Case Study: Review Pay Positioning to Steer Growth
Background
- A private equity firm specializes in venture capital, private equity investment, equity investment and M&A investment.
- Though the company is relatively young and upcoming, it has experienced rapid growth since its establishment and outperformed its peers in both investment performance and profitability.
Objectives
- Strengthen the pay and performance correlation to ensure alignment between pay positioning and business performance. This can steer the management team to further grasp the opportunities triggered by global high tech advancement and regional infrastructure development.
- Examine the relationship among staff cost, revenue, and profitability to drive the team in achieving long-term return for shareholders and investors.
- Ensure the pay mix can incentivize and retain key talent and facilitate long-term sustainable development of the company.
Process
- Select the peer group based on similarity of business model, talent, brand value, industry, regions of investment and office location.
- Benchmark the aggregate and per capita revenue, profit before tax, fixed pay, total incentives and total compensation of each business and the company as a whole.
- Conduct input and output analysis to examine the relationship among staff cost, revenue and profitability, then combine with pay and performance benchmarking results to provide recommendations on market catch up by phases.
- Perform pay mix analysis to compare the ratios of fixed and variable pay between the company and the market. Provide recommendations to rebalance the ratios to align pay mix with profitability and strategic goals.
Result
- The analysis and recommendations provide directions for optimizing pay positioning and staff costs to steer growth for the next phase.
Illustration: Pay and Performance Benchmarking
- The per capita pay and performance analyses divide the aggregate data by the total headcount to reflect the revenue/profit generated by each employee and the related compensation costs paid by the company regardless of company size. These can assess employee's productivity and determine whether the allocation of the total compensation budget is reasonable to ensure compensation strategy aligns with business directions.
- The figure below compares per capita revenue, profit and total compensation of Company A against the 25th, median, and 75th percentiles in the market to determine the percentile ranking. Company A's per capita revenue is close to P75, and its per capita profit before tax surpasses most of its peers. However, the per capita total compensation lags behind the market median. This misalignment between pay and performance increases the risk of employee turnover.
Illustration: Input-Output Analysis
- Through dividing total compensation by revenue and profit before tax, we can obtain the revenue and profit generated per dollar of total compensation.
- Revenue/profit before tax is divided by total compensation to conduct the input and output analysis. The table below shows the 25th, median and 75th percentiles, the percentile ranking of Company A reveals the productivity of Company A against the peer group. This helps identify businesses with high/low productivity and facilitate resource optimization.
Illustration: Pay Mix Analysis
- The chart below analyses the ratios of fixed and variable pay of the total package of Company A and compares it against the market. The analysis serves as a reference for optimizing compensation strategy, ensuring pay mix aligns with the strategic goals and profitability of the company. This ensures the pay package motivates performance and provides a reasonable reward mechanism in return.
