Tag Archive for: compensation

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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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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Giving a Promotion Without a Pay Raise

Compensation Alert periodically features guest articles from thought leaders in their fields. National speaker and trainer Jeff Kortes, founder of Human Asset Management LLC., shares his views on pay raises and promotions to reduce turnover. Jeff helps organizations recruit, engage, develop, and retain talent.

As an employee retention speaker and trainer, I see a lot. I also see a lot that simply amazes me. One of the things I just saw was an article in the Wall Street Journal that stated that 39% of employers hand out promotions with no pay increase. My question is: Why don’t you just slap the employee in the face and tell them to look for a new job?

In the opinion of this employee retention trainer, it is a huge insult. You want to give the person more responsibility, probably more work and not pay them anything more? Organizations that do this are just begging to have the person quit and go somewhere where they are rewarded for what they do.

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You often hear people say it’s not about the money. I do not buy that; not totally. Few employees are independently wealthy and work just for the fun of it. People work to pay the mortgage, make the car payment, send the kids to college, and have a decent life. So, to an extent, it IS about the money. People are told to work hard and get rewarded. Then, when they clearly work hard, are doing something right, and get promoted and DON’T get rewarded for it, the perception of most people is, “That’s not fair.”

Most people expect to be treated fairly. In a fair system, the top performers get paid more!

The most important thing to this employee retention author is that not giving a raise sends the message you do not think enough of the person to pay them what they are worth. This is about respect (or lack of it). That is how most people would view it. They would feel disrespected. When people feel disrespected they get angry. That anger is one of the things that drives a person to action. The action taken may be to go home (or maybe even fire up their computer during lunch to look on Indeed for a new job).

Even in this economy, you might as well count that employee as a turnover statistic. The best people are always in high demand.

MY TAKEAWAY

Rarely does this employee retention speaker advocate throwing money at an employee retention issue. However, in this case, to quote a local Milwaukee attorney, “It IS about the money!” Money is a factor in employee retention and when an organization does promote someone, a pay raise is warranted. Organizations that do not do this risk losing some of their best people.

ABOUT THE AUTHOR

Jeff Kortes is a recognized speaker and trainer who helps organizations recruit, engage, develop, and retain talent. Founder of Human Asset Management LLC, he has more than 25 years of experience in human resources working with companies including ConAgra Foods, SPX, Midas International and American Crystal Sugar. He is a member of the National Speakers Association (NSA) and the author of several books including: Give Your Employees C.R.A.P., 7 Other Secrets to Employee Retention, and HR Horror Stories…True Tales from the Trenches. For more information visit http://www.jeffkortes.com

ABOUT LAPPLEY & ASSOCIATES

Lappley & Associates is a management consulting firm that specializes in the development and implementation of compensation programs for clients. We primarily consult with manufacturing, service, utilities, and not-for-profit organizations for medium and small-sized businesses.

CONTACT US

If you would like to discuss this or other compensation related topics, contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.


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[Salesforce Alert Dec. 2018] Selling the New Salesforce Incentive Plan & Effectively Communicating It

The year 2018 has been one of major volatility in many markets creating widespread uncertainty. In this environment, it is understandable that companies are evaluating the impact market volatility may have on their salesforce incentive plans for 2019.

Fortunately, mindful planning and clear communication about your salesforce incentive plan can accelerate growth even in an uncertain economy. But first, two important next steps are to sell this new plan to the C-Suite and effectively communicate the new plan to the salesforce. Getting these steps right creates a double win. Salespeople win because appropriate rewards are available to them, while the company wins with a more motivated sales team aligned with the company’s goals.

Here are four recommendations supporting a win-win outcome by gaining approval of your salesforce incentive plan with the C-Suite:

1) Provide a Clear and Crisp Upfront Summary. Make the first page of your summary a topline summary. Start with the reason for change, a brief description of the approach used in analyzing the current plan, the primary plan changes being suggested, and the results of the new plan’s simulations. Then end with the benefits of the new plan (for example, better alignment with the company’s business strategy or more focused emphasis on margin enhancement).

2) Present the Rationale for the Recommended Plan and Tailor It to Your Audience. Visual perception research suggests that presenting a picture can often be more persuasive, engaging and powerful than text and speech alone. You can think of using a visual, for example, to demonstrate the extensive analysis done on the current plan.

Also, consider using a well-constructed table with numbers to let the C-Suite see for themselves the point you are making.

3) Strive for Clarity and Transparency. Sufficient time should be spent to ensure each page of the presentation is crisply worded and each chart can be clearly understood. Without this, the credibility of the speaker and the recommendations will both suffer.

4) Tell Them Again What You Told Them. At the end of the presentation, share an executive summary to refresh everyone on the main takeaway points. Then ask for agreement. Be prepared and open to engaging your audience in discussing your recommendations, alternatives you reviewed, or objections that may arise.

After securing approval for changes to next year’s salesforce incentive program, it’s time to move to the task of communicating the plan to your salesforce.

Here are three recommendations to get your salesforce on board with the incentive plan:

1) Provide a Clear Summary Incentive Plan Description. Including these elements in the description will promote understanding.

  • State briefly the business reasons why the incentive plan has changed.
  • State the incentive plan components along with a clear description of each. 
  • Show an example of how the new incentive plan payout at target compares to the old plan by using an example of “Salesperson X average performer”.
  • State the process that will be used, and by whom, to address any issues.

You may want to consider adding a frequently asked questions (FAQ) section at the end of the written plan description.

2) Create a Short Video to Support the Plan’s Introduction. With the increasing popularity of online videos and the shrinking of attention spans, an engaging two or three minute video can deliver the elements of your incentive plan in a compelling way.

For example, in the video the company’s president could briefly state why the plan has changed, while the vice president of sales could highlight the new plan’s components and how they align with the company’s strategy. A sales administration manager could then state the target earnings opportunity and payout frequency and refer the viewer to the summary plan description for further details.

3) Anticipate Resistance and be Prepared to Counter Challenges. Our experience shows that it is very likely that an individual or a group will resist the proposed changes to your sales incentive plan. For example, a star salesperson may see the need for plan adjustments, yet still feel anxiety about the changes. Anticipate resistance and be proactive. In this case, meeting in advance with your star salesperson may offset objections during your official presentation.

Contact Us
To learn more or discuss your sales compensation concerns, please contact Tim Weizer at tjweizer@gmail.com (phone 312-479-6411) or Neil Lappley at nlappley@lappley.com.

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[July 2017 Comp Alert] Variable Pay: What’s Ahead

Variable pay has evolved greatly over the past five to 10 years, and is expected to change more in the future. However, variable pay programs and changes to them have not occurred without challenges.

Prior to the 1970s, the concept of the annual bonus was primarily reserved for the executive level and based on discretionary payments for accomplishing individual objectives. The need for employers to better control their fixed costs led to variable pay in the broader workforce. Organizations also saw that these programs were effective in focusing employees on critical objectives, motivating the achievement of desired results, influencing the way they performed their work, and helping to better align programs and work efforts with the organization’s mission and strategy.

What’s New?
Variable pay has been on the leading edge of one of the foremost changes in compensation philosophy since formal compensation programs were introduced. It has been driven by shrinking expenditures on salary increases, rising cost of employee benefits, and large increases in funding and expenditures on broad-based employee bonuses. Since variable pay increases do not add to, or compound, future costs and are usually dependent on performance results, companies have expanded their overall compensation investment with greater spending on variable pay.

During the past 25 years, salary increase spending has been cut in half (from 5.5 to 2.8 percent of payroll), while funding for bonuses has tripled (from 4.2 to 12.8 percent of payroll), according to AON Hewitt surveys from 1990 to 2017. Variable pay has filled the gap this created in compensation growth.

The shift in spending from salary increases to variable pay has been in parallel with the expectation that bonus programs would become much more important for achieving pay for performance. Initially, broad-based bonus programs focused mostly on organizational goals. Profit-sharing and gain-sharing plans were early examples. In recent years, there has been a drive to create a stronger line of sight in variable pay plans by incorporating greater managerial discretion and a greater focus on individual performance.

What’s Next?
Recent trends and approaches in variable pay programs show several future directions. Organizations will break away from one-size-fits-all plans to ones that have a small common enterprise-wide component and varying measures and weights intended to better measure the performance of a business unit, function or department. Calibrated plans will take the place of homogeneous plans, and we will see more winners and losers within the organization based on different levels of achievement.

Greater use of qualitative measures will also increase. Early generations of incentive plans relied heavily on quantitative measures. There is a growing recognition that critical outcomes and employee behaviors can be enticed by programs that do not use quantitative formulae. However, these qualitative measures may not be always precisely measured.

In the future, almost all variable pay programs will increase or decrease payouts based on individual performance achievement. In the next 5 to 10 years, this will become a mainstay in pay for performance plans.

Levels of spending on broad-based variable pay plans will also continue to increase as organizations expect it to continue to grow. This will most likely be the result of shifting funds from other rewards programs, such as salary growth and some benefits programs.

What’s Challenging?
Variable pay programs have their difficulties. Many organizations struggle to identify the right measures and weightings. Some have too many measures, which leads to diluting their relevance. Some have too strong a reliance on quantitative goals, where measuring outcomes qualitatively may better represent the organization’s strategic goals. And some are stuck on historical measures that have been used in the past and are unwilling to give them up.

More organizations are implementing an individual pay for performance component to their programs. But according to the recent AON Hewitt survey, employers have had no greater success in differentiating rewards by performance level than what they have experienced with their salary programs. The keys to successfully implementing a pay for performance component of variable pay plans is the quality of goal setting, manager training and accountability for differentiating, and the ability to define differences in employee performance.

Effective communication of variable pay continues to be an area of difficulty for organizations. Employees must know what is expected of them, and it should occur at the beginning of the planned year. Additionally, it is critical that employees receive feedback throughout the year. Furthermore, periodic feedback of results vs. organization-wide goals should occur at least quarterly.

Evolving Role of Variable Pay. In the past two decades, variable pay has gone from applying to only the top executives to the primary driver of pay for performance for all employees in the organization. The concepts of variable pay continue to evolve as organizations push them down further in the organization. What will not change is the growing importance of variable pay and the expectation for shaping employee behaviors and motivating the achievement of key business outcomes.

Please contact me at nlappley@lappley.com or (847) 921-2812 to discuss any comments or questions you may have regarding the implementation of variable pay programs in your organization. Feel free to forward this email to anyone else who may be interested.

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[March 2017 Comp Alert] Cost of Not Paying to Market

Low unemployment and a looming labor shortage means employers have to work harder to attract and retain top talent. Across gender and education levels, salary and benefits are the most important factors when job seekers are choosing an employer, according to research conducted by Randstad North America. 

It is becoming a candidate-driven market again, and job seekers have more tools to determine if they are getting paid what they’re worth.

A recent survey by Gallup asked the question: “What do workers want most out of their job and their company?” The answer can help companies develop better retention strategies. It can also give insights into why employees may join the organization.

Gallup asked employees how important certain attributes are when considering whether to take a job with a different organization. Although the reasons for changing employers are often multi-faceted and typically include the ability to do what they do best and greater work-life balance, a significant increase in compensation is one of the most important reasons.

A Significant Increase in Compensation

Roughly four out of 10 employees (41 percent) say a significant increase in pay is “very important” to them when considering a new job. Specifically, more male employees than female employees say this factor is “very important”. Not surprisingly, more millennials and Gen Xers, than baby boomers, rate this factor “very important” in a job search.
Income matters to people, and organizations cannot overlook its importance. Organizations should ensure that managers have conversations with candidates explaining in great depth the company’s compensation strategy and how compensation programs work.Retaining Current Employees
At the same time organizations must focus on retaining current staff, particularly top performers and high-potentials. Most companies address this in several ways:

  • Developing a Compensation Strategy – Organizations develop a compensation strategy to better understand how pay supports the overall strategy and culture of the company.  A compensation strategy will describe targeted levels of competitiveness for salary, incentives and benefits; the organization’s approach to pay for performance; and how pay programs will be communicated.
  • Compensation Market Competitiveness – Companies regularly assess the competitiveness of their compensation programs by comparing themselves to market. Consideration is given to who they compete with and who they hire from and lose employees to.
  • Salary Plan – As my colleague Rich Sperling and I have stated in our presentations to senior management and human resource groups, merit increases to top performers and high-potential employees ought to be at least twice the amount given, on average, to fully-competent employees. For example, with an overall salary increase budget of 3 percent, 20 percent of employees can receive an average of 5 percent, while the remaining 80 percent receives an average of 2.5 percent.
  • Incentive Compensation Programs – Companies are slowing moving to increasing the number of variable pay plans for two important reasons: 1) to reward employees for achieving corporate-driven objectives, and 2) to reduce fixed costs.
Now is a good time to review your organization’s compensation strategy and determine if its goals are being met. If yes, great and continue on track. If not, re-evaluate your compensation strategy to determine if it remains appropriated and review pay programs to ensure they are in accord with your strategy.

Contact Us
Please contact me at nlappley@lapppley.com or (847) 864-8979 to discuss any questions you may have from this eNewsletter. Feel free to forward this email to anyone else who may be interested.
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[DEC 2016 COMP ALERT] Rewarding the Right Employees

Many organizations profess to have a pay for performance compensation plan in place. What does that mean exactly? Does it recognize and reward the right employees? 

What the definition should be is that the right employee is whoever has performed well above the majority of other employees during the performance cycle. Those employees that the organization can rightly call high achievers. And those employees whose resignation would cause their manager to lose sleep at night. Everyone else should be treated differently.

So What’s the Problem?
Well, that’s not how things work in many organizations. There are a number of other considerations besides performance alone. The result is that perhaps the right employee does not get rewarded. Or what they are given is not much more than what is also given to the average employee.

Why does this happen? Several potential culprits follow:

  • Not much money to go around: This is a common argument when merit budgets are tight. That is to say that when a manager cannot make much of a distinction when granting increases, the manger cannot make much of a distinction with rewards either. Proponents often say, “Let’s just push the easy button and give everyone the same raise.”
  • Everyone deserves something: Advocates of this strategy suggest that if an employee has not been fired then they should get something for sitting around for 12 months. They proclaim, “Hasn’t inflation increased for everyone?”
  • Someone might quit: An employee quitting is often a manager’s worst fear and in this case, may lead to an interest in providing pay increases that would retain staff. Surely they suggest, “If an employee quits it’s more work for the manager and the potential for criticism from their boss.
  • I want to be liked: “I want to be liked” is an attitude often prevalent among new managers, who want to build a collaborative team. They can be reluctant to make performance assessments and pay increases for their team. Many would blame human resources for not providing enough funds.
  • They avoid career-impacting decisions: Some managers would prefer someone else play judge and jury with an employees’ career.

Making the Hard Decisions

Rewarding the right employee becomes essentially about the manager being willing and able to make discretionary decisions about an employee’s job performance and effectiveness as an employee of the organization.
Because the budget for pay increases is always going to be tight, there will never be enough money for everyone. So an effective manager has to choose how to spend available reward dollars in a way that generates the best return for the organization.In some cases, this means that an average employee may not receive a merit increase this year, even if performance has been ok / satisfactory / meets expectations.

Making these decisions is not easy. Nor is it supposed to be.
My colleague, Rich Sperling, and I have spoken and written extensively on the topic of taking care of top performers and high-potential employees.  Contact me and we will be pleased to share our thoughts with you.
Contact Us
Please contact me at (847) 864-8979 or at nlappley@lappley.com to discuss discriminating pay among employees based on performance.  And forward this email to anyone who may also be interested in this topic.
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