Enlightened employers in Spain are starting to understand that the way they reward their staff not only helps them attract and retain the kind of people they need to be successful, but, supported by other peoplemanagement policies, can also have a significant impact on organizational behavior and change. By more closely aligning individual and corporate objectives, these employers are effectively turning employees into participants in their organizations’ success.

One of the most tangible manifestations of a new, more strategic approach to compensation is salary reviews, where criteria such as an individual’s performance, capability, commitment and potential now carry far more weight than traditional factors such as inflation and years of service.

Factors companies take into account when doing salary reviews

By emphasizing the contribution of the individual in making compensation decisions, organizations are starting to invest their money where it will earn them the greatest return. This approach also helps keep a lid on salary costs without resorting to a blanket, undifferentiated and ultimately demotivating cost-control policy.

Nevertheless, Mercer’s research shows that cost of living remains an important consideration. This is understandable, given the need to peg reviews to purchasing power. Salary levels and seniority also need to be taken into account: If someone is performing very well and has high potential, but is already as senior and as well-paid in his or her particular role as that person can be, then the organization needs to bring other HR policies into play – promotion, for example – to ensure that the individual is appropriately rewarded. But years of service is becoming a less important factor in salary reviews, with far more emphasis now placed on individual performance.

Another clear trend in compensation strategy in Spain is the growing differentiation between executive remuneration and rewards for the rest of the organization, not just in the sense of absolute pay, but also in terms of long- and short-term incentives, pensions and other benefits, including health insurance and company cars. Executives also receive a higher proportion of variable pay than they used to and than others in the organization enjoy, because employers believe that executives have the greatest influence on achieving corporate objectives in the medium term – three to five years – and that a significant element of their pay should therefore be tied to the business’s success.

But far-sighted companies are successfully applying variable pay to all levels of the organization, rather than restricting it to top management. Consequently, many middle managers, increasingly regarded as key players in ensuring the execution of strategy to achieve corporate goals, now receive variable incentive-related pay. For example, middle managers are frequently given ad hoc bonuses for taking on, leading or participating in successful projects. Similarly, companies are starting to pay special bonuses to blue-collar workers to help improve productivity – an issue that has been the subject of much debate recently in Spain. While unemployment has fallen, so has productivity, and including productivity bonuses in collective bargaining agreements is seen as a way to address this problem without incurring additional structural costs.

Progress has been impressive over the past few years. Some 21 percent of the companies Mercer surveyed in 2007 offer some sort of variable pay and choice of benefits. It seems that fears about the additional administration involved are diminishing as the benefits of the new strategy start to emerge. Among those benefits is greater motivation among employees who now enjoy a better work-life balance. Providing such benefits doesn’t have to be expensive either, given the potential to reap economies of scale with bulk buying, and significant tax advantages.

It is not just individuals and employers who gain from this new strategic approach to compensation. The Spanish economy has also benefited. A recent report from the Organisation for Economic Co-operation and Development (OECD) showed that Spain is the only one of the 30 OECD countries to reduce its overall real salary levels – by 4 percent – in a climate of economic growth.

This has not happened by accident, of course. Spain has had a salary moderation policy for the past 10 years. But while companies have been keen to keep a lid on salaries, they have not sat back and watched their employees’ purchasing power erode. Instead they have worked hard to maintain employees’ purchasing power both by rewarding performance and by allowing employees to choose the benefits that are of most value to them. In the past companies had indiscriminate benefits policies, which meant they often wasted money on giving benefits to staff who didn’t value them.

Also, more and more employers now focus on “total reward” rather than purely financial compensation. This has improved their ability to attract and retain employees, who, as study after study shows, are not motivated by money alone. Among the “benefits” companies offer are interesting career paths, including opportunities to gain international experience; flexible schedules and tele-working to improve work-life balance; and open, participative, communicative and democratic cultures – as well as fair and competitive compensation strategies.

Mercer studies have shown that employees may not realize when they are being paid above-average salaries, but they do know when they are being paid below the average. So while salaries have to be competitive, paying over the odds can be counterproductive in the same way that giving employees benefits they don’t value is counterproductive. Likewise, giving employees benefits whose value they don’t appreciate – pensions, until recently, being a classic example – is also counterproductive. It is important, therefore, not just to focus on total reward, but to communicate the value of these rewards to employees.

One final trend in compensation strategies that is worth noting is the growing use of technology to help companies manage compensation in an increasingly globalized environment. Companies need technological platforms that allow the rapid sharing and collation of market and internal company information to be able to compare and harmonize compensation policies and salaries in all the countries where they have a presence.

Technology is also critical in giving organizations the flexibility to adapt corporate guidelines to specific countries or lines of business, and to manage each subsidiary’s compensation strategy according to the relative importance of that subsidiary and its competitive position in the local marketplace. Ensuring internal equity and external competitiveness of compensation strategies is as important in a global context as it is at a domestic level, but without the help of sophisticated technology, is virtually impossible to achieve.

In conclusion, compensation can make an active contribution to business strategy, provided organizations adopt a professional approach, introduce robust methodologies and clearly communicate those methodologies so that employees can see what they have to gain. By integrating total reward into the overall people strategy, and supporting it with technology, organizations can not only improve their competitive position, but also enhance their standing and reputation as good employer brands.