color refers to bad practice




Mixed model – an introduction

» There are 2 main organizational requirements from the new system:

› Development of the logical system applicable to all employees

› Capability of the system to recruit and keep at job leading managers and experts

» Mixed model represents combination of two systems:

› Core module: 2-lines payment system (payment groups / payment levels)

› Extended module: negotiation system

Mixed model integrates all adventages of other models


Parameter Standardized

systemNegotiation system

Value of coefficient Pre-determined & unified

Number of coefficients Determined Adapted

Salary level Adapted Determined

Recommended for… All other employees Key managers and experts




Mixed model – an overview (“2-lines mixed payment group system”)

Mixed model allows all types of employees’ development


Vertical development

Horizontal development

Hybrid development

Group I

Group II

Group III

Group IV

Group V

…..

Group “n”

Rate 1 Rate 2 Rate 3 Rate 4 Rate 5 ….. Rate “n”

Primary level of classifying (status oriented)

Secondary level of classifying (personal development oriented)




2-lines payment system – illustration

Overlapping is a significant

characteristic of 2-lines payment

system


From 3 to 5.25

From 3.8 to 6.65

From 5 to 8.75

From 7 to 12.24

From 10 to 17.49

OVERLAPPING

0,0

4,0

8,0

12,0

16,0

20,0

Group I Group II Group III ..... Group "n"

Num

ber

of co

effic

ients

Level 1 Level 2 Level 3

..... Level "n"




Primary classification – overview

» Used for:

› Determining employee’s position in the organizational structure (status determining)

› Determining vertical improvement of employees

Two basic criteria for primary classification:

› Hierarchical position

› Relevance in main business process streams

» Indirectly, key parameters for determining primary classification are:

› Education level

› Working experience (cumulated know-how)

› Profile and skills

» Basically, higher level of responsibility (LoR) and job complexity (JC) is directly related to upper payment group

Primary classification = classification into payment groups

Payment group = f (LoR, JC)

Primary classification

refers to definition of

payment groups (reflects vertical

development)





Primary classification – example

For example, it can be 7

payment groups


Payment group

Name of the group

Examples Coefficient spread

Group I Lower executives Driver, Housekeeper, Courier, Laundry 1.0 – 4.0

Group II Higher executives Technician, Accountant, Help Desk 3.0 – 6.0

Group III Associates HR Expert, System Administrator 5.0 – 7.5

Group IV Lower management Team leaders, Heads of lower units 6.0 – 9.0

Group V Project managers eCTD Project Manager 8.0 – 10.5

Group VI Middle management & leading experts

Heads of upper units, leading assessors 10.5 – 13.0

(+ negotiable salary)

Group VII Top management Director, Executive Directors, advisors 13.0 – 16.0

(+ negotiable salary)




Secondary classification - overview

» Used to:

› Reflect differences among employees within single payment group

› Reflect horizontal employees development

» Within single payment group, some significant differences among employees can arise, due to:

› Various working experience (years of service – criteria 1) – YoS

› Various levels of qualifications (education level – criteria 2) - EdL

› Various professional improvement (additional education – criteria 3) – AdEd

› Various levels of cumulated know-how (core expertise level – criteria 4) - CEx

› Various personal characteristics (profiles and skills – criteria 5) – P&S

» Personal development is reflected through improvement in each above defined criteria

Secondary classification = classification into payment levels (weighted system)

Payment level = weighted f (YoS, EdL, AdEd, CEx, R&S)

Secondary classification

refers to payment level

(reflects horizontal

development)





Secondary classification is methodology-

oriented


Secondary classification – example

Criteria Parameter WeightMeasured result

Weighted result

Criteria 1 Working experience Years of service 25% 25 6.25

Criteria 2 Qualification level Educational level 25% 75 18.75

Criteria 3 Professional improvement Additional education 10% 75 7.5

Criteria 4 Cumulated know-how Core expertise level 25% 100 25

Criteria 5 Personal characteristics Skills 10% 100 10

Criteria 6 Personal characteristics Profile 5% 50 2.5

Total 70

Parameter Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level 8

Weighted results spread 0 – 15 15 – 25 25 – 40 40 – 55 55 – 65 65 – 80 80 – 90 90 – 100

Number of coefficients (payment group IV)

5.5 5.8 6.0 6.2 6.4 6.6 6.8 7.0




Process of implementation

Implementation in 5 steps


Step 1: defining payment groups

Defining criteria 1st level of classifyingDefining spreads

Step 2: defining payment levels

Defining criteria 2nd level of classifyingDefining spreads

Step 3: defining coefficient value

Step 4: defining negotiable salaries

Step 5: adaptation to all employees




Section III / Part 3




Stimulations – an overwiew

» Rewarding is indirect and objective. Rewarding depends on evaluation results (performance evaluation). It means that stracture and amount of bonus depends on: (a) evaluation results and (b) intention of management to motivate employees

» Implementation of bonus system has two goals:

› To reward employees, depending on results

› To motivate employees to improve performances

» Subject of evaluation: personal characteristics of employees, employee’s behaviour, employee’s results etc.

» Types of stimulations

› According to nature

» Ordinary stimulations (short-term bonuses, annual bonus, group stimulations etc)

» Extraordinary stimulations (for significant improvement, special types of rewarding etc)

› Quartal stimulations

› Annual stimulations

› Extraordinary stimulations of managers

› Group stimulations

› Stimulations for significant improvements

› Special stimulations (for top managers, for experts etc)

Section III / part 3 – Managing bonuses

Managing bonuses is one of the critical management

activities




Rewarding system framework


Managing bonuses is a link

between evaluation and improvement of

employees




Introduction to evaluation

» What is the evaluation:

Evaluation is a process of assessment of employee’s contribution to achieving of organizational goals in defined period of time. Three main parts:

It is assessment process

This process is oriented toward employee’s performances

This process is time determined

» What are the benefits:

› Increase of motivation & employee’s development

› Better planning

› Better communication & convergence of goals

› Efficiency improvement


Evaluation is highly

significant and has multiple management

use




Proposed types of evaluation


Evaluation can be classificated

by 4 criteria




Evaluation process


Implementation in 7 steps

Step 1: defining the model of evaluation

Step 2: defining the evaluation parameters

Step 3: selection of evaluators

Step 4: defining timeframe for evaluation

Step 5: defining the evaluation methods

Step 6: realization of evaluation

Step 7: analyzing results




Step 1: defining model

Parameter Component 1 Component 2 Component 3

Name Quarterly evaluation Yearly assessment Extraordinary evaluation

Form Measurement Assessment Measurement & assessment

Frequency Quarterly Yearly Extraordinary

Coverage Individual & group Individual Individual and/or group

IndicatorsMostly performance based

Mostly personality based

Performance and/or personality based

Criteria Mostly quantitative Mostly qualitative Quantitative and/or qualitative

Example form Quarterly evaluations Annual interview

› Evaluation of extraordinary results of employees

› Evaluation of special groups of employees (managers, experts)

› Evaluation of problematic employees

Key inputs› Quarterly evaluation

appraisals

› Results of quarterly evaluation

› Personal development plans

› Details on extraordinary results

› Details on other key essentials

Models to be developed

› Model for individual quarterly evaluation

› Model for group quarterly evaluation

› Model for individual yearly evaluation

› Model for evaluation of extraordinary results

› Model for evaluation of special groups of employees

› Model of evaluation of problematic employees

Step 1 –defining

appropriate model of

evaluation





Step 2: defining parameters

» Defining the parameters refers to selecting the indicators (1st step) and selecting the criteria (2nd step)


Step 2 –defining right

parameters for evaluation

Indicators Used for Related to Main characteristics

Performance oriented

› Measuring work results

› Measuring key dimensions of business efficiency

› Particular workplaces

› Particular business processes

› Mostly quantitative

› Easy measurable

Personality oriented

› Assessing personal characteristics

› Assessing personal behavior

› Individuals

› Teams

› Mostly qualitative

› Easy assessable

Criteria Main characteristics Examples Mostly used for

Quantitative › Easy measurable

› KPI oriented

› Respect the terms

› Contributions

› Learning speed

› Measuring performances

Qualitative

› Hardly measurable / easy assessable

› Important for personal development

› Team work orientation

› Creativity

› Reliability

› Assessing personality




Step 2: proposed weighted system


Step 3 –defining

appropriate weights

Criteria for evaluation WeightMeasured result

Weighted result

Quantitative Work correctness & precision 20% 5 1.00

Respect the terms 10% 4 0.40

Contribution to results 10% 4 0.40

Independency in work 5% 3 0.15

Learning speed 5% 3 0.15

Qualitative Team work orientation 20% 3 0.60

Level of motivation 10% 3 0.30

Systematic work 10% 5 0.50

Reliability in work 5% 4 0.20

Creativity in work 5% 3 0.15

Total 100% 37 3.85




Step 3: selection of evaluators


Step 3 –selection of evaluators

Evaluator PRO’s CON’s

Managers

› Evaluation experience

› Good insight in goals and results

› Wider organizational picture

› Discontinuity in monitoring

› Focus on administrative aspects

› Subjectivity

Employees (self-evaluation)

› Best insight in work details

› Participation

› Self-monitoring

› Discrepancy between managers’ and employees’ evaluation

› Subjectivity

Colleagues

› Various dimensions of evaluation

› Appraisals are stabile in time

› Focus on competences

› Maximum information for evaluation

› Appraisals are usable for employee’s professional improvement

› Appraisals distortion (protection of colleagues)

› Erosion of managers’ influence

› Stereotypes

› Mistrust after lower appraisals

Top management › Development aspects

› Double control

› Predetermined appraisal

› Lack of information

External partners › Focus on customer satisfaction › Hard to quantify and measure

External evaluators › High level of professionalism

› Objectivity

› Lack of information

› Unnatural behavior of employees




Step 3: proposed model (360°)

» Model of multiplied sources of evaluation (“Model 360°”) - based on weighted evaluation from 3 lines:

› Hierarchy line (formal authority and formal subordinated)

› Professional line (professional authority and professional subordinated)

› Process line (input and output process cooperators)


Step 3 –selection of

evaluators (360 degrees

principle)

Note: distribution of weights can vary by each single employee and more then 6 colleagues can be involved in evaluation




Step 4: defining timeframe

» Defining timeframe of evaluation refers to defining: a) cycles of evaluation and b) duration of each single evaluation

» It is recommended to make a difference between:

› Evaluation in rewarding purposes (suitable for periodic assessment)

› Evaluation in purpose of career development of employees (suitable for occasional assessment)


Step 4 –defining the

time (cycles and duration) of evaluation

Time cycles Monitoring Measurement Assessment Type of evaluation

Monthly High Low Average › Monthly interviews

Quarterly Average High Low › Quarterly individual evaluation

› Quarterly group evaluation

Yearly Average Low High › Yearly interviews (feedback int.)

Occasionally Low Average High

› Evaluation of extraordinary results

› Evaluation of managers

› Career development evaluation




» Defining methods are significant step in evaluation process and refers to:

› Defining evaluation methods:

» Objective evaluation method, mostly based on performance and focused on quantitative indicators

» Subjective evaluation method, mostly based on personality and focused on qualitative indicators

› Defining evaluation techniques:

» Employees ranking technique

» Comparing with descriptively defined standards

» Comparing with numerically defined standards

› Defining evaluation instruments:

» “Hard” instruments (direct evaluation, fulfilling questionnaires etc.)

» “Soft” instruments (interviews, interpersonal interaction, observation etc.)


Step 5 –defining

methods of evaluation

Step 5: defining methods




Step 5: proposed methods


2 main methods are quarterly

and yearly individual evaluation

Evaluation type

Evaluation method

Evaluation technique

Evaluation instrument

Quarterly individual evaluation

Objective method

Comparing with numerically defined standards

Exemplars for direct evaluation

Yearly individual evaluation

Subjective method

Comparing with descriptively defined standards (goals realization)

Yearly interview (feedback interview)




Steps 6 & 7: realization of evaluation and analyzing results

» Realization of evaluation

› In accordance with General Evaluation Plan (part of HR Annual Work Plan)

› Two main conditions for successful realization of evaluation:

» Pre-condition – all previous issues (model, parameters, evaluators, timeframe, methods) must be clarified

» Post-condition – methodology of analyzing results and system of rewarding must be defined

» Analyzing results

› Analyzing results includes: a) assembling and classification of materials, b) processing and extracting results, and c) analysis of results and preparation for the next step (rewarding)

» Some useful notes

› In order to avoid errors in evaluations, evaluation system must be as much as possible precisely and objectively defined

› ALIMS should acquire modern IT tools, in order to successfully implement RMS in the real life

› Performing periodical (repetitive) evaluations, organization is cumulating experience and significantly improving its know-how, which enables it to improve evaluation system


Steps 6 & 7 are very important

(implementation and control)




Linkages between evaluation and rewarding system

Evaluation and rewarding

(bonuses) are closely linked and depend each other





Evaluation and stimulation in practice

Example shows how it works


EVALUATOR MARK WEIGHT WEIGHTED MARK

Formal authority 3 30% 0,90

Formal subordinate 5 20% 1,00

Professional authority 5 15% 0,75

Professional subordinate 4 15% 0,60

Collaborator in process (input) 3 10% 0,30

Collaborator in process (output) 2 10% 0,20

TOTAL /AVERAGE 3,67 100% 3,75

STIMULATION 10%

STIMULATION CRITERIA % OF STIMULATION BASIS

For mark between 0 and 1 -20%

E.g. basic salary

For mark between 1 and 2 -10%

For mark between 2 and 3 0%



NOTE:

All data are arbitrary and used exclusively for

illustration




Double overlapping after stimulation

System of bonuses allows

firm to have double

overlapping system


0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,00

18,00

20,00

GROUP I GROUP II GROUP III GROUP ... GROUP "N"

Subgroup 1

Subgroup 2

Subgroup 3

Subgroup …

Subgroup …

Subgroup "n"

Coefficient overlapping – 1:6




Structure of remuneration packages

Remuneration packages can

vary in few ways





Further steps

Further steps




www.aventinpartners.com; [email protected]

Contact

» Address: Đevđelijska 55, 11000 Belgrade

» Phone (fix): +381 11 240 50 22

» Phone (cell): +381 62 227 045

» E-mail (business): [email protected]

» E-mail (personal): [email protected]

» Web: www.aventinpartners.com

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