Offering employees what they want

Segmentation allows employers to focus rewards on specific groups

As the Canadian labour market stretches to accommodate rising demand and diminishing supply, employee attraction and retention are at the top of the workplace agenda. As a result, many organizations are enhancing the segmentation of their workforce — offering different rewards for different employee groups — to better compete in the marketplace and make the most of their investments.

In the past, companies tied incentive plans, target bonuses or eligibility criteria to a job level or type of role to drive performance and align with competitive market practice, says Claudine Kapel, principal with Kapel and Associates in Toronto. But segmentation can also be effective in attracting and retaining employees.

“As the demographics come into play, with an aggressive population and tight labour market, organizations are going to become more sensitive to making sure they have an attractive employment offer,” she says. “The key is trying to make sure you understand what drives attraction and retention in different populations. Understanding from a broader perspective what employees value can offer insights in terms of how to make the most of investments in rewards.”

A recent study of 580 organizations in the United States and Canada by HR consulting firm Mercer finds the criteria most often used to segment the workforce are job level (55 per cent), geographic location (35 per cent), business unit or product line (27 per cent), job family (19 per cent) and business life cycle (15 per cent). And the most common rewards for differentiating among employee segments are base pay and short-term incentive opportunities and eligibility.

“If you look at rewards and benefits, they’ve tended to be segmented mostly by employee category, such as hourly versus salary… driven by the marketplace expectations of employees,” says Iain Morris, principal and faculty member of the Mercer global total rewards strategy practice in Toronto. “What some organizations are doing now is looking at segmentation a little bit differently, where they preserve that hierarchical segmentation and on top of that look more closely at the workforce, the organization, and try to identify where value is actually created, the value drivers. And then look at the jobs that support the creation of value, the enabling roles.”

It really starts with the business strategy, he says, knowing where the business is going and establishing a framework to see which roles, job families or business units are driving value. It’s also a good idea for organizations to look at the “legacy drivers” — the parts of the organization that historically were important and well paid but now may be relatively expensive compared to their value contribution because of changing technology or a new business direction.

“Employers are struggling to determine where to best allocate their limited total rewards resources,” says Steven Gross, global leader of Mercer’s broad-based performance and rewards consulting business in Philadelphia. “By segmenting their workforce, they can focus their rewards and investments on the employee groups that contribute the most to the organization’s growth and productivity.”

Excluding executive pay and sales pay, which work differently, there are several reasons why a company segments its employees, says David Johnston, president of Sales Resource Group, a Toronto-based sales force effectiveness consulting firm, and teacher of total rewards and sales compensation certification courses for WorldatWork, an international HR association based in Scottsdale, Ariz., which helps employers implement total rewards.

“From a total rewards standpoint, some groups have very different requirements,” says Johnston.

“To be fair to each group, you have to segment your population and identify the way in which their compensation is structured and then identify the competitiveness in the marketplace.”

But segmentation based on skill sets is a recent development that has companies identifying “hot” job families, says Johnston. Here compensation is very much tied to economic theory, so as demand goes up, supply goes down and prices rise. Typically over time that attracts more people into those professions, so the price comes back down.

Rewards for high-potential people and top performers can include equity opportunities (if it’s a smaller company) or stock options (if it’s publicly traded).

“More organizations are moving towards identifying what they can do for these people to differentiate them from the average performer because (increases in) base salaries have tended to be quite low over the last 10 years,” says Johnston. Often top performers receive anywhere from 3.5 per cent to four per cent while low- to medium performers receive 2.5 to three per cent, “so there’s not much differential,” he says.

Businesses are targeting top performers or critically skilled employees who are “mission-critical” to their business through the increased use of sign-on bonuses, off-cycle base salary adjustments or greater focus on career development, says Liz Wright, Toronto practice leader of compensation at Watson Wyatt.

“Where there are attraction and retention issues in terms of that talent base, we’re seeing a number of different practices happening,” she says.

While high performers are important to any business, knowledge and skill sets should also be considered when looking into areas that drive growth, says Wright.

“It’s not a simple thing to draw a black-and-white line between individuals. You have to do it very carefully if you segment that way,” she says.

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