7 Best Compensation Management Practices

Uncertainty and volatility have become the norm for organizations after more than two years fighting a global pandemic, supply chain disruptions, societal disorders, and now the highest inflation in 40 years and the possibility of a recession. In addition, a growing gap between job openings and available talent is making hiring more challenging, leaving many companies short-handed.

Each of these issues impact the bottom line and leave companies with difficult choices, often ad hoc, especially where compensation is concerned. By paying large increases to hire and retain quality staff, chances are company pay scales have been thrown out of balance. Without updating an organization’s compensation plan, this results in disparities existing between people in similar roles and job levels, a situation exacerbating turnover.

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To support hiring and retention efforts, conducting a review and analysis of your current compensation strategy should be a priority. Even more so today, workers are drawn to and remain with employers that offer fair, competitive, and equitable pay opportunities. Here are seven compensation management practices to follow when implementing your review:

Define the Compensation Strategy

Compensation strategy is the bedrock to establishing a pay philosophy. When formulating the compensation strategy, consider the following:

  • Company purpose, values, strategy, and culture. These shape the company’s approach to pay, including how employee purpose and values intersect with those of their employer.
  • Where the company recruits its people including industry, geography, and job type.
  • Competitive targets for salary, total cash, and total compensation.
  • Pay for performance, including rewarding team or individual performance.
  • Pay equity, diversity, and inclusion initiatives.
  • Compensation goals and the company’s approach to transparency.
  • Performance metrics that indicate that compensation programs are achieving their goals.

Determine Data Sources and Participate in Surveys

Multiple data sources – typically three or more – provide the necessary information to benchmark compensation in today’s pay environment. Consider location, and type of jobs in the organization, although often smaller organizations rely on one comprehensive survey. Sources of data include:

  • Salary survey data, where HR submits compensation information, it is vetted by the provider and reported by statistical analysis.
  • Free and open data often reported by governmental agencies.
  • Employee reported data submitted anonymously by current or past employees.
  • Pulse or quick surveys, compiled by HR firms and associations.

Additionally, surveys ask for company information including salary increase plans and information describing industry, location, and size. Participants receive statistical analysis by position.

Benchmark Compensation Program Competitiveness

As noted above most companies utilize market compensation data from multiple survey sources since any one survey will not provide an exact, ideal comparison. Hence, many times matches that approximate several survey sources are used for a job and determination is made by the analyst to combine the several data points.

Following market pricing many of the organization’s positions, a trend will emerge that will characterize the competitive position of the company’s pay programs relative to the market. Often this is reported as a percentile. In addition, intended aggregate salary increases are reported by participants.

Understand What Employees Want and Need

Employees are asking for greater reward differentiation, considering performance, age/life stage, gender, race, economic circumstances, and disability. One size does not fit all when defining employee needs and desired benefits. Start by listening to them. One-on-one meetings, focus groups, and surveys provide valuable insights to customize compensation offerings.

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Prepare the Compensation Budget

Each fall compensation develops a pay increase budget for the next year and follow a five-stage process.

First, compare actual competitive results from survey participation to competitive targets. Dig down to analyze competitiveness of superior performers, high-potential employees, and critical positions; compare new employee pay to that of veterans in same positions and to first and second level supervisors. Also look at pay equity issues previously uncovered and not addressed.

Second, look at what peer organizations are planning for compensation increases, both in aggregate and by function.

Third, understand the impact of inflation currently running at 40-year highs. Historically, organizations have not immediately responded to inflation, but to what the market of peers are planning.

Fourth, collaborate with finance who is pulling together an economic outlook for the company.

Finally, when a compensation plan is finalized, including salary increase budget and incentive pay opportunities, communicate it to the organization and educate its managers on administering the program.

Communicate the Compensation Program

Businesses embrace pay communications and transparency benefit in a variety of ways. Companies that are open about compensation earn greater trust from employees. In addition, pay transparency makes it easier to make progress towards achieving equity, diversity, and inclusion goals. Finally, employees who understand what they earn, how and why will be more fully inspired and connected.

Once you outline your communications objectives and key employee takeaways, determine what information will be communicated, how and when. Utilizing existing internal communications channels and creating feedback mechanisms often works best.

Manage Compensation

As pay decisions have become more complex, purpose-built software tools have replaced spreadsheets to support the design and day-to-day operation of a strategic compensation framework. More and more, leaders are leveraging many sources of data to drive more accurate and effective pay decisions. This is imperative as they manage salary increases; payments for short- and long-term incentive programs across business units and geographies; evaluate program performance; and test alternative scenarios solutions.

Contact Us

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.

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Update: Four Themes Impacting 2022 Compensation

At the start of the year, Lappley & Associates examined four important themes impacting compensation in 2022: competitiveness, pay equity, remote/flexible working arrangements, and Environmental, Social and Governance (ESG). These issues have become integral to compensation planning regardless of how businesses are performing. Despite supply chain disruptions, inflation and persistent labor shortages, CEO confidence remained high. Then a war with Ukraine and roiling stock market added more uncertainty to the picture.

As we near the mid-point of the year, it is clear there is no immediate fix to economic areas of concern. So, we asked industry peers and leaders we work with about how business conditions are affecting their compensation plans and progress in these areas. We also tapped fresh survey data to get a clearer picture. Here is our update:

Compensation Competitiveness

After a decade of salary increases centered at 3%, employers report 2022 salary increase budgets ranging from 3% to 4%, with some at 5% or higher. Recent pulse surveys by Korn Ferry and salary.com confirm increases at 3.5%.

With year-over-year inflation above 8%, employees are experiencing net income loss. However, companies are reluctant to increase salaries further as this would also increase long-term fixed costs. Instead, employers are giving bonuses to cushion inflation effect on their employees. This includes across the board for all employees, sign-on, referral and retention bonuses.

We expect businesses will expand annual and long-term incentive programs, both with number of plans and number of participants. This trend continues as companies focus on linking compensation more closely with organizational performance and lower employee fixed costs.

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Pay Equity

Because of the tight labor market ? the number of job openings are almost double the number of workers seeking employment – employers are offering higher starting salaries to attract qualified talent. Often the result is compression with the newly hired worker making the same or more than experienced, longer-term employees. This creates disparities between subordinates and their supervisors. If compression is not addressed, it will lead to turnover among more senior or high-performing employees.

Pay equity is often the result of pay compression where pay is not related to factors recognized as legitimate reasons for compensation differences. This can result in legal problems, but more importantly affects the organization’s reputation. During recent conversations with consulting contacts, most organizations are addressing potential pay compression and equity problems.

Flexibility and Remote Working

Employees want autonomy to choose when and where they work. Leaders, on the other hand, are more concerned about maintaining morale and a strong culture in a remote or hybrid workspace. Work models are evolving to meet these mutual concerns, according to a recent Chief Executive survey:

  • One third report a mix of remote, hybrid and onsite workers depending on employee role or by department.
  • Another 31% of CEOs say they are fully in the office. Of those, 54% say fully in-office will be long-term and it is working well.
  • An additional 28% are adopting a hybrid model with equal halves setting in-office days/times and the other half opting for scheduling flexibility with no requirements.
  • Only 7% are adopting fully remote.
  • Flexible scheduling is reported to be the most effective method to maintain a strong culture and employee morale regardless of work model.

Approaches to remote working compensation are adapting to address new work models. WorldatWork recently released the results of its Geographic Pay Policies survey, which offers these insights:

  • Fifty-six percent of companies use metro/city location as the basis for determining pay differentials. Cost of labor is overwhelmingly a greater factor than cost of living in determining differentials.
  • Forty-five percent of organizations are applying pay differentials as a premium or discount to baseline pay structure while another 24% create base pay structures for each geographic location.
  • Employees (73%) expect that their pay to differ based on geographic location. Employees are saying (85%) that their organization is moderately to extremely transparent in communicating geographic practices.
  • For those organizations with geographic policies in place, 57% are considering modifying them with the increase of full-time remote work.
  • Remote working is valuable enough for 38% of employees to consider looking for new employment if it were to be discontinued.

Environmental, Social and Governance (ESG) Metrics

Environmental, Social and Governance (ESG) metrics are slowly factoring into executive incentive performance. Analysis of 2022 proxy statements from the 500 largest public companies showed approximately 50% included ESG in their performance measurement, representing 15% to 20% of incentive opportunity, and are most often reflected in annual plans. ESG measurements tended towards Diversity, Equity and Inclusion (DEI), as environmental efforts are often longer term and more difficult to place in a timetable. Medium and smaller companies have not typically used ESG metrics in executive pay evaluations.

In addition, DEI is becoming a factor in evaluating managerial performance. Often a scorecard with a variety of measures is used to fully capture DEI dimensions.

Contact Us

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.

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Six Steps to Pay Transparency

In recent years widespread social-justice movements are demanding pay equality. And in today’s war for talent, pay transparency is critical for employee acquisition and retention. While President Biden has made closing gender and racial pay gaps a priority, so far progress has been mostly limited to the federal workforce. Instead, states and municipalities are passing laws requiring disclosure of pay ranges to job applicants, a trend that is accelerating. Colorado, California, and most recently New York City have enacted pay transparency laws.

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Although regulatory action is certainly driving more pay transparency, there is growing evidence that employers adopting their own pay transparency programs have a competitive advantage. How? Job seekers gain a clearer idea that the employer values pay equity and has inclusive hiring practices. In addition, being upfront about compensation saves time during the hiring process by eliminating candidates who do not match salary expectations.

In fact, 6 out of 10 job candidates say they are more likely to apply to a job when salary information is shared, according to the 2021 Employee Expectations in Hiring survey by compensation software firm beqom. Millennial and Gen X workers have a higher expectation than do Gen Z or older Boomers.

Perception Meets Reality

Despite the apparent advantages businesses accrue from pay transparency practices, many are reluctant to act. Some fear that when salary ranges are posted all employees will expect to be paid at the high end of the scale. Others are concerned they will lose their best talent to competitors.

A recent salary.com survey of over 1,000 participants, representing companies large and small from across the U.S, finds that just over one-third (34.3%) of respondents share salary ranges with job applicants or employees. In sharp contrast, 73% of employees say it is important for them to know they are paid fairly in comparison to their colleagues in similar roles.

Putting Pay Transparency into Practice

Wherever employers land on the pay transparency issue, they may find that the goodwill generated with workers and job candidates far outweighs the potential risks. Following are six recommended steps to achieve pay transparency:

  1. Understand Pay Transparency Perceptions – An employee survey or in-depth conversations with managers and staff provides a benchmark for future planning. Make sure to address what employees know about current pay practices, whether they believe they are paid fairly, and how they view opportunities for advancement. Asking the right questions will also reveal where there are gaps in understanding. These research findings set the stage for organizational compensation plans, newly enacted pay transparency initiatives, and communications effectiveness.
  2. Define Pay Transparency Goals – In addition to improved hiring and retention success, there are other considerations impacting transparency goals. First, linking transparency objectives to the company mission and purpose helps employees understand their role in the workplace and how they contribute to the greater good. Second, a better understanding of compensation programs leads to improved productivity and performance. Employee engagement and support for DEI implementation can also be achieved. At least initially, establish only one or two goals. Then devise specific measures to determine if goals are attained.
  3. Decide What to Communicate – Once the compensation philosophy and plan are defined, outline specific information to communicate to prospects and employees. Getting the balance right between transparency and privacy is key. In that respect, give people information on how pay is determined (both salary and incentive programs); sources of competitive information and pay opportunity relative to market; the salary range for each person’s position and job level; and where and why they are paid within the range. Should a company decide to go deeper, full transparency may include publishing all company salary ranges by group (gender, national origin, etc.) relative to CEO compensation or average employee pay. Communication around DEI implementation can also be developed.
  4. Have HR Take the Lead – The company’s human resources (HR) team will be tasked with rolling out and communicating the compensation program. Most organizations thoughtfully develop communications materials that align with company policies. They also use the full scope of communications channels and tools at their disposal: the company intranet, Town Hall meetings, in-person or virtual presentations, leadership videos, tool kits, newsletters and more to ensure that every employee understands the pay philosophy and program.
  5. Support Managers with Training – Since employees rely on their managers to answer questions or address issues on a day-to-day basis, they are essential to pay transparency success. Historically, having conversations about compensation has not been easy for them. Coaching or training will help managers integrate pay discussions with guidance on each employee’s development plan. In addition, role playing can prepare managers on how to answer tough questions or deal with confrontational situations.
  6. Set Metrics to Evaluate Program Effectiveness – At least annually, a company needs to determine its employees understanding of their compensation programs using measures established in Step 2.

Final Thoughts

Legal requirements to better communicate to job candidates and employees about pay and future compensation are mounting. Still, there are many more compelling reasons to proactively address pay transparency.

First, organizations that openly communicate compensation enjoy higher trust leading to higher retention. Second, pay transparency promotes pay equity and equal opportunity. Finally, it leads to better employee engagement and job satisfaction. These are all practices that Top Workplaces have in common, and they are increasingly important to employees navigating the workplace in a post-pandemic world.

Contact Us

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.

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Steps for Attaining Compensation Program Success

As companies across our region and the U.S. compete for talent, compensation plans are getting increased scrutiny. Plan designs are evolving to meet current economic demand and accelerated hiring needs. At the same time, concerns about inflation, interest rates, and political instability have CEOs worried future business conditions could worsen over the coming year.

These issues are underscored in Chief Executive’s February CEO Confidence Index, which finds 62% of CEOs plan to increase capital expenditures, while 72% forecast increased hiring. Still, a successful compensation strategy program must do more than respond to changing business conditions. As a company’s largest expense, compensation is a strategic investment in employees to perform an organization’s business imperatives. Therefore, we believe compensation should be reviewed and updated annually.

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Make sure the compensation program offered will attract and retain top talent and motivate employees to generate the desired results. Here are six steps for plan success:

Step 1: Use Compensation as a Strategic Tool

Having the right employees on your team and aligning pay with your business strategy are key drivers to business success. We recommend designing a plan that rewards the best behaviors and sets performance benchmarks. This approach ensures top performers can achieve career objectives, while communicating to under performers that they are not meeting expectations. When compensation is viewed as being fair, turnover is reduced.

Step 2: Define Your Compensation Philosophy

The statement of compensation philosophy is the cornerstone for consistent and effective pay programs and serves as a guideline for fair and transparent pay practices. A comprehensive statement should address the following considerations:

  • Competition for talent including geographic, industry, position type, and marketplace demand.
  • Competitiveness targets for each employee segment of the organization.
  • Determine targets for base salary, total cash (base plus annual incentive) and total compensation (base plus annual and long-term incentive).
  • Whether the organization will pay for performance or employee tenure.
  • Rewards for individual and/or team performance.
  • How the organization promotes fairness and supports diversity, equity, and inclusion within the company.
  • Methods to communicate compensation goals and programs and approach to pay transparency.
  • Performance metrics that indicate that compensation is achieving its goals.

Step 3: Ownership Type and Growth Stage

Ownership type and growth stage influence compensation program design. Organizations that are public typically use a combination of equity and cash to reward senior management, while private companies rely more on cash programs. Private companies additionally can focus on a longer horizon, as they do not have to meet quarterly earning reporting and can use non-financial metrics to judge performance. Not-for-profits often have a heavier mix of salary in their reward plans.

Fast-growing companies typically need to preserve limited cash and put more emphasis on equity or future payouts. Profitable companies use cash rather than diluting ownership equity.

Step 4: Understand What Employees Want and Need

Employees are asking for greater total reward differentiation, considering age/life stage, gender, race, economic circumstances, and disability. One size does not fit all when defining employee pay needs and desired benefits. Start by listening to them. One-on-one meetings, focus groups, and surveys provide valuable insights to customize compensation offerings.

In a high-inflation environment, just increasing base salaries adds to fixed costs and compensated employees still may be disappointed. Remote and flexible work schedules, health and financial wellness programs, development and training opportunities, and parental leave and family support programs may carry more weight.

Step 5: Benchmark Your Compensation Program’s Competitiveness

Obtaining compensation information from reputable sources can help to inform decisions of compensation increases and job offers. There are a multitude of data sources. Be mindful when selecting a survey source; make sure that it matches up with your industry, key jobs, and locations.

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Companies should examine their pay competitiveness levels annually. Sources of data include:

  • Salary survey data: data gathered in traditional salary surveys where information is submitted by HR professionals, vetted by provider, and reported with statistical analysis.
  • Employee reported data: information reported anonymously by current or past employees.
  • Free and open data: these data types are free and open to the public. This includes Government provided data; the best known is the Bureau of Labor Statistics.
  • Pulse or quick surveys: in today’s fast changing economic environment, companies are keeping on top of shifting competitiveness by accessing pulse or quick surveys that capture up-to-date movement.

Most organizations rely on the voracity of salary survey information. These sources include verified salary surveys with employer-reported data, usually published by third-parties. However, more companies are also starting to add employee-reported data into their survey mix as an added source of market intelligence. Typically, leveraging multiple data sources gives a better approximation of the right market price.

Step 6: Communicate Program Values and Purpose

Businesses embracing pay communication and transparency benefit in a variety of ways. Companies that are open about compensation earn greater trust from employees. In addition, pay transparency makes it easier to make progress towards achieving diversity, equity, and inclusion goals. Finally, employees who understand what they earn, how, and why will be more fully engaged, and retained.

In addition, employees (especially millennials) are eager to link their values with their organization’s purpose. They want to find meaning in their work beyond collecting a paycheck.

About Us

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.

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Four Themes Impacting 2022 Compensation

During the past two years the business operating environment has changed dramatically, impacted by a wide-ranging pandemic. After a steep global economic downturn, government stimulus supported a robust recovery. However, a tightening labor market and escalating inflation are putting pay and performance programs under increased scrutiny. Among the issues making compensation increasingly complex are employee turnover, hiring challenges, and intensified worker recruiting.

As the debate rages over whether inflation is temporary or long-term, economists are projecting growth of 3.7% in 2022 after a 5.6% gain in 2021. A Federal Reserve Bank of Chicago survey of economists has unemployment dropping below 4.0% by the end of 2022 and inflation dropping to 2.5%.

So, what should senior executives, compensation and human resource professionals be thinking about to address these complexities? Lappley & Associates client research and consulting experience points to four themes that will impact compensation in 2022 and beyond.

Compensation Competitiveness During Challenging Times

Compensation is often cited, along with benefits, flexibility, company culture and development opportunities, as reasons by workers who quit a current employer or join a new organization. Not only is a competitive compensation strategy a key factor to attract and retain talent, but it is also the cost of entry to employment. If compensation is not right, employees will look elsewhere. In other words, in a job market this hot, paying employees less than what they can make on the market is a recipe for losing employees. Of course, employers must strike a balance between affordable pay and level of market competitiveness.

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Planned salary increase budgets reported by WorldatWork last summer were 3.3% average and 3.0% median for 2022. According to results of a recent pulse survey by WorldatWork, salary increase budgets now are expected to be 4.0% average and 5.0% median. Still, that’s about one percentage point shy of increases – 5.0% average and 6.0% median – which compensation professionals say is necessary to attract and retain needed talent, particularly in light of higher inflation, the highest seen increase since the 1980s. Further, the Conference Board reported salary increases will average 3.9% in 2022 and Pearl Meyer, in a recent quick poll, forecasts 2022 salary increases will surpass 4.0% (and increases greater than 5.0% reported by 40% of those surveyed).

These surveys bear out a growing trend to meet inflation with higher wages and salaries, but is that the best compensation solution? If you believe inflation will return to its recent rate of under 2.0%, let us offer an alternative: Keep a merit budget around 3.0% and pay a one-time COLA increase in the range of 1.5% to 3.0%. Reserve this option for long-term employees. You will be seen as keeping employees whole while not having to explain a decrease in future merit spending.

In addition to pay increases, organizations are also relying on sign-on (79%), referral (75%), and retention (57%) bonuses to attract and keep key talent, according to another WorldatWork survey. Although many employers feel a need to follow suit, the question remains: Will short-term bonus practices lead to long-term employment?

With these adjustments, newly hired employees are sometimes making the same or more than established, more experienced workers, creating pay compression issues. For people in similar roles, employers will likely need to look beyond standard merit increases to adjust tendered workers’ pay with special funding, if available. In addition, compression may also exist with first and second level supervisors.

Finally, annual and long-term incentive compensation has been on the rise for the past several years, both with number of plans and number of participants. This trend will continue as companies focus on linking compensation more closely to organization performance and lower employee fixed costs.

Pay Equity Issues Continue

Taking a strong position on pay equity can improve an organization’s public perception of its brand and becomes positive reinforcement to employees. Organizations with a formal pay equity program are more likely to have positive Glassdoor ratings, for instance. Further, when organizations make pay equity a priority it has been shown that they enjoy higher employee engagement and are more likely to exceed industry levels of productivity.

Preparing for 2020, many companies had put a plan in place to address pay inequities. With the advent of the pandemic, some of those plans were put on hold as funding of salary adjustments dried up and millions of women left the workforce to care for children and aging parents. Looking to 2022, employers need to reexamine their equity analysis and plans, and to communicate commitments to their employees. In addition, businesses should reexamine hiring, salary increase, promotion, and employee development practices to uncover reasons that inequities creep into their compensation programs.

Organizations with accurate market information and equitable pay practices should be proactive in communicating with employees as being transparent with their workers garners a perception of fair pay. With record high turnover, the mere perception of unfair pay can be harmful to a company.

Environmental, Social and Governance (ESG) Metrics Rising

For over a century, company performance was evaluated by financial measures: usually in the form of profitability and revenue growth. In the past decade, however, environmental, social and governance (ESG) measures have begun to appear. The trend has been influenced mutually by stockholders desiring to invest in socially responsible companies and employees interested in joining organizations where their purpose aligns with corporate purpose.

According to consulting firm Willis Towers Watson, the majority of companies they surveyed assess executive performance with ESG metrics, making up 15% to 20% of annual incentive program evaluation. Priority measures include sustainability, people and human resources, and inclusion and diversity. We expect more ESG metrics to support executive pay in the year ahead.

Flexibility and Remote Working Here to Stay

Pre-pandemic, flexible rewards and work options were on the rise, but the trend was accelerated in 2020 and 2021 out of necessity. As workers discovered the benefits these arrangements provided, including improved productivity and work-life balance, these practices have become essential tools for attracting and retaining talent. For moms schooling kids at home, more employers are considering parental leave and childcare benefits.

A result of added work flexibility is remote work; compensation for remote workers has not settled on a particular approach, although most organizations have decided to use a cost of labor approach rather than cost of living. The most open question seems to focus on how large a region to consider in determining competitiveness. Whether to base this analysis on a city, state, or regional scenario varies by industry and other workforce dynamics. Further considerations may arise when survey providers categorize positions as onsite, hybrid or remote.

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.

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Compensation Plan Updates

Employers are proving to be flexible and resilient in the face of a global pandemic. Many are adapting by implementing remote work and more robust health, safety, and wellness measures. But how is COVID-19 impacting business strategy and compensation? To answer that question, the MIT Sloan Management Review Forum asked its panel of experts if the pandemic has permanently changed how companies should think about business strategy. Most respondents (56%) either agreed or strongly agreed.

Ongoing business challenges are serving as a catalyst for Environmental, Social, and Governance (ESG) initiatives as employees seek purpose in their work and stakeholders put pressure on companies to address climate change, social and workforce inequities.

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As an organization’s business strategy evolves to address these and other factors, such as labor shortages, inflation, and supply chain disruptions, compensation also needs a fresh look for companies to support its business direction. With that in mind, here are guidelines to consider when developing or adjusting your organization’s 2021-2022 compensation plan:

Compensation Strategy Research Steps

Compensation strategy is unique to each company. Therefore, a thoughtful assessment of the following internal issues and external trends serves as a great starting point:

  1. Gather information and perspectives from stakeholders including directors, customers, executives, managers, and employees.
  1. Review the company’s purpose, values, culture, business strategy, and human resource strategy. Consider the organization’s business cycle stage: inception, growth, and maturity.
  2. Survey employees to determine their priorities. Age of employees can affect their choice of compensation plans.
  3. Benchmark the organization versus business competitors and competitors for employees. This step shows where you are versus competition but is not necessarily where you want to position yourself. Your compensation programs need to reflect your unique strengths, purpose, and strategies.

With this information in hand, employers can create a compensation plan designed to recruit and retain top talent, increase job performance, and improve workplace satisfaction. The compensation plan should address all the components of employee compensation, including base and variable pay. Lappley & Associates recommends the following:

Establishing Competitiveness Targets

Market competitiveness target is a key element of an organization’s compensation strategy and can vary by job function and job level. Company size, revenues, geographical and industry data, and economic trends also influence competitiveness targets.

There are two ways to establish competitiveness targets for an organization. The first is the traditional way. That is, determine a target competitiveness level for base salary and total cash (base plus incentive/bonus). Then, assess the mix of fixed and variable compensation. For example, target base at median and total cash target at the 60th percentile for middle managers.

The second approach is to specify the mix desired of fixed and variable pay. For example, target 70% of compensation as fixed and 30% variable for senior management. Then position base at the 40th percentile and estimate the total cash competitiveness.

Although market median is often chosen as the competitiveness target, there are circumstances where companies will want to target above or below the median. For example, if a particular skill is in short supply pay may need to be above the median to attract the right talent. However, if employee retention is steady, the talent pool is plentiful, and more generous benefits make up for lower pay it may be possible to pay below the median.

What Should be Rewarded

The typical compensation plan sets base salaries and calculates salary ranges for various positions within a job category. The intent is to establish job worth and reward ongoing performance. As employees acquire new skills and responsibilities, pay raises can be adjusted as goals are achieved. Further compensation design elements include salary range width, the pace an employee should move through the salary range, rationale for segments of the salary range, approach for employees working remotely, and whether short-term differentials will be used.

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To drive better business outcomes, employers frequently use incentives that can be earned on top of base salaries. Annual incentives reward annual performance. Long-term incentives are meant to reward a longer performance cycle, from two to five years. Design elements include eligibility, incentive opportunity, performance feedback, and payment or holdback schedule. Performance measures typically include annual or long-term profitability, revenue targets, individual achievement, and operational goals. Measures of attainment of ESG initiatives, principally diversity, equity, and inclusion goals, are becoming more prevalent in incentive programs.

Pay For Performance

Pay for performance refers to bonuses or incentives and salary increases that are contingent on employee performance. The idea is to encourage employees to pursue goals rewarding excellent performance for higher pay or other rewards. Higher achieving employees earn more than workers performing satisfactorily when they hit certain benchmarks. Data shows that the ratio of base salary increases for excellent performance is around 1.7 times the increase for fully satisfactory. Organizations that emphasize performance may push the ratio to 2.0 times or more.

At the start of the pandemic, companies increased the variable pay share of annual salary packages because of economic uncertainty and in a bid to reduce costs. No doubt, variable pay will play a significant role in compensation plans in the year ahead as companies adjust to volatile business cycles demanding more flexible pay structures.

Communications and Pay Transparency

Businesses that embrace communication and pay transparency benefit in a variety of ways. Companies that are more open about pay earn greater trust from employees. In addition, pay transparency makes it easier to make progress towards achieving diversity, equity, and inclusion goals. Finally, employees who understand what they earn, how, and why will be more fully engaged and retained.

Compensation Strategy in the Future

Many companies have repositioned themselves during the pandemic reflected in their approach to compensation. And as the tough period slowly ends, numerous organizations wish to get back to normal. However, major threats such as climate change, digitization, and growing inequity pose potential business challenges. As companies continue to adapt and update their business strategies, they must also alter their approach to compensation.

Contact Us

If you would like more information on this topic or help with your compensation strategy, please call or email me at (847) 921-2812 or nlappley@lappley.com.

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2022 Salary Increase Budgets

Will salary increase budgets rise or fall in 2022? Although employment has not yet returned to pre-pandemic levels, most executives are optimistic the economic recovery will continue, a sentiment that paves the way for higher wages.

In fact, a recent poll by Chief Executive shows CEOs anticipate both revenue growth (79%) and profit growth (68%) over the next 12 months despite setbacks that may have occurred for some in 2021. At the same time, there is growing uncertainty on many fronts. Looking ahead, the C-Suite is concerned about labor costs and shortages (63%); the overall economy (50%); workplace safety and ongoing Covid mandates and restrictions (48%); and supply chain issues (40%).

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Against this backdrop, companies are facing one of the tightest labor markets in memory as they determine how to adjust 2022 salary increase budgets to attract and retain top talent.

To get a sense of what management teams are planning for salaries and wages in 2022, we have gathered compensation survey information from a variety of consulting sources including:

WorldatWork

WorldatWork’s 2021-2022 Salary Budget Survey reported that salary increase budgets rose to 3.0% in 2021. In addition, zero increase budgets dropped by half in most employee groups from 2020 levels, which were ten times higher than in 2019.

Not surprisingly, survey participants salary increase budgets this year varied across industries as the pandemic had varying impacts. For example, Mining, Quarrying, and Oil and Gas, saw salary increase budgets falling from 3.1% last year to 2.3% after rising for several years. On the other hand, Educational Services saw a large increase from 1.5% in 2020 to 2.5% in 2021. Salary increases also varied between companies in the same industry.

The survey projects median salary increase budgets will be 3.0% in 2022, while average 2022 salary budgets will be 3.3%. Survey participants predicted no significant differences between nonexempt employees, exempt employees, or executives.

According to survey participants and consistent with previous years, salary increase budgets continue to be greater in smaller companies, resulting in the average being higher than the median.

According to survey participants and consistent with previous years, salary increase budgets continue to be greater in smaller companies, resulting in the average being higher than the median.

Willis Watson Wyatt

According to the Willis Watson Wyatt General Industry Salary Budget Survey, respondents report only 3.0% intend to give no raises in 2022. This is a decrease from 8.0% earlier in 2021. The survey reports projected salary increases of 3.0% for executives, management, professional, and support staff for 2022. This is up from the 2.7% average increases companies gave their staff in 2021. Production and manual labor employees are slated for 2.8% increases, a slight rise from the 2.5% paid this year.

High-tech and pharmaceutical companies project the largest salary budget increases at 3.1%. Next are health care, media, and financial services organizations with 3.0%. Oil and gas companies, leisure and hospitality companies are budgeting salary increases of 2.4%. Retail organizations predict increases of 2.9% next year.

The survey found that top performers received larger pay increases than average-rated employees. Those receiving the highest performance rating received an average increase of 4.5%, 73% higher than the 2.6% granted to average evaluated performers. Note that Lappley & Associates has long advocated that top performers be recognized with increases double those of average rated performers.

Conference Board

According to the Conference Board, median total 2021 salary budget increases for 2021 are 3.0%, on par with the previous 10 years. The projections for 2022 are also at 3.0% and are expected to hold steady across employment categories.

Photo courtesy of Pixabay

National Association of Manufacturers (NAM)

In a survey taken in August of manufacturers conducted by the National Association of Manufacturers (NAM), participants said they plan to increase wages and full-time employment by 3.5% and 3.8%, respectively, in the next 12 months. NAM reports that manufacturers are continuing to invest in workers and capital at paces that indicate an extremely positive industry outlook for 2022.

Like other industries, manufacturers are facing workforce shortages along with supply chain disruptions, rising cost pressures, and increasing coronavirus cases.

Our Thoughts

It is interesting to note that salary budget increases for next year are consistent by survey source, although they seem to be getting larger as the year progresses. Furthermore, the issues of retention, upskilling and recruiting remain top-of-mind with management executives as they consider plans for next year. With that in mind, here are our predictions:

First, small to medium-sized companies (SME) may have a competitive hiring advantage with more flexibility, the absence of vaccine mandates, and a smaller regulatory burden. We predict they will adopt salary increase budgets of 3.3% to 4.0% in 2022 while large organizations will be closer to 3.0%. The difference between SME and large organization approaches reflects a pattern over the past several years. Further, more recent surveys are pushing expected increases higher.

Second, despite salary budget increases in 2022 exceeding recent years, there will be growing pressure from employees for larger pay increases. This will add to increased turnover risk as employees seek higher compensation. Although it may be temporary, inflation is real and having an impact on American households. For example, federal sources report wholesale prices climbed 8.3% from August 2020 to August 2021, while retail prices rose 5.3% over the same period. In addition, Price Waterhouse Cooper’s Health Research Institute is projecting a 6.5% medical cost trend in 2022, slightly lower than the 7.0% medical cost trend in 2021 and slightly higher than it was between 2016 and 2020.

Third, companies should examine their pay competitiveness levels using salary surveys that robustly test business type, along with competitors for people based on geography and other factors. Then evaluate how close your organization can come to meeting compensation strategy competitiveness goals based on available funding. At Lappley & Associates we have access to a large number of surveys making such an evaluation possible.

Let us Connect

If you liked this newsletter, please pass it along to colleagues who would be interested. And reach out if you would like to discuss further at nlappley@lappley.com or (847) 921-2812.

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The Future of Pay

The pandemic and resulting economic fallout impacted lives and businesses like no other event for a generation. In response, employers adapted with agility and speed. Remote work became the norm. Companies embraced digital technologies to enhance employee safety and collaboration. However, as companies have repositioned in the marketplace, compensation and rewards programs have not kept pace.

There is a profound need for companies to reshape their approach to rewards. A successful rewards scheme will encourage the right behaviors, driving performance and focusing employees on a common purpose to deliver a business’s mission. Here are the trends most likely to impact restructuring of company pay and rewards:

Photo courtesy of Pixabay

1) Aligning Purpose with Pay – Based on the idea that business leaders should serve communities along with their other stakeholders, compensation is now more closely tied to achieving a successful strategy founded in purpose. In other words, companies are striving to make a positive societal impact through environmental or social activities ─ both internal and external ─ that build a more equitable and sustainable world.

Company purpose is established by determining the impact that can be made in the markets served, a vision that is aligned with brand, business model, growth strategy, and stakeholder interests. Purpose comes to life as Environmental and Social Governance (ESG) or Corporate Social Responsibility (CSR) programs. Both activities tend to be employed by public companies, however, more private companies are following their lead. When structured well, the return-on-investment includes a better company reputation and more committed and engaged employees.

Investors, employees, and other audiences want accountability and transparency with these programs, so compensation strategy and design should include:

  • Multiple metrics or a scorecard approach to gauge accomplishment of company purpose in performance management and incentives programs.
  • Expanded use of long-term incentives since purpose-based initiatives at organizations emphasize longer-term over short-term goal achievement.
  • Eligibility for incentive participation and opportunity for more employees so they have a stake in the outcome.
  • Performance management systems incorporating more frequent feedback to employees and emphasizing employee development.

2) Skills-Based Training – Skills required for the jobs available now may be different than pre-pandemic opportunities, in part due to the accelerated adoption of digital technology. In addition, worker shortages and the drive to reduce costs have some employers leaning on automated processes and artificial intelligence (AI) to perform work formerly done with human labor. This shifts the focus to more professional, technology and “soft” skills, such as critical thinking and innovation. To retain valued employees and attract new hires from a limited talent pool, more employers are investing in reskilling and upskilling programs. Moreover, investing in people leads to greater job satisfaction and engagement.

Research shows that reskilling including training costs, time off work, and administration costs an average of $24,800 per worker. The costs of not reskilling, however, including recruiting, onboarding and severances costs likely outweigh retraining.

Therefore, rewards must be redesigned to attract future-leading skills, whether those skills are developed by updating current employees or through hiring. Rewards should be designed so that they do not over value old skills but reward future business model needs.

3) Diversity, Equity, and Inclusion (DEI) – Many companies delayed implementation of DEI initiatives during the pandemic as hiring was curtailed, limited money was available, and remote working made addressing inclusion difficult. As a result, employees continue to believe that there is compensation inequity.

Photo courtesy of Pixabay

Because pay equity perceptions have such a strong influence on retention, it is imperative that organizations be more transparent with employees about pay gaps and what they are doing to close them. Be sure to include DEI metrics in compensation and incentive plans to help promote progress on these initiatives.

4) Remote Working – Most employers expect to keep some portion of their workforce remote as pandemic restrictions ease. What started as a safety practice has become an important benefit to employees who value the flexibility working from home offers.

In addition, since remote work can be done from anywhere, employers can tap into a wider talent pool. Depending on where employees work, deciding what to pay them is more challenging. If they are in a lower cost-of-living area, should they be paid less? Or should all competitive pay be based on cost of labor? Some companies are using a national median as a starting point, then layering in geographic pay differentials and occupational data. How deep the analysis becomes is based on the level of competitiveness desired.

5) Benefits & Other Rewards – As workers’ needs evolve, the value of benefits to all employees has become increasingly apparent, especially those that center around flexibility, health care and wellness. For example, employers are revising their benefit strategies to better accommodate caregiving needs by letting employees work outside the historic 9 to 5 workday and subsidizing childcare during working hours.

To demonstrate their commitment to employee health and well-being, many companies are offering wellness programs. These include subsidized gym memberships, EAP resources, telehealth options, and meditation apps to help workers manage stress. Wellness is seen to be a significant future component of employee benefits.

Special bonuses are also gaining ground in 2021. These are used to recognize and reward employees for meeting challenges during a difficult business cycle, rewarding them for the completion of an important project, or to retain top talent. And with hiring shortages in some industries, sign-on and referral bonuses are increasing.

Summary

Inflation pressures, supply chain issues, and a virus that is still unpredictable are all weighing on employers, making it difficult to predict what will happen with compensation and rewards through the end of the year. Still, companies can take several actions to keep their compensation strategies on course.

First, stay on top of labor markets and increase hourly wages periodically to meet competitive markets. Next, review pay of first- and second-level supervisors to maintain parity with hourly workers. Finally, track salaries for professional and management positions so they are competitive ─ particularly top performers, high-demand positions, and high-potential employees. Businesses learned to be flexible and resilient during the last 15 months, lessons learned that can be applied to the future of pay.

Contact Us

If you would like to discuss the future of pay and rewards, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com. A discussion carries no charges.

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Winning the War for Talent

The talent war is raging, and CEOs want their human resource heads (CHROs) to spend more time finding, retaining, and upskilling great employees. That is according to a recent poll by Chief Executive and the Society for Human Resource Management (SHRM).

Photo courtesy of Pixabay

Many companies are gearing up for significant growth as the pandemic eases, but the speed of the economic recovery has unleashed a talent shortage. Few organizations have all the talent they currently need. Further, poaching may rob companies of talent needed to grow. In fact, the more successful a company is, the more likely it is to become a recruiting target.

To acquire and retain talent, organizations must be preemptive by developing a competitive and fair compensation program. Worker shortages, the improving economy, and inflation are putting increased pressure on wages and salaries. Making sure compensation comparisons are up to date is essential (and more challenging). Survey data may be less reliable in this rapidly growing economy. To update the comparison, we also recommend getting a pulse on the market through colleagues as we continually assess through out contacts.

With an equitable compensation plan as a starting point, HR teams hiring and retention initiatives will go further.

HIRING TOP TALENT

The U.S. Labor Department reported more than 7.5 million unfilled job openings in June 2021, a slight improvement over March of this year. Nonetheless, employers continue to struggle with hiring and finding employees whose skills match their hiring needs. To close the gap, we advise organizations to:

1) Shift the hiring focus from a work history to a skills or competency-based approach. This will open a new pool of potential workers and demonstrate that there is no best route to a role. For example, significant numbers of food service employees have lost their jobs. Many have the skills to be successful in customer service roles, currently a high-demand function.

Refocusing on skills will mean recasting job descriptions to skills needed versus work history requirements. Managers will need to change their mindsets and expand training programs to prepare employees for new roles. And an adapted evaluation process may be needed as the newly hired learn on the job.

2) Do not overlook internal candidates. Emphasis on skills is the future of training and development. Companies are realizing the need to reskill or upskill their employees. Exposing employees to different areas of the company will help to identify business areas that they are interested in. Start by including them in cross-functional teams and meetings. Most important, encourage employees to keep to a continuous learning cycle.

3) Get creative to recruit women back to the workforce. In March of this year, almost 1.5 million fewer mothers of school age children were working compared to February 2020. As schools return to in-person instruction, more women will be available to fill recruiting needs.

However, some creativity is required. Consider flexibility to address childcare responsibilities, work-from-home arrangements, access to EAP or mental health programs, and reintegration training for women who have been off long-term.

RETAINING KEY EMPLOYEES

Surveys show that anywhere from a quarter to more than half of employees are planning to look for a new job post-pandemic. To avoid losing key employees, companies need to offer competitive compensation. After all, these employees are among your most valuable assets. Losing them is expensive and replacing them may not be possible.

Photo courtesy of Pixabay

There are three employee groups that bear special consideration: top performers, those in positions of high demand, and high-potential employees. About 10% to 15% of salaried employees are top performers. Look at employees that performed consistently for at least two years; last year can be considered an anomaly.

High-demand positions are those that came into prominence last year. An example is supply chain workers dealing with product shortages, shipping delays and general vendor delivery uncertainty. These jobs are netting higher wages and salaries as demand outpaces supply. Employers may have no choice but to invest more heavily in these positions.

The final group is high-potential employees who have been identified to receive special developmental opportunities. These are your future leaders. Continue to invest in cross-functional training and educational experiences.

SUMMARY

Moving forward, businesses relying on a pre-pandemic pay equity analysis must adjust to changing market conditions. Some will be forced to wait until profits return to fund pay equity adjustments. A thoughtful analysis will help companies get from here to there.

HR hiring and retention programs will be challenged for months to come. However, there are compensation planning steps employers can take now to improve program outcomes and make the most of the current job market.

LET’S CONNECT

To discuss how to recruit and retain key employees, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.

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Post-Pandemic Compensation Considerations

How will your organization meet employee demands in a post-pandemic economy? Despite an expanding jobs market and growing optimism about the recovery, employers are finding that in many ways employees are in the driver’s seat as competition for workers tightens. This seeming paradox comes as unemployment levels remain high.

Photo courtesy of Pixabay

Agile companies are responding with compensation and benefits programs that address employees’ shifting priorities. Yes, making a fair and competitive wage or salary is important. But so is workplace flexibility and a focus on employee health, wealth, and well-being.

Here are four of the most relevant post-pandemic workforce challenges and opportunities to consider when revising your compensation plan in 2021:

1) Hiring & Retaining Key Employees

The biggest human resource challenge facing companies as the economy recovers is hiring and retaining employees. In the latest jobs report for March 2021, openings in the U.S. rose to 8.123 million, the highest on record. This is 5 million above pre-pandemic levels, based on data tracked by the Bureau of Labor Statistics.

While many of these job opportunities are in industries virtually shut down during the pandemic, other sectors including manufacturing are expanding. Unlike prior recessions, the laws of supply and demand are not the only trends impacting hiring and employee turnover. Concerns about workplace safety, issues with childcare, and other factors such as generous unemployment benefits may be keeping some workers on the sidelines.

Still, paying a competitive salary is key to bringing on new talent and rewarding key employees, especially your top performers and those in positions in high demand.

Finding real-time wage and salary information will help you determine how competitive your current compensation plan is and whether adjustments should be made.

2) Targeting Pay Equity

Organizations are targeting pay equity to ensure employees doing similar work under similar working conditions are paid fairly. Employees are demanding it; laws require it; and employers must address it to recruit and retain top talent.

Photo courtesy of Pixabay

The current federal administration will likely apply more stringent enforcement of equal pay regulations. Already employers who run afoul of the Equal Pay Act (EPA) can face penalties from the Equal Employment Opportunity Commission (EEOC). However, the reputation damage can be much worse, affecting the ability to attract and retain talent.

3) Enhancing Benefit Programs

As workers’ needs evolved during the pandemic, the value of benefits to all employees has become increasingly apparent.

Flexible work arrangements have been evolving and have been accelerated during the pandemic as employees had to care for children being schooled at home or for other family members. Accommodating flexible employment arrangements has become central to being an employer of choice. This means working outside of the historic 8 am to 5 pm workday and balancing employer and employee needs.

Some employees are subsidizing childcare, recognizing that difficulties finding reliable care during working hours may affect productivity. Others provide care on-site.

In any case, taking a fresh look at benefit strategies goes together with pay to support a competitive total compensation package.

4) Compensating Remote Work

During the pandemic, most organizations implemented employee work-from-home programs. Many employees would prefer to continue working remotely, at least part of the time. In exchange for reduced commuting time and more flexibility, many found these new arrangements to be more productive and family friendly.

Employers also found remote work arrangements helped them save on real estate and other overhead, such as travel and meeting expenses. Making these types of arrangements permanent or long-term will require changes to management style to integrate remote and in-office workers.

In addition, companies who can hire from any location must decide how they will pay their remote workforce. On the one hand this is a desirable workplace perk, while on the other salaries vary drastically depending on competitive practice cost of living and other factors from region to region.

We believe that most companies will approach the issue by referencing cost of labor and not cost of living data. Whether they use specific location or broad geographic information to determine a compensation structure has yet to be determined. But companies will most likely base remote compensation on competitive practice to avoid paying under market and allowing employees to be poached away because of pay.

Summary

Shifting attitudes about work and the workplace developed during the pandemic will carry over longer term and will impact compensation, hiring and retention in 2021 and beyond. What you pay employees and how you reward them with benefits and services will either help or hinder employee management plans in an increasingly competitive job market. Be sure to make the right choices based on what’s competitive for your industry and market.

Contact Us

For help or information on this topic, you can email me nlappley@lappley.com or call (847) 921-2812.

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Incentivizing Executive Compensation at Private Companies

When managed properly, private company executive compensation helps companies attract, keep, and motivate business leaders to achieve corporate objectives and generate financial returns. Many boards and recruiting teams at private companies struggle with the challenge, however, because they fail to consider the total compensation package or link it to desired corporate results.

According to executive recruiting software firm Thrive, opened executive searches grew by 18% in fourth quarter 2020 year-over-year with significant positive momentum swings in nearly all industries tracked. Although overall headcount is not expected to increase in 2021, demand for top performers is growing. To compete effectively for talent with public companies, executive recruiting teams are being challenged to develop more competitive compensation offers.

It is our experience that when executive pay aligns with corporate purpose, values, and strategies better performance is the result. A good private company executive compensation program begins with an organization’s strategic goals and business priorities. These objectives may have changed in the post-pandemic economy as some companies may have realigned their business purpose and strategies.

Photo courtesy of Pixabay

Although data about executive compensation at private firms is more difficult to obtain than pay at public companies, a WorldatWork biannual survey finds private firms are behaving more like their public company counterparts. In fact, spending on Short-Term Incentives (STIs) increased at private companies, reflecting 6.5% of operating profit compared to 6.0% in the prior survey. Moreover, an uptick in Long-Term Incentives (LTIs), from 54% to 62%, indicates private companies are taking a more holistic view to incentive management. An update to the survey is expected later this year.

With this data in mind, here are the pay variables and incentives to consider when preparing executive compensation plans:

Fixed Versus Variable Pay

Total compensation is made up of base salary (determined in advance and paid in cash), along with STIs and LTIs. Both types of incentives are variable or at risk and are typically contingent on achievement of organizational or individual goals.

The WorldatWork analysis shows that just under 65% of private company CEO compensation is variable. Reporting executives will have a somewhat higher percentage in fixed pay. When compared to public companies, small-cap companies pay approximately 70% of compensation in the form of variable payments.

Undoubtedly, as organizations reimagine the workplace in 2021 and determine how to adapt to future business needs, they are being challenged to keep up with the pace of change. For companies in transformation with ample resources to invest, greater emphasis should be placed on STIs to achieve short-term goals. Companies with less cash on hand and more focused on sustainability can incorporate LTIs.

Short-Term Incentives

According to the WorldatWork survey, Annual Incentive Plan (AIP) prevalence increased to 86%, which is up from two years earlier. Median target award levels are about 80% of salary for CEOs, although AIP opportunity often varies with industry, company size and appetite for risk. For positions reporting to the CEO, opportunity decreases by about half for each lower position level.

Most STI plans base payouts of performance against pre-established goals. Performance goals are generally derived from the organization’s budget. To a pronounced lesser extent, some companies prefer to base bonuses on after-the-fact assessment of performance.

Private companies typically use one to three performance measures, with profitability the most prevalent and revenue the second. In addition, we are finding a third measure related to Diversity, Equity, and Inclusion (DEI) being incorporated by approximately 25% of private organizations. DEI metrics will accelerate in coming years. The CEO is typically measured on corporate performance, while other executives are measured on both corporate and unit/division/personal performance.

Long-Term Incentives

Just over 6 out of 10 private companies have implemented LTI plans. That is up substantially over the past 12 years when only 35% reported having LTI programs in place.

Private companies offer three categories of long-term plans. Just over a third offer real equity programs, such as stock options, restricted stock units or restricted stock. Many owners are reluctant to part with real stock, however, as it dilutes their ownership. For companies that use real equity, total overhang is generally less than 10%.

Photo courtesy of Pixabay

Another option is phantom equity – used by 15% of organizations – including phantom stock and stock appreciation rights. The difficulty with these programs is the timing of reported results due to the lag in determining company values and the black box of valuations. The third alternative is cash-based performance awards used by 65% of organizations.

LTI eligibility is reserved for the CEO and other executives at the top level of the organization. Respondents related that median LTI incentive opportunity for CEOs is between 70% and 90%, falling about 30 percentage points for reporting positions.

Profitability measures are by far the most popular measure with performance plans, followed by a return-on-investment measure and revenue. Performance targets generally flow from budget or are an improvement over prior years. Cash payouts are primarily based on corporate results. Three years is the most common performance period, although it can vary from two to five years.

Summary

The robust economic recovery predicted by many experts will create fierce competition for executives who have proven they can perform under difficult circumstances. Organizations hoping to attract the best and the brightest must be ready with competitive compensation offers.

Copying another organization’s approach leads to suboptimal results. Make sure recruiting strategies and executive compensation packages are reality tested and aligned with corporate objectives.

Contact Us

Would you like to know more about private company executive pay practices or compensation planning for private companies? Please contact Neil Lappley at nlappley@lappley.com or call 847-921-2812.


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Managing Compensation During Difficult Times

It is increasingly challenging to administer compensation in an uncertain economic climate. Inflationary pressures, wage compression, competition for talent, and the prospect of a recession are a few of the challenges that make it difficult to keep up with increasing compensation demands. We believe there are five current economic influences that impact pay
decisions:

Influences that Impact Pay Decisions


First, a company’s ability to increase customer prices is waning. During the pandemic with supply disruptions and higher commodity prices, a customer conversation might be difficult to have, but price increase discussions were relatively straightforward. With inflation trending down, customers expect their prices to stabilize. This makes it harder to pass wage increases. Lower margins leave less room to raise wages.

Second, although job openings continue to decrease and quit rate it back to pre-pandemic level, competition for key talent continues to be robust as witnessed by an unemployment rate in the mid-three percent and recent monthly hiring trends. Third, inflation continues on a downward trend as the Federal Reserve has raised interest rates over several months. However, even at reduced levels, after three years of pay increases, employees have not kept up with inflation; they are looking to recover much of the gap. A fourth influence is that the cost of investments is growing as increased interest rates make it more expensive to invest in artificial intelligence and automation, potentially replacing the need for people.


Finally, the fear of a recession is significant, although CEOs, according to a recent Conference Board survey, are expecting a short and mild recession. However, many organizations continue to be reluctant to invest in higher compensation costs.
Current Approaches to Compensation So far this year, companies are not using a common approach to compensation increases. We highlight below several that we have recently found:

● Companies with sufficient cash and an optimistic view of future business are providing compensation increase budgets between 3.0% and 4.0%. This is less than the projections in surveys earlier this year of between 4.0% and 4.5%.
● Many organizations are relying on bonuses rather than salary increases which are, of course, fixed costs going forward. Bonus types include sign-on, retention, referral, and performance. Salary increase budgets of these organizations are around 2.0%.
● A few companies are handing out a cost-of-living adjustment of 1.5% to 2.0%. They then are waiting for fall to give further increases when a clearer economic picture develops.
● A small number of organizations are looking to offer time-off benefits. Examples include providing half the crew with Friday afternoons off and the next week the other half leaving at noon, or closing the day before July 4 th or the Friday before Labor Day weekend, providing a four-day holiday.
● Many employers are offering or strengthening relatively low-cost, non-medical benefits such as life insurance, disability insurance, accident, legal plans, ID protection, and pet insurance. We urge organizations to poll their employees to determine the highest interest prior to adding additional benefit programs.


Interesting Times
A Chinese proverb says, “May you live in interesting times.” Well, we are. Pay trends are both disruptive and challenging, but the upside for those able to navigate the tricky terrain is substantial and impactful.


Pay Transparency
A new pay-equity focus is being reinforced by regulatory legislation. Several U.S. jurisdictions have recently passed or are about to pass laws requiring organizations to disclose salary ranges for job postings. The EU is, perhaps, even more advanced than the U.S. in disclosure requirements. WorldatWork reports that two-thirds of organizations state they are subject to regulations requiring disclosures.


The legislation mandating the disclosure of pay ranges aims primarily to create transparency and reduce pay inequities for underrepresented groups, both during recruitment and for current employees. But critics report it will only add to compensation costs. We expect to explore more fully pay transparency in our next Compensation Alert newsletter.


Contact Us
If you would like to discuss your approach to compensation increases, please contact Neil Lappley at nlappley@lappley.com or (847) 921-2812.

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Designing the Right Compensation Package

My colleagues at Executive Benefits Network, R. David Fritz and Patrick Margot, and I collaborated on a white paper: Designing the Right Compensation Package. The white paper discusses the key components of providing a robust package for employees. In particular, EBN explores types of Nonqualified Deferred Compensation Plans that companies are using to attract, retain and motivate top talent.

Read the entire article here: https://lnkd.in/gjVjAb_q

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Four Themes Impacting 2023 Compensation

The past few years have certainly been eventful, from both a talent and rewards perspective. The intersection of a global pandemic, world political and supply chain disruptions, shortage of talent, and raging inflation present difficult terrain to manage for both employers and employees. 

In 2023, employers will continue to face significant pay challenges: a competitive talent landscape, an exhaustive workforce, and pressure to control costs amid a potential economic downturn. How employers respond could determine whether they are an employer of choice. 

So, what should employers be thinking about to address these complexities? Lappley & Associates research and consulting experience point to four themes that will impact compensation for 2023 and beyond.

  • Determining and implementing compensation strategy short term.
  • Embedding pay equity principles in rewards programs.
  • Being transparent in pay management.
  • Making rewards communications more effective.

These four trends are explored below in this month’s newsletter.

Update: 2023 Compensation Budgets

Faced with uncertainty over inflation and a possible recession, most companies plan to raise salaries, but not enough to keep up with the cost of living according to a recent Korn Ferry pulse survey focusing on compensation and rewards strategy. Survey participants reported that companies are planning 2023 wage increases of between 4% and 4.5%. This is consistent with our November newsletter that summarized several surveys reporting on 2023 anticipated compensation increases.  

And while wage increases are going up, they still trail the inflation rate. It seems that a number of companies are taking a wait-and-see approach so that they don’t lock in costs that lead to layoff recession hits. While hiring has softened a bit in the past couple of months, there are nearly two times as many jobs available as there are people to fill them. In addition, recent communications by the International Monetary Fund (IMF) suggest that, forsaking major international events, the U.S. economy will, at worst, face a mild recession. It’s still a workers’ labor market. 

While companies balance the costs and returns for increasing salaries, including differentiating increases between excellent and long-term employees, funding equity increases, and addressing competitive practice for high-demand positions and high-potential employees, they often continue to utilize hiring and retention bonuses. 

Pay Equity

While many organizations conduct pay equity audits to ensure that pay outcomes don’t appreciably vary between gender and race groups, a great deal don’t go beyond these initial efforts. Inclusive organizations are insisting that their rewards programs are inclusive, as well. This expands a narrow focus on statistical analysis to include the following.

  • Inclusive contributions incorporate a belief that rewards are an investment and not simply a cost. This approach incorporates leaders including underrepresented talent, along with other stakeholders, to be part of design thinking. This fosters alignment and a feeling of ownership across the organization.  
  • Expand statistical assessments to include overall pay gaps across all employee groups.
  • Establish metrics and processes to measure accountability.
  • Setting up rewards processes that support pay equity, including hiring, promotions, and development.
  • Optimizing the balance between freedom and framework, ensuring that management discretion has appropriate guiderails to minimize pay-equity risk.
  • Education for all employees including managers who are at the forefront of inclusion administration.

Pay Transparency

A new pay equity focus is being enforced by regulatory progression. Several U.S. jurisdictions (e.g., California, Colorado, Connecticut, Washington, and New York City) have recently passed laws requiring organizations to disclose salary ranges for job postings. That follows many jurisdictions that don’t allow asking recruits for their salary history. Passage of these laws will likely drive disclosing pay ranges nationally. 

Disclosure of pay ranges aims primarily to reduce pay inequalities for underrepresented groups. However, recently newly hired employees have often leapfrogged incumbent employees into higher paying jobs creating equity issues and concerns about employee engagement, loyalty, and disillusionment leading, of course, to their leaving the organization.  

Organizations facing this new legislation need to reexamine the design of their compensation programs. This process starts with a review of the purpose of the organization’s rewards strategy, followed by ensuring that logical rewards processes and structures are in place, and that the rewards programs are aligned with the business.

Following reexamination of rewards design, it must be communicated to all employees. Rewards should not be seen as a black box. Communication elements include strategy intent and alignment with organization purpose, determination of job grades and titles, competitive benchmarking, and how individual performance is rewarded.

Robust rewards program design enables companies to have a good story to tell which they need to share effectively and transparently.

Pay Communications

Rewards convey a very loud message to employees about the organization’s values, culture, and character. It may be the loudest day-to-day message an employee receives. Employees have become more discerning and demanding than ever with high expectations of their employer which have increased during the ongoing talent shortage. It has become more complex with expanded employee expectations such as linkage of employee and employer purpose, fairness, and the ESG agenda. 

Therefore, it is imperative to deliver a highly regarded reward to employees with effective communications. Marketing plays a pivotal part. To the extent possible, communications need to be personalized, or at least segmented, based on employee needs. If achieved successfully, it is a competitive advantage.  

The key to communicating compensation centers on managers. A majority of employees say their manager is their direct link to their organization. But people managers are struggling to balance their employee expectations of purpose, flexibility, and career opportunities with performance pressures from senior management. In 2023, managers need to provide support and education to bridge the widening skills gap, while clarifying the linkage between company goals and employee compensation. 

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Contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com to discuss 2023 compensation challenges and trends. 

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2023 Salary Increase Budgets

As budgeting for 2023 quickly approaches, compensation and human resource professionals must narrow in on their salary increase strategies for the coming year. Labor market conditions this year, including historic high inflation and unprecedented turnover, have had a dizzying impact on the cost of labor. Looking ahead to 2023, the threat of recession now looms. Projecting salary increase budgets for next year may seem like a daunting task, but an approach that rests on systematically analyzing what you know can help inform your talent strategies at a juncture point in the market. 

Determining Your Salary Increase Budget 

We believe that a process such as the following will aid your decision making. First, review compensation strategy competitive targets, based on geography, industry, business unit, function, and employees thought as in high demand and high potential positions. Second, assess current level of competitiveness for each group, including recently published spot surveys. Third, take the temperature of employees regarding pay, including competitiveness, internal equity, and their priorities. 

Next, consult with business leaders and finance sharing information gathered so far and gain their assessment of current and anticipated business conditions, sketching out salary increase alternatives. Finally, develop a salary increase plan, including incentive and bonus alternatives that don’t increase longer-term fixed costs while maintaining total competitiveness, and low-cost employee-paid benefits that are attractive to employees. 

One final thought. Keep in mind that employers have historically lagged salary increases during high inflation times, catching up over one to three years. It happened in the 1980s and after the financial crisis earlier this century. Lastly, each organization is likely to form its own unique solution with alternative plans should company circumstances change.

2023 Salary Increase Survey Projections 

Following are salary increase projection results provided by participants for several recently published compensation surveys. We suggest a note of caution, however, in interpreting results. Often it is necessary to dig into the reported projections to better understand the content of the numbers. 

For instance, all projections include general/COLA and merit increases. Some survey participants, though, may also include promotion increases and sign-on, retention, and referral bonuses in their 

submissions, while others don’t. 

The WorldatWork Salary Budget Survey 2022-2023 reported 2023 mean salary increase budgets of 4.1%, including general/COLA of 2.3%, merit 3.6%, and other 1.2%. Both nonexempt hourly nonunion and salaried are projected at 4.1%, while exempt salaried at 4.2%, and officer/executive was 4.1%. Salary structures are expected to increase 2.7%. 

The percentage of participants using variable pay is to stay constant at 85%, while budgeting for 2023 is down from 2022 actual. Mean budgeting as percentage of payroll for nonexempt hourly nonunion is projected at 5.6% versus 6.4% paid in 2022, 6.5% for nonexempt salaried versus 7.3%, 13.3% for exempt salaried versus 14.3%, and 38.3% for executive/officer versus 42.7%. 

Salary.com’s 2022-2023 Salary Increase Survey reported that 2023 salaries will increase 4.0% across all employee categories. Forty-eight percent of survey participants are planning year-over-year salary increases. 

Respondents to Payscale’s 2022-2023 Salary Increase Survey report an average national planned base salary increase of 3.8% in 2023 up from 3.6% in 2022. Exactly half expect to increase their budgets for 2023 in response to competition for talent. Note planned increases in the Payscale survey include general/COLA, merit, and other increases. 

Base salary increases in manufacturing, retail, energy & utilities are expected to be 3.8% to slightly higher, while technology (includes software), finance & insurance, and nonprofit will be in the 4.0% to 4.2% range. Engineering & science are reported the highest at 4.6%. Companies with less than 100 employees report anticipated increases of 3.6% while organizations with between 100 and 5,000 employees report planned increases of 3.9% to 4.1%. Further, Midwest states of Illinois, Indiana, Iowa, Minnesota, Ohio, and Wisconsin report slightly higher anticipated increases of 3.8% to 3.9%.

Twenty-five percent of participants report they budget separately for promotions. Of those, promotion increases are budgeted at 1.8% of payroll for 2023, up from 1.7% in 2022. 

Willis Towers Watson reports 2023 overall salary increase budgets of 4.1% versus 4.0% actual in 2022. Sixty-four percent of recent survey participants are planning higher budgets for 2023. 

The Economic Research Institute (ERI) recently updated its National Compensation Forecast for 2023. ERI projects salary increase budgets of 3.78%. Based on its analysis of economic trends, it believes its projections will continue to increase as 2023 comes closer. It further projects salary structure movement to be 2.98%. 

Carlson Dettmann, a Cottingham & Butler Company, recently released the results of its Annual Wage Increase 2022/2023 Survey. In the survey, largely of upper Midwest organizations, participants of private companies projected 2023 budget increases of 4.0% for salaried employees and 3.8% for nonexempt. Additionally, respondents of public organizations projected increases of 3.5% for both salaried and nonexempt employees. 

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Determining 2023 compensation expenditures is a trade-off between employee expectations feeling the effects of inflation and their employer’s success over the past several years and companies’ reluctance to remain competitive in uncertain times and to add to fixed costs. Each organization is likely to form its own unique solution. Feel free to contact Neil Lappley at nlappley@lappley.com or (847) 921-2812 to discuss your company’s approach.

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