He is changing the way companies contemplate compensation. By linking pay to Position, Person, and Perfor-mance-or what he calls the 3Ps-Christian Cloche, the 54-year-old CEO of the Geneva-based Corporate Resources Group, is compelling corporates to manage all their people better. In his 3-P model, compensation is a function of the value a company creates for its customers. So, it is not enough to assess job-profiles, individual competencies, or personal achievements while rewarding an employee. What matters is the department's, division's, and company's performance. Cloche, who has visited the country twice in the last 6 months to explain his radical ideas, recently discussed his framework with BT's Nanda Majumdar in Mumbai. Excerpts from an exclusive interview:

Q. Mr Cloche, I have been looking forward to this opportunity to discuss with you the novel Human Resource Management (HRM) paradigms that you propound. You have conceptualised a model that integrates corporate resources-of which HR is just one element-with business strategy. What exactly are the linkages between the two?

A. Fundamentally, any organisation needs to manage 3 kinds of corporate resources: financial, technical, and human resources. Financial resources are short-term; they are quick and available. Technical resources are more medium-term; they have to do with tools, equipment, processes, and systems. They follow the company's technological development, and involve evolution and change. hr, however, is a long-term strength for a company. It is the only intelligent resource organisations have. And you must build on it to sustain your company's vitality.

You can build the models for managing your finances around specific tools, like planning, reporting, controlling, accounting, treasury, and risk-management. But when it comes to hr, you have got to think it through carefully. You must ask: how do I create a method of managing hr as effectively as I manage financial resources? And it is very important to link people development with business strategy. Therefore, my view of hr is integrated; it goes into the full framework of managing a business.

When it comes to business management, organisations should start with a tool like objective-setting, which leads to a performance review and a performance contract. That, effectively, focuses everybody on group objectives to achieve group results. There are other tools too, such as position clarification-which clarifies roles and job descriptions-and position evaluation, which ranks positions in the right order. This way, you create the right balance of positions and, guided by your strategy, shape your organisation of tomorrow.

You then come to personality development: the principal tool for motivating individual employees in the direction of the values, visions, goals, and priorities of the organisation. That includes recruitment, succession-planning, career-planning, training, and promotion-planning. And, finally, all these tools lead to compensation management...

Your 3-P concept of corporate compensation seems to disassociate the position, the performance, and the person from each other. Why is that necessary?

Compensation is the most concrete element of hr management. It is a mathematical consequence of the calculation of the company's costs and economics. It reflects the value added by the company in the marketplace, and is conditioned by it. I look at compensation as being a consequence of everything instead of being the prime objective of hr management. For, you have to manage, evaluate, and, finally, pay for the 3 Ps. It is quite a consequence.

Managing the 3 Ps is analytical and systematic. But there is a lot of difference in managing a position, a person, or a performance. It is true that many global companies do it all at once. But they make a mess of it. At the end of every year, they have performance review meetings, where both the parties-the appraiser and the appraisee-talk. They check the person's position, evaluate what he has achieved that year, discuss his competence level, and then, decide on an increment or a promotion. They come to a single conclusion that is not analytical and clear.

The 3-P concept, on the other hand, makes the analytical process clear. First, we look at the position or the nature of the job. It follows an organisational cycle: whenever the organisational structure changes, the position is re-evaluated. Therefore, when we consider performance, the business cycle comes into play. We have, for instance, a specific objective for a given period of time. We review the objective over that time, the business time.

Again, when we speak about reviewing or evaluating a person-that is, the skills of the candidate-we are with the person's cycle. But each component remains independent of the other two. Which allows increments to be computed separately for each component. Thus, excellent performance can be rewarded handsomely even if the manager's skills are not high enough to merit the highest raise-without the overall compensation shooting up.

What are the characteristics of this individual cycle? How should an organisation respond to it?

It is an interesting concept in people-evaluation because it looks at the speed of the person. You have people who are slow, and you have people who are fast. As an organisation, you are supposed to follow a slow-mover slowly, but a bit faster than him so as to push him a little. But you should not follow a slow-mover too fast; if you do so, you could demotivate him. Similarly, you have to follow a fast-mover even faster to ensure that you anticipate him.

So, it is very important that you understand each person's speed and keep up with it. I do not believe that people should be reviewed every year. A lot depends on how people train and develop themselves over time. While recruiting people, you have to follow them very closely. You must understand their specific speeds of development. Judging by that, you could review an employee in 3 months or 18 months. But your assessment should be right, and be based on discussions with the person himself. You must understand that people know their own speed. You have to support that.

Determining a compensation range is a complex issue. But you have constantly argued against broad-banding...

Basically, you need to have a fixed-cost organisation chart and, therefore, a fixed, manageable number of grades. Say, 6 -10. Otherwise, a newcomer, who joins at the minimum point in the (salary) range, tends to quit when he has reached the maximum point in the range in, say, 3 years. American companies think broad vertical banding isn't enough. So they eliminate some (grades), and go for horizontal banding. They never finish managing salaries. I must emphasise that clarity, simplicity, and consistency are crucial to the success of any compensation plan.

Is there a foolproof way of measuring the cost of an organisational chart?

Yes. An organisational chart is more than just one person reporting to another. It is a structural process to find out which position is, effectively, reporting to another in a given hierarchy in a matrix organisation, a satellite organisation, or a nuclear organisation. So, when you are looking at a position, you are actually focusing on the network of interaction. Internally, you are trying to understand how a position relates to another in the organisation. Externally, you are trying to figure out how it relates to either a customer or a supplier. It is valuable to fathom all the input-output impacts, and the drive within and outside the organisation. Ultimately, it is a process of organisational evaluation.

If you multiply the fixed cost of a position-the reference salary, that is-by the number of positions in the organisation, you quickly get the cost of the organisation chart. Pay-for-position is an interesting concept since it ascertains the paying-capacity of an organisation. Consequently, you buy a position in much the same way that you would buy any equipment or make any investment. It has a value and a cost associated with it, which must be reviewed over time.

Do you believe that a 6-grade system is a solution to most such problems?

Every problem and every issue must be weighed by each organisation. A 6-grade system may not be appropriate for every company. You have to first identify how many grades you want. Fifteen grades mean a bigger hierarchy, but it will lead to lesser delegation. Seven grades would mean a smaller hierarchy, and 3-4 grades would create a leaner organisation and greater delegation. You must also find out the number of people in each grade. That will give you a fair idea of how people are distributed in the company.

You must keep up with the demographic profile of the organisation too. To keep the group together, you cannot cut a grade within 1 full group. And you have to lay down the steps for moving up the hierarchy. An organisation must ensure that if an employee moves from Grade 5 to Grade 6, it is actually a promotion. So, moving from Grade 5 to Grade 7 should prove to be an even more challenging proposition...

You have often said that promotion should not be linked to performance. But why?

There are several aspects of the pay-for-performance system. It is very much a variable pay system, where performance is tied to results. In fact, you are paid out of the results you have achieved. But companies, often, mix up variable pay with regular pay. Merit increase is a killer. It works like this: you pay an employee whose annual increment, at 10 per cent of Rs 100, is Rs 10. In the first year, he performs so well that you give him Rs 40 as a bonus. So, he earns Rs 150. The next year, he performs badly, but he gets a 10 per cent increase on Rs 150. This is wrong because you are, effectively, paying for his past performance. In the end, the organisation will end up carrying abnormally high costs. And it will goad you into making unnecessary mistakes, like restructuring and downsizing. You might pay the employee Rs 40 for his performance this year but, in the second year, you should start from Rs 110-not Rs 150.

Promotion should not be based on performance. It is so because companies tend to stay stuck to salary-ranges they must eliminate. So, if they see an individual performing, and want to pay him more, they cannot do so as they are bound by the range. Hence, if they have to push him up to a higher salary-range, they, naturally, have to promote him-which is a mistake. For instance, if you make your best salesman a commercial director, you make 3 mistakes. One, you lose your best salesman. Two, you may not get an able commercial director. Three, you demotivate the person who was good at his earlier job, but is now lost in his new position...

Fair enough. What you are suggesting is that promotions should be linked to individual capabilities too. But is there an objective way of ascertaining that? Moreover, would a performer feel suitably rewarded without a promotion?

That is a valid point. In most countries, we are stuck by the natural development of compensation, and the acquired rights of established positions. So, in many companies, we are not yet ready to say: ''Yes, there is a value to the pay-for-position. If you perform, there is a performance-pay for it, which is quite motivating. And if you do not perform, you don't get it.'' Such a suggestion is, often, resisted by companies; they feel the need to increase salaries every year.

But there is a fixed pay for a position; there is also a variable pay because of variable performance. On top of that, salaries for the same position can be different. After all, it is right to pay someone more than others, but you must have the right parameters for doing so. If you pay one person more than another, it should be because the person knows more, or is more competent. In other words, you pay the person's market value. So, to retain him, you must be ready to pay a premium on top of your pay-for-position salary for that person. The 3-P approach simplifies such issues.

Should the parameters of the 3-P evaluation be laid out up-front?

Indeed. When a company defines its compensation strategy, it needs to examine two aspects. First, it needs to look inside, at its philosophy and culture, its capacity to pay, its present approach-be it the differential or the standard system-and its performance parameters. Secondly, it needs to look outside at how other firms pay, their principles, and their methods. In the 3-P model, the criteria are made clear up-front. We establish the definition of a position, a performance, and a person, and, thereafter, the evaluation process of the person, the performance, and the position. But, of course, in some cases, companies do not like such clarity and transparency because they like to continue playing in a grey zone. So, we have to find ways, over time, to move from fuzziness to clarity.

How do people's competencies mesh with those of an organisation?

Competencies are specific to organisations. A given organisation has its own competency requirements, which may depend on the kind of business it is in. It is a business strategy decision. It is a really difficult task for the company because it has to deal with values, capabilities, competencies, and skills.

So, the process of identifying and developing competencies must start at the highest level in the organisation. Top management must be clear about the competencies the company requires, and define them. Companies have to identify their competencies by interviewing their key people. They must ask them what competencies are relevant to them and the organisation. After identifying the competencies, the organisation must clearly define them. It is not enough to say: ''I need a risk-taking, a decision-making, or a controlling skill.''

You have to explain clearly what you mean by these words. And you have to create the demand levels for that competency. For example, written communication could be a competency in a company. You must define what you mean by written communication. Once you have done that, you have to define what the levels of demand are. You may have, for example, a beginning, a mature, an expected, a mastery, or an excellence level of demand. Once everything is defined clearly, the company can list its requirement of competencies.

Thank you, Mr Cloche.

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