Remuneration Management System in Public Sector

Methodology and implementation
Belgrade, April 2014
Structure of presentation
Section I:
Introduction to RMS
1. 2.
Introduction to RMS Regulatory framework for RMS
1.
Structure of money remunerations Structuring basic salaries Structuring allowances Structuring other personal expenses Structuring taxes and contributions Structuring bonuses
Section II:
Analysis of remuneration structure
2. 3. 4. 5. 6.
Section III:
Proposed principles for RMS in public sector
1. 2. 3.
Essentials of RMS development Managing basic salaries Managing bonuses
Igor Lazarevi, Aventin Partners Djevdjelijska 55, 11000 Belgrade; +381 62 227 045 www.aventinpartners.com; igor.lazarevic@aventinpartners.com
Page 2
Section I
Section I / part 1 Introduction to RSM
Overview of RMS
RMS is a complex system that affect both financial performance and quality of human resource management
Page 4
Section I / part 1 Introduction to RSM
Short introduction to RMS
If implemented well, organization can benefit from 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
Page 5
Section I / part 2 Regulatory framework
Regulatory framework for RMS
RMS is regulated system
Constitution and laws
Decrees
Collective Agreements
Other
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
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
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Section I / part 2 Regulatory framework
Framework for defining RMS
with significant space for adoption and flexibility
Structure of money compensation (remuneration)
Precisely defined
Payroll deadlines Rates and basis for taxes and contributions Obligations for insurance and other allowances
Limits for various allowances within Labor Law
Only limits defined
Limits for other personal expenses within Labor Law Limits for bonuses within Collective Agreements
Calculation of basic salaries (incl. structure of coefficients)
Not strictly defined
Bonus schemes and evaluation principles Management of variable part of salaries
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Section II
Section II / part 1 Structure of remuneration packages
Structure of money remunerations basics

Money remuneration packages can be structured in 3 ways
Money remuneration packages consists of 5 elements: basic salary, allowances, other personal expenses, taxes and contributions, and bonuses There are 3 types of structuring:
Net / gross Fixed / variable Fixed Direct / indirect
Basic salary
Basic salary
Basic salary
Direct Page 9 Indirect
Allowances
Taxes and contributions
Other personal expenses
Bonuses
Other
Variable
Net
Allowances
Allowances
Bonuses
Bonuses
Section II / part 2 Structuring basic salaries
Structuring basic salaries
Basic salaries can be based on coefficients (fixed model) and discretion of employer (negotiable model)
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
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Section II / part 2 Structuring basic salaries
Structuring basic salaries illustration
Coefficients and its values are two building blocks of basic salaries
Basic salary
Number of coefficients
Value of one coefficient
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
Page 11
Section II / part 3 Structuring allowances
Structuring allowances
Allowances are strictly defined by law, so it can not be managed directly
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
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Section II / part 3 Structuring allowances
Structuring allowances illustration
There are 2 types of allowances salary increments & salary indemnifications
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Section II / part 4 Structuring other personal expenses
Structuring other personal expenses
Other expenses depend on employers will and are tax free
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)
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Section II / part 4 Structuring other personal expenses
Structuring other personal expenses illustration

There are 2 types of other personal expenses cost reimbursements and other receips
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Section II / part 5 Structuring taxes and contributions
Structuring taxes & contributions
Taxes & contributions are distributed between employer and employee
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Section II / part 6 Structuring bonuses
Structuring bonuses
Bonus management is a most reliable instrument for motivation of employees and their evaluation
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?
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Section II / part 6 Structuring bonuses
Structuring bonuses - illustration
There are 2 questions:: (1) how to determine basis and (2) how to determine % of stimulation
Bonuses and stimulations
Basis
% of stimulation
Determined by existing wage system defined within Specific Collective Agreement from 2005 Key dilemmas:
Determined by actual Specific Collective Agreement from 2005 According to this:
Basic salary is used

as a basis
What to use as a
basis (basic, net or gross salary)?
Amount (monthly
or average) is not precisely defined
Which amount to
use (single month, yearly average, etc.)?
Limits can be +20% or more
Page 18
Section III
Section III / part 1 Essentials of RMS development in ALIMS
Basic requirements & criteria for RMS development

RMS management is based on principles
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 employees 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.)
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Section III / part 1 Essentials of RMS development in ALIMS
RSM in practice
What can be managed? (1)Basic salaries (2) Bonuses and incentives
Unmanageable
Not applicable
Unmanageable
Limited possibilities
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Section III / Part 2
Page 22
Section III / part 2 Managing basic salaries
Managing basic salaries framework
Management of basic salaries is based on management of coefficient number
Basic salary
Value of one coefficient
As an essence of basic salary system, it is made to reflect differences among employees 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
Page 23
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
Criteria
Arbitrary model High Questionable Low Low Negotiable Not defined Average SMEs
Structured model 1-line payment system Low Average Average High Systematically Strictly defined High 2-lines payment system Average High High High Systematically Strictly defined High
Mixed model High High High Average Mixed Strictly defined High
Flexibility Justness Transparency & clearness Structure & coherence
Determination of single salary Criteria for salary classifying

Integration in MIS Recommended for
Medium and big enterprises and public sector
Notes: green color refers to good practice, red color refers to bad practice
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Mixed model an introduction
Mixed model integrates all adventages of other models
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
Parameter
Standardized system
Negotiation system
Value of coefficient Number of coefficients Salary level Recommended for
Pre-determined & unified Determined Adapted All other employees Adapted Determined Key managers and experts
Page 25
Mixed model an overview (2-lines mixed payment group system)

Mixed model allows all types of employees development
Primary level of classifying (status oriented) Secondary level of classifying (personal development oriented)
Rate 1
Rate 2
Rate 3
Rate 4
Rate 5
..
Rate n
Horizontal development Group I Group II Group III Group IV Vertical development Group V .. Group n Hybrid development
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2-lines payment system illustration
20,0
Overlapping is a significant characteristic of 2-lines payment system
Lev el 1 ..... 16,0
Lev el 2 Lev el "n"
Lev el 3
From 10 to 17.49
From 7 to 12.24
12,0
From 5 to 8.75 From 3.8 to 6.65 From 3 to 5.25
8,0
4,0
OVERLAPPING
0,0
Group I
Group II
Group III
.....
Group "n"
Page 27
Primary classification overview
Primary classification refers to definition of payment groups (reflects vertical development)
Used for:

Determining employees 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)
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Primary classification example
For example, it can be 7 payment groups
Payment group Group I
Name of the group Lower executives
Examples
Coefficient spread
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 Middle management & leading experts Top management
eCTD Project Manager
8.0 10.5 10.5 13.0 (+ negotiable salary) 13.0 16.0 (+ negotiable salary)
Group VI
Heads of upper units, leading assessors
Group VII
Director, Executive Directors, advisors
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Secondary classification - overview
Secondary classification refers to payment level (reflects horizontal development)
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)
Page 30
Secondary classification example
Secondary classification is methodologyoriented
Criteria Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6 Total Working experience Qualification level Professional improvement Cumulated know-how Personal characteristics Personal characteristics
Parameter Years of service Educational level Additional education Core expertise level Skills Profile
Weight 25% 25% 10% 25% 10% 5%
Measured result 25 75 75 100 100 50
Weighted result 6.25 18.75 7.5 25 10 2.5 70
Parameter Weighted results spread Number of coefficients (payment group IV)
Level 1 0 15 5.5
Level 2 15 25 5.8
Level 3 25 40 6.0
Level 4 40 55 6.2
Level 5 55 65 6.4
Level 6 65 80 6.6
Level 7 80 90 6.8
Level 8 90 100 7.0
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Process of implementation
Implementation in 5 steps
Step 1: defining payment groups

Defining criteria Defining spreads 1st level of classifying
Step 2: defining payment levels

Defining criteria Defining spreads 2nd level of classifying
Step 3: defining coefficient value
Step 4: defining negotiable salaries
Step 5: adaptation to all employees
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Section III / Part 3
Page 33
Section III / part 3 Managing bonuses
Stimulations an overwiew
Managing bonuses is one of the critical management activities
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, employees behaviour, employees 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)
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Rewarding system framework
Managing bonuses is a link between evaluation and improvement of employees
Page 35
Introduction to evaluation
Evaluation is highly significant and has multiple management use
What is the evaluation:

Evaluation is a process of assessment of employees contribution to achieving of organizational goals in defined period of time. Three main parts: It is assessment process This process is oriented toward employees performances This process is time determined
What are the benefits:

Increase of motivation & employees development Better planning Better communication & convergence of goals Efficiency improvement
Page 36
Proposed types of evaluation
Evaluation can be classificated by 4 criteria
Page 37
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
Page 38
Step 1: defining model
Step 1 defining appropriate model of evaluation
Parameter Name Form Frequency Coverage Indicators Criteria
Component 1 Quarterly evaluation Measurement Quarterly Individual & group Mostly performance based Mostly quantitative
Component 2 Yearly assessment Assessment Yearly Individual Mostly personality based Mostly qualitative
Component 3 Extraordinary evaluation Measurement & assessment Extraordinary Individual and/or group Performance and/or personality based Quantitative and/or qualitative Evaluation of extraordinary results of employees
Example form
Quarterly evaluations
Annual interview
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 Model for evaluation of extraordinary results
Models to be developed
Model for individual quarterly evaluation Model for group quarterly evaluation
Model for individual yearly evaluation
Model for evaluation of special groups of employees Model of evaluation of problematic employees
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Step 2: defining parameters
Step 2 defining right parameters for evaluation
Defining the parameters refers to selecting the indicators (1st step) and selecting the criteria (2nd step)
Indicators Used for
Performance oriented Personality oriented Measuring work results Measuring key dimensions of business efficiency Assessing personal characteristics Assessing personal behavior Related to Particular workplaces Particular business processes Individuals Teams Main characteristics Mostly quantitative Easy measurable Mostly qualitative Easy assessable
Criteria
Quantitative
Main characteristics Easy measurable KPI oriented Hardly measurable / easy assessable Important for personal development
Examples Respect the terms Contributions Learning speed Team work orientation Creativity Reliability
Mostly used for Measuring performances
Qualitative
Assessing personality
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Step 2: proposed weighted system
Step 3 defining appropriate weights
Criteria for evaluation Quantitative Work correctness & precision Respect the terms Contribution to results Independency in work Learning speed Qualitative Team work orientation Level of motivation Systematic work Reliability in work Creativity in work Total
Weight 20% 10% 10% 5% 5% 20% 10% 10% 5% 5% 100%
Measured result 5 4 4 3 3 3 3 5 4 3 37
Weighted result 1.00 0.40 0.40 0.15 0.15 0.60 0.30 0.50 0.20 0.15 3.85
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Step 3: selection of evaluators
Step 3 selection of evaluators
Evaluator
PROs Evaluation experience Good insight in goals and results Wider organizational picture Best insight in work details Participation Self-monitoring Various dimensions of evaluation Appraisals are stabile in time Focus on competences Maximum information for evaluation Appraisals are usable for employees professional improvement Development aspects Double control Focus on customer satisfaction High level of professionalism Objectivity
CONs Discontinuity in monitoring Focus on administrative aspects Subjectivity Discrepancy between managers and employees evaluation Subjectivity Appraisals distortion (protection of colleagues) Erosion of managers influence Stereotypes Mistrust after lower appraisals Predetermined appraisal Lack of information Hard to quantify and measure Lack of information Unnatural behavior of employees
Managers
Employees (self-evaluation)
Colleagues
Top management External partners External evaluators
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Step 3: proposed model (360)
Step 3 selection of evaluators (360 degrees principle)
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)
Note: distribution of weights can vary by each single employee and more then 6 colleagues can be involved in evaluation
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Step 4: defining timeframe
Step 4 defining the time (cycles and duration) of evaluation
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)
Time cycles Monthly Quarterly Yearly
Monitoring High Average Average
Measurement Low High Low
Assessment Average Low High
Type of evaluation Monthly interviews Quarterly individual evaluation Quarterly group evaluation Yearly interviews (feedback int.) Evaluation of extraordinary results Evaluation of managers Career development evaluation
Occasionally
Low
Average
High
Page 44
Step 5: defining methods
Step 5 defining methods of 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.)
Page 45
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)
Page 46
Steps 6 & 7: realization of evaluation and analyzing results

Steps 6 & 7 are very important (implementation and control)
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
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Linkages between evaluation and rewarding system

Evaluation and rewarding (bonuses) are closely linked and depend each other
Page 48
Evaluation and stimulation in practice
Example shows how it works
EVALUATOR Formal authority Formal subordinate Professional authority Professional subordinate Collaborator in process (input) Collaborator in process (output) TOTAL /AVERAGE STIMULATION
MARK 3 5 5 4 3 2 3,67
WEIGHT 30% 20% 15% 15% 10% 10% 100%
WEIGHTED MARK 0,90 1,00 0,75 0,60 0,30 0,20 3,75 10%
STIMULATION CRITERIA For mark between 0 and 1 For mark between 1 and 2 For mark between 2 and 3 For mark between 3 and 4 For mark between 4 and 5
% OF STIMULATION -20% -10% 0% 10% 20%
BASIS
E.g. basic salary
NOTE: All data are arbitrary and used exclusively for illustration
Page 49
Double overlapping after stimulation
System of bonuses allows firm to have double overlapping system
20,00 18,00 16,00
Coefficient overlapping 1:6
Subgroup 1 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 GROUP I GROUP II GROUP III GROUP ... GROUP "N" Subgroup 2 Subgroup 3 Subgroup Subgroup Subgroup "n"
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Structure of remuneration packages
Remuneration packages can vary in few ways
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Further steps
Further steps
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Contact
Address: evelijska 55, 11000 Belgrade Phone (fix): +381 11 240 50 22 Phone (cell): +381 62 227 045 E-mail (business): office@aventinpartners.com E-mail (personal): igor.lazarevic@aventinpartners.com Web: www.aventinpartners.com
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Methodology and implementation

Belgrade, April 2014

Introduction to RMS Regulatory framework for RMS

Essentials of RMS development Managing basic salaries Managing bonuses

Belgrade, April 2014

Section I / part 1 Introduction to RSM

Section I / part 1 Introduction to RSM

Short introduction to RMS

If implemented well, organization can benefit from RMS

What is Remuneration Management System (RMS)

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

What are the benefits:

Section I / part 2 Regulatory framework

Regulatory framework for RMS

RMS is regulated system

Constitution and laws

Various decrees made by Serbian Government

General Collective Agreement Specific Collective Agreement Individual Collective Agreement

Section I / part 2 Regulatory framework

Framework for defining RMS

with significant space for adoption and flexibility

Structure of money compensation (remuneration)

Limits for various allowances within Labor Law

Only limits defined

Calculation of basic salaries (incl. structure of coefficients)

Not strictly defined

Bonus schemes and evaluation principles Management of variable part of salaries

Belgrade, April 2014

Section II / part 1 Structure of remuneration packages

Structure of money remunerations basics

Taxes and contributions

Other personal expenses

Taxes and contributions

Other personal expenses

Other personal expenses

Taxes and contributions

Section II / part 2 Structuring basic salaries

Structuring basic salaries

Section II / part 2 Structuring basic salaries

Structuring basic salaries illustration

Value of one coefficient

Section II / part 3 Structuring allowances

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

All allowances are comprised of 2 parts:

Section II / part 3 Structuring allowances

Structuring allowances illustration

There are 2 types of allowances salary increments & salary indemnifications

Section II / part 4 Structuring other personal expenses

Structuring other personal expenses

Other expenses depend on employers will and are tax free

Section II / part 4 Structuring other personal expenses

Structuring other personal expenses illustration

Section II / part 5 Structuring taxes and contributions

Structuring taxes & contributions

Taxes & contributions are distributed between employer and employee

Section II / part 6 Structuring bonuses

Section II / part 6 Structuring bonuses

Structuring bonuses - illustration

Bonuses and stimulations

Determined by actual Specific Collective Agreement from 2005 According to this:

Basic salary is used

Limits can be +20% or more

Belgrade, April 2014

Section III / part 1 Essentials of RMS development in ALIMS