Case Study on Remuneration Strategy and Implementation

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Case Study on Remuneration Strategy and Implementation

Michael DiLallo

Remuneration and Benefits Manager, INPEX

Developing INPEX’s remuneration strategy

To understand INPEX Australia’s remuneration journey it is important to understand both INPEX and its business. INPEX is a Japanese oil and gas company developing – and eventually operating – the Ichthys LNG Project in Australia. Historically INPEX has been an investor in oil and gas assets, but with the Ichthys Project, it will become the operator of a world-scale project. The Ichthys LNG Project is a more than US$ 34 billion dollar project which can be considered as three mega projects in one, incorporating (1) some of the world’s biggest and most advanced offshore facilities off the Western Australian coast, (2) a massive onshore processing facility near Darwin in the Northern Territory, and (3) an 890 kilometre pipeline. It is one of the few—if not only—mega projects worldwide incorporating the whole chain of development and production components: subsea, offshore, pipeline and onshore.

The Final Investment Decision (FID) for the Project occurred in early 2012. US $20 Billion of fundraising through external parties set a new world record for project finance. INPEX’s investment in the Project represents Japan’s single largest overseas investment. Prior to FID, INPEX was lightly staffed in Australia. However, post-FID the company had to ramp up quickly (not only in personnel terms, but in associated standards, practices and processes) to construct this mega project.

As INPEX Australia grew from its incorporation it developed a number of remuneration practices, but with the Ichthys Project Final Investment Decision being made, it was appropriate to review those practices holistically and further to articulate an overarching remuneration strategy and underpinning rationale to guide the development of INPEX’s remuneration practices. This provided an opportunity for INPEX Australia to develop its remuneration strategy and associated processes and practices.

As part of this ramp-up, the HR team increased headcount in a number of areas, including remuneration. In mid-June 2012, I was employed as the Manager of Remunerations, Benefits and Payroll, to help establish the future strategy and remuneration practices for INPEX Australia.   This case study illustrates INPEX Australia’s remuneration journey from strategy development to implementation. Implementing the strategy involved the development of a job framework that included elements such as job architecture, a grading system, rate ranges, allowances and short-term incentives. This paper also discusses the associated stakeholder engagement required to ensure the successful implementation plan for the remuneration strategy.

Inputs into the Remuneration Strategy

A remuneration strategy should consider both the business environment and the organisational context in which the company is operating. Of special importance is a link between the remuneration strategy and the overarching HR strategy and company strategic drivers. Below are four of the key inputs under these two broad categories that were factored into strategy development for the Ichthys LNG Project:

  • A tight labour market,
  • A need to ramp-up the recruitment (i.e. buy talent) of contractors and employees across all functions,
  • A limited brand identity in Australia, and
  • A need to develop robust remuneration practices fit for the Australian market.

INPEX Australia’s remuneration strategy

Considering the business and organisational context, INPEX Australia developed a remuneration strategy “to be strongly competitive in the Australian oil and gas industry with a cash-heavy remuneration focus and to be a performance-oriented Company”.

While the above strategy seems fairly straightforward, it became a powerful foundation for building remuneration practices. As such, it is important to provide some detail about the underlying rationale that drove the development of this strategy.

INPEX competes with other oil and gas companies for talent, not only in the technical areas but in corporate functions such as finance, accounting, information technology, human resources, and legal. It not only had to deliver a mega project in a tight timeframe, but also had to develop a host of systems, processes and procedures associated with being an operating company in Australia. As such INPEX Australia recognised that it could not initially grow its talent and it needed staff in all areas that could hit the ground running. As oil and gas companies tend to be high-paying employers and given the tight labour market, the decision to peg remuneration against other oil and gas companies was made, with a full understanding of the associated cost-benefits.

INPEX Australia purposely defined our competitive position as “strongly” competitive in recognition of the tight labour market and INPEX’s limited brand recognition in Australia. This allowed for the flexibility to target remuneration higher than the 50 percentile for some disciplines/job families. The approach also allowed for modifying the target position if the business environment changed- up or down. This was important because, while the current large drop in oil and gas prices was not foreseen, it was predicted that when the slew of current mega projects in Australia were completed, the Australian labour market could look dramatically different and move to equilibrium. Further, as the project advanced, INPEX’s brand in Australia (and worldwide) would be a much stronger drawcard.

The assessment was made that employees prefer cash to benefits as it provides them with choice on how to spend their compensation. It was also noted that some studies have shown employees often undervalue and/or incorrectly value benefits. Thus, rather than try to “sell” employees on the value of the benefits, a focus was placed on providing cash and marketing the “flexibility” of being able to spend it as they desired. This decision also considered that the tax benefits and buying power of company benefits are now fairly limited. Thus, a cash-heavy package meant that the spend on benefits would be limited to those that address specific business needs (e.g. income protection and study assistance). This approach also had the advantage of limiting the time required from HR practitioners in the benefits area, with some focus only on “corporate discounts”.

The “performance-oriented” aspect of the strategy signalled that even though INPEX is a Tokyo-based company, remuneration would be based on performance and not seniority or years of service as it would be in Japan. Through this approach, INPEX would remunerate based on performance and not competencies.

After obtaining general concurrence on the strategy from the Director, Corporate Coordination, to whom the General Manager of Human Resources reports, input and support was solicited from a number of key Directors, who were explained the strategy and rationale, but also the implications so that they could see the path forward. As a final step, Board approval of the remuneration strategy was obtained.

It is also important to note that the remuneration practices INPEX Australia had in place largely aligned with the newly developed strategy. This was fortunate, as changing remuneration practices can be very difficult. As the remuneration strategy provided a common agreed framing for INPEX Australia remuneration practices, the next step was implementing the strategy.

 

Implementing the strategy: Developing a job framework

While there are many aspects to implementing a remuneration strategy, this case study focuses on various aspects of INPEX’s remuneration framework. Developing a remuneration framework refers to developing a job grading system and a job architecture (e.g. a job categorisation structure) tied to rate range developed via market data.

Job Grades

In 2012, INPEX Australia had a job grade structure, with a number of jobs tied to the grade structure and associated rate range. At this point, however, there was no overarching framework. As the company grew, more and more positions were being resourced with no market data or INPEX framework on which to rely. This led to ad hoc decisions being made daily. Further, there was no formal job evaluation or criteria to determine what level/grade a job was. Thus, level/grade was left to the discretion of each manager. Such practices are not unusual for smaller companies which INPEX Australia was at the time of FID, but were not sustainable for the Project.

In addition, position titles were not a controlled field, leaving them open to the discretion of each manager.   For example, position titles such as FPSP Engineer, Mechanical Engineer, Turret Engineer and Field Engineer were all used for jobs with common competencies and responsibilities. This meant the business did not have a sound mechanism for understanding and managing its talent pool – or participate in salary surveys with accuracy to obtain reliable market data.

While most large companies use a formal job evaluation system, INPEX made a business decision to go in another direction. This decision was made for a number of reasons including:

  1. Implementing a job evaluation system would have been time consuming and, given the focus on meeting project timelines, would not have been acceptable to the organisation.
  2. While job evaluation systems provide objective criteria, determining where the job fits based on that criteria is subjective and open to manipulation/“gaming”.
  3. Job evaluation systems can allow management to ultimately relinquish responsibility for the final decision of the grade of the job.
  4. Given the dynamics of the labour market, it was important to focus on external market rates rather than an internal measure of job value.

At that time the number of grades in the remuneration structure was rather small (similar to broad banding levels,) rather than the 15+ grades many organisations have. For a number of reasons, such as accurately tracking project actual spend against budgeted spend, it was a business imperative to retain the previous grading structure in place. While many might see this as a hindrance, it was used to our advantage to help develop a different way forward to job evaluations. For each level/grade, general descriptors were developed for the types and level of jobs that fit in that grade. For example, all jobs that met the criteria for the job level of “manager” were given the same grade (i.e. a manager is a manager regardless of what function/discipline they are in).

That being said, we recognised that the market rate for a “manager” would differ based on function/family (e.g. the market generally pays more for a subsea engineering manager than a mechanical engineering manager or remunerations manager). Thus, we agreed that we would establish multiple rate range structures, based on market data.

Given that highly technical personnel are a key part of the talent pool in oil and gas companies, job levels and associated grades that were developed supported the dual career ladder philosophy that most oil and gas companies use (where a technically-oriented employee can advance high in the organisation without having to move to the manager career ladder). While this was clearly not a new concept, establishing a structure that supported this concept was an important business need for INPEX.

Job Architecture

The next piece of the puzzle was developing a job architecture that would allow positions to be grouped into common “jobs”. Each position would then be assigned a function (e.g. engineering, geoscience, IT, human resources) a family/discipline (in engineering some of the families/disciplines include mechanical, subsea, electrical, technical safety, etc.) and a job level (e.g. senior, supervisor, manager). With the job architecture:

  • Every person is in a unique position.
  • Positions are grouped into like jobs.
  • Jobs are grouped into job families.
  • Job families are grouped under a function.

HR drafted the job architecture and then tested it with a number of General Managers and Directors to ensure it would capture all positions and made logical sense within our business context. The rationale for not doing a formal job evaluation process was agreed, with the senior management liking the simplicity and logic of the business solution presented by human resources.

There were multiple iterations of the job architecture draft to ensure agreement and alignment across the organisation (and in fact it still is evolving today). As the job architecture was built, we also started to refine our descriptors for each function, family and job level. Once this was achieved formal approval was obtained for the job architecture.

The next objective was to place every positon within the job architecture. Again, HR did a first pass based on current grade, position title and knowledge of our organisation. Senior management assisted by reviewing the job architecture assigned to each position. Often when jobs within the same function and family were in multiple departments, senior managers shared helped ensure alignment / consistency across the organisation. This process supported engagement from senior line management, as well as ownership the end results (i.e. it was seen to be less driven by HR). As the refinement process went on, the job architecture itself was modified and improved, as what looks fully robust on paper often needs refinement in practice.

The resulting information was then loaded into SAP and used not only for remuneration, but across the organisation for a host of areas – particularly for competency development. In fact, as we have matured, the ownership of the job architecture moved to the HR People and Culture group (which includes competencies, training and succession planning).

From a remuneration perspective, every position was now mapped to a function, family, job level and grade. A flexible framework was also in place which could be used as we ramped up hiring and modified to include new families/disciplines as needed. This allowed confidence that the company had alignment across the organisation for like positions, in the same function, family and job level. It also permitted INPEX to benchmark and match to various job surveys.

Market Data

Within the oil and gas industry there are a number of available remuneration surveys. INPEX critically reviewed surveys to ensure that they had the competitors we wanted, the key jobs where we needed data to build rate range tables and the capability to align survey data to match our remuneration structure.

Through the last several years our survey providers have been refined which has increased our data accuracy and reduced our spend in terms of cost and time. We now have market data for more than 50 per cent of our jobs.

Market data was used to build the component parts of the total remuneration package (e.g. base, allowance, incentives benefits).   It is important to note that ultimately it is the total package comparison that is important. This is especially true given our cash-heavy strategy. Thus, our focus is on how our total package compares to the competition, rather than how our component parts for the remuneration package compares to our competition.

Rate range tables

A broad banding concept was used so that all managers regardless of their discipline are at the same level/grade. Likewise for a supervisor, a senior, etc. In addition, multiple rate range tables were built and used in recognition that managers, for example, from different disciplines are not paid alike in the marketplace.

A business decision was made that there would be three large categories of jobs (Technical, Corporate and Operational). For example engineering, geoscience jobs are in the Technical job category; Finance, IT, HR are in the Corporate job category; and Operation Techs, Offshore Installation Managers are the Operations job category. The placement of the job into the job category was based on the job family and not the department the position was based in. Thus, an Engineering job in Operations would fall in the Technical job category and not the Operations job category.

For each one of these job categories, a number of rate range tables were used (i.e. we expected that while both the subsea engineering manager and the mechanical engineering manager would be in the technical job category, the former would generally be paid more than the latter).

After having a conceptual model for the number of rate range tables we would use, we started to populate the model. Jobs for which we had market data were placed into one of the rate range tables, using the job category, job family, job level and market data. This allowed us to determine which job families fell into which rate range table. Enough data existed to build our various rate range tables. As the market survey data is not perfect and is often incumbent driven, the data was a starting point and not the end point in developing the rate range tables. An understanding of the market, business and the market data were all important in refining the rate range tables.

Once the rate range tables were developed, each job family for which we did not have market data was linked to a rate range based on the job function and/or comparable job families. For example, there was data for remuneration and benefits, but not for recruiters. The recruiter job family was linked to the same rate range table and grade of remuneration and benefits. Senior managers in relevant functions were contacted for input, to assist with correct linking where uncertainty existed. An overview of what job families fell in each range was shared with senior managers to get concurrence. Lastly, approval was obtained from the Corporate Coordination Director for this work

 

Stakeholder engagement

Throughout this case study, stakeholders were engaged in the development and implementation of the remuneration strategy, but much of that was ad hoc. Here we will discuss stakeholder engagement as it relates to various levels in the organisation.

The INPEX Australia Board reviews and approves the annual remuneration review budget, the INPEX Short Term Incentive Plan Company objectives and KPIs, and the subsequent ISTIP Company performance and associated payout each year. In 2012, the quality and depth of analysis presented to the board for their review and approval was piecemeal and less than desirable. Our goal at the Board meeting was to present a consistent and coherent picture of the way forward in remuneration with supporting data. By the end of 2013, this goal was achieved, with the remuneration strategy, job architecture and associated rate range tables in place. It was also at this time that the Board started to express confidence in INPEX Australia’s remuneration practices. The Board asked us to share our work – especially the job architecture – with HR Japan, as the Board saw value in this model being implemented in other INPEX locations globally. Since that time, remuneration discussions at the Board level have continued to be driven by data, with discussions often focusing on key business issues and how remuneration can support resolution of these.

Throughout this journey the General Managers and Directors were consulted on a number of remuneration issues. However, because these interactions were on a one-to-one ad hoc basis, there was no forum to address differing opinions. Under this scenario, HR had to manage competing inputs which tends to be a losing proposition. Further, when it came to issues such as the annual remuneration budget and the company short-term inactive plan objectives/KPIs input were only obtained from a couple of Directors.

As we continued to ramp up in the construction phase of the Project, the lack of a forum to work through remuneration issues at the most senior level of the organisation became more problematic. This became clear in 2013 when INPEX Australia’s short-term incentive plan objectives and KPIs were shared with Directors and they voiced their strong disagreement. While this was a difficult experience, it provided a golden opportunity to increase the transparency with, and input from, Directors.

Subsequently, approval was obtained for a Compensation Advisory Committee (CAC) whose members were Director level to provide input and advice on our strategy and key issues/practices.

With HR’s guidance, the CAC discussed the pros and cons of remuneration issues and jointly recommended a way forward. Final approval rested with either the Director of Corporate Coordination and/or the INPEX Australia Board. With the implementation of the CAC, the line organisation now owned the outcome of these decisions and became active advocates for INPEX’s remuneration practices.

By this time we had much of the job framework largely in place and we were in a position to provide robust data to develop and support recommendations made. We let the data do the talking for us and gained significant trust and support.

While General Managers and Directors were involved in many aspects of remuneration, in the 2013 annual remuneration review, only two of the eight directors were allowed to be involved in the process. As INPEX grew as a company this was not sustainable. This meant that accountability and responsibility were not held at a reasonable level in the organisation and that GMs did not “own” the outcome of one of the most important rem processes – the annual remuneration review.

The work with senior managers on remuneration increased the organisation’s comfort with devolving the annual remuneration review down the organisation, to Directors in 2013 and then to General Managers in 2014.

The annual remuneration review budget and methodology in INPEX is similar to that in many other organisations. A roll-up process is employed, where General Managers make annual remuneration recommendations that escalated up to the next level for review and modification where appropriate. This roll-up process continues up to the President Director.

The keys to making this happen was not only having the job framework in place, but also having the associated annual remuneration process, tools and business rules in place, including a first-pass recommendation based on performance and position in the rate range. The CAC was used to provide input to the recommendations and to support General Manager engagement in the process. In 2014, for the first time, General Managers had active input into the process and owned the outcome. Clearly this was a win-win not only for the organisation and human resources, but also for our employees, who now had someone closer to them in the organisational hierarchy providing direct input into their remuneration.

The specifics of remuneration (e.g. grades, rate ranges, etc.) are not shared with managers – let alone with employees. Even the how and why of our remuneration practices were not shared.   This “black box” approach generally leads to a lack of trust. That is why many in HR generally advocate a high level of transparency about a company’s remuneration practices. However, given INPEX’s history and the fact that remuneration practices were being built and modified to meet the business needs, to share our remuneration practice prematurely would have been unwise.

As our remuneration practices became stable and business as usual, HR lobbied for greater transparency. Senior management agreed that in 2015 INPEX Australia would share its general practices as well as the rationale on remuneration (i.e. the presentation included much of what is in this case study). However, specifics such as the grading system and rate range tables were not shared.

This information was rolled out to managers and then to employees. This cascading rollout helped ensure managers, while not knowing the specific details of INPEX Australia remuneration framework, were the first “port of call” for employees who might have questions after being informed of the practices. The rollout to managers and then with employees was conducted through group information sessions by HR. It was important that the rollout of this information was generally face-to-face to help ensure key concepts and messages were delivered and heard consistently and there was an opportunity to ask questions to clarify issues. Once all the sessions were completed employees received the slide pack from the sessions along with an employee remuneration and benefits handbooks. This delayed distribution of material helped to ensure that key points were delivered consistently and that employees would attend the sessions.

The specifics of INPEX Australia’s structure are considered confidential and were not included in the abovementioned rollout. While managers and employees would prefer to know the specifics of their grade and rate range as well as the general grade and rate range structures, the information sessions went quite well, with most attendees comforted that the remuneration strategy and practices were now well-structured and based on sound logic.

It was explained to managers and employees the rationale for our decision to treat the specifics of the remuneration information as confidential. It was reinforced to employees that the important issue is not where a person is on a rate range, but rather if they are being paid fairly and competitively. While INPEX Australia could show employees their rate range and tell them they are high in the range, employees make their decision on whether they are paid fairly based on their knowledge of the market as well as how they assess their competencies and performance. Ultimately INPEX Australia wanted to get away from the conversation of “how do I make more money” and focus rather on the conversation about performance and development.

A few last words

While many of INPEX Australia’s remuneration practices and processes are now stable and considered “business as usual”, a number of remuneration issues have been identified to work on in the next few years. For planning purposes, the remuneration plan has a 2 – 3 year forward view. Also, as we move to steady state operations, we will assess both the external market and INPEX Australia to determine whether our strategy, processes and practices are still relevant.

Finally, while this case study concerns remuneration and benefits, the success of the journey has been attributed to the whole HR department working together with key stakeholders. All human resources interactions were needed to support and reinforce this work. Without this, the consistent implementation and messaging, the effective remuneration strategy development and implementation would not have occurred.

 

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