Are CEOs worth their massive remuneration packages, or is there too much cash in the corner office?
Executive pay has been in the spotlight in recent weeks amid a lacklustre reporting season for some of Australia’s biggest companies. Beleaguered Qantas chief Alan Joyce chose to forgo his bonuses after the company’s first annual loss since 1995; ANZ has extended its executive pay freeze for 900 of its senior executives in anticipation of subdued lending growth in 2013-14.
In contrast, there seemed to be little contrition from the Commonwealth Bank, where former CEO Sir Ralph Norris is evidently owed $9.6 million in salary and potential bonuses for the final five months of his tenure. This means that, during this period, he was earning around $64,000 a day - more than many of his bank employees would earn in an entire year.
Job evaluation systems may provide an answer. Over the last half century or so, job evaluation has become a common feature in the employee remuneration landscape for many organisations. Job evaluation systems are widely used in different types of organisations for establishing a notional grading of jobs in the determination of a reasonable level for a position’s pay.
What is job evaluation?
Job evaluation (JE) is an analytical, systematic and methodical approach to remuneration. JE is based on the work content of the job, its complexity and challenges, as well as the knowledge, skills, experience, training, qualifications and interpersonal skills required to do the job.
A job evaluation system’s explicit purpose is classification and grading of positions – that is, work - not employees. This typically takes place before recruitment and selection of employees, in order to establish at which level a job is to be situated in the organisation.
Commonly used in the public sector, job evaluation systems are also extensively used in the private sector. Indeed, job evaluation is used in a broad variety of organisations, including banks, universities, retail, insurance and telecommunications companies. Yet the concept of job evaluation is sometimes maligned and is frequently misunderstood, partly due to myths being perpetuated.
The myth of performance appraisal
For example, job evaluation (JE) is frequently confused with performance appraisal. However, given that JE is a job-based approach to remuneration systems rather than person-based, it is specifically not concerned with evaluating employees, nor with measuring their performance. The focus of a job evaluation system is solely on the respective position or job and the content of the work within that job. Thus it is the job that is evaluated, not the employee.
Old pay and “new pay”
Job evaluation can be usefully considered in contrast to “New Pay”, an American term coined some two decades ago (making it now a somewhat dated term). The “new pay” is characterised by variable or contingency pay, such as bonuses, commissions and other incentives or inducements — which are contingent on employee performance. These forms of pay can be seen as employers transferring risk to employees, whose pay is no longer stable.
Although something of an anathema for job evaluation practitioners, these types of variable remuneration have become fashionable in Australian organisations. A case in point is executive pay.
Why does this matter?
The Productivity Commission’s recent report on executive remuneration has revealed vast growth in executive pay. This has grown by about 250% in Australia since the early 1990s. CEOs at the top 100 companies have enjoyed pay rises of about 10% per annum after inflation. The top 20 CEOs are paid about $10 million on average. This is 150 times average weekly earnings.
How can such excess ever be justified? Such possibilities are much less likely with job evaluation. A JE system would evaluate the job of CEO – the work itself - relative to the other jobs in the organisation and is thus more likely to achieve a fair and reasonable outcome, acceptable to more stakeholders.
But what about the market?
Market factors are separate from JE and, while organisations might consider the remuneration market as part of the recruitment and selection process when appointing a CEO, JE provides a reasonable starting point in terms of workforce relativities. Typically, a board makes decisions regarding short-term incentives - such as bonuses - and long-term incentives - such as shares or options via its remuneration committee.
Job Evaluation and Good Practices
Research carried out in the varied work settings of the public sector, where job evaluation is used extensively, suggests a range of good practices of which three main ones are dominant, agreed by employees, unions, management and human resources practitioners.
Firstly, before the job is evaluated, the position should be analysed and documented to produce a concise position description, which is more than a list of tasks. This includes gender neutral job titles – such as clerical officer, fire-fighter (not fireman), police officer (not police-man) chairperson, flight attendant (not steward/ess) and so on.
In order to avoid historical bias and potential to undervalue women’s work — gender should not be considered unless demonstrably relevant. Some of the “soft” aspects of “caring” jobs are hard to evaluate, and this is where a thorough job analysis (JA) process is fundamental as a pre-requisite to JE, in order to capture those elusive soft skills, such as communication, negotiation, problem-solving, planning, co-ordination, organising and so on.
Secondly, JE is most effectively and fairly carried out by a panel of trained and experienced job evaluators, with union participation as well as management.
Thirdly, training for job evaluators is fundamental. The language of work and job evaluation can seem like a different language and the JE process includes a JE system manual requiring some explanation and interpretation, so that job evaluators can all be ‘on the same page’ with terminology.
To avoid historical bias associated with many jobs, training highlights typical areas of bias and gender stereotypes in jobs. Training can help evaluators focus on the job, instead of the person doing the job.
Indeed, JE is not perfect, since only those who use JE can ensure the fairness aspect, by minimising bias and applying the JE process within the determination of a reasonable level for a position’s pay. While job evaluation systems can be a useful tool in the pay determination process, they alone cannot ensure fairness. JE can enable it. This is an important distinction between ensuring and enabling: like most systems, JE is only as good as those who implement it.