Tag Archive for: compensation planning

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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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.

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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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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).

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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.

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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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Look Beyond Compensation Surveys to Reset Salaries

What factors will your organization look at when determining 2021 salary budget increases and compensation plans? No doubt pay data will be part of your decision tree. But the volatile economy makes salary predictions challenging. To prove that point, forecasts from compensation surveys provided earlier in 2020 have shifted in recent months. That is why we advise companies to consider many more factors – both internal and external – when making their compensation plans.

We provided a roadmap outlining key actions to take in our September Compensation Alert. Since then and resulting from an extended pandemic, flexibility above all other factors has become priority one for employees, many of whom are working remotely and juggling care for children and parents. Health and financial wellness programs, telemedicine, education incentives and more personalized perks, such as a company library or Lifestyle Spending Account, are also growing in popularity.

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So, where do we go from here?

Creativity and purpose will be essential elements to compensation planning in 2021. In addition to studying salary and compensation trends, benchmarking competitors’ total rewards strategies will be perhaps more important.

Here is our take on recent survey data and how employers can navigate the future to overcome financial pressures and motivate a world-class workforce for shared success:

Companies Reducing 2021 Salary Increase Budgets

According to the North American Compensation Planning Pulse Survey of 705 U.S. employers completed the week of September 21 by Willis Towers Watson, 35% have reduced their projected 2021 salary increase budgets from earlier estimates; 50% kept them intact. All non-executive employee groups are projected to receive salary increases averaging 2.6%, with executives getting slightly smaller increases averaging 2.5%. Willis Towers Watson’s prior survey conducted from May to July had salary increases of 2.8%. And while 84% of employers will deliver pay increases, almost one in six employees will not receive any.

A second study fielded Oct. 4-31, the WorldatWork 2020-21 Salary Update Survey, reveals almost 40% of 694 respondents either have made or are considering making changes to their 2021 salary increase budgets. The survey showed a projected average salary increase for all employee groups of 2.8%, down slightly from June’s forecast of 2.9%.

According to their press release, WorldatWork reports the projected 2021 salary increase budgets showed a slight 0.1 percentage-point drop since June, from 2.9% to 2.8%. Contributing to those declines was an increase in the number of organizations reporting zero or no salary budget increase.

Finally, Korn Ferry now reports about a third of companies are planning 2021 salary budget increases to 50% or fewer of their general employee population, three times the number of organizations reporting this finding last year. The projected increase in North America is expected to be 0.3% percentage points lower than 2020 or about 2.7% in 2021. Korn Ferry used survey data from its annual and periodic pulse surveys to provide these updated insights.

Our analysis: Organizations will plan salary increases that align with business conditions. Industries that are hurting will provide zero salary increases or allocate these selectively. Others doing well will be more generous. But all companies should set money aside to recognize top performers, those in critical roles, and high potential employees. After all, these employees are your most valuable assets and are most vulnerable to being lured away.

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Non-Salary Rewards

Though many employees may not be receiving raises, they are increasingly being rewarded in other ways. For instance, WorldatWork reports significant increases in wellness and other employer-sponsored programs designed to promote a positive culture, recruit and develop talent, and retain valued workers. These perks range from telemedicine and counseling programs to tuition discounts, paying off college debt and caregiver leave.

Annual Incentive Programs

Many companies have adopted new business models based on how markets and their supply chain have been altered. Often, product mix, margins, investments, and growth expectations have changed. This requires them to change key performance measures used to determine incentive-based pay.

Setting 2021 performance targets, thresholds and performance ranges will not be easy. There will be questions about setting targets that may be lower than actual performance. Instead of setting specific targets, it may be appropriate for companies to use relative targets based on competitor or industry norms. Uncertainty may also lead to flatter payout curves. Or companies may bet on a rapid recovery and adopt steeper, more aggressive payout rules.

Summary

With more uncertainty ahead, now is the time to consider changes to your compensation strategies. We continue to believe that executives will not follow national market trends, but instead focus on doing what is economically feasible for future growth and sustainability based on local and regional developments. They will decide on what they want to invest in people rather than blindly following the market.

Contact Us

If you would like to discuss 2021 salary increases or other compensation-related topics, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com. A discussion carries no charges and perhaps after you get to know me and my capabilities, when an assignment arises you will call me.

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New 2021 HR Predictions

What will your HR and compensation priorities be in 2021? Chances are they will look a lot different from where you started in 2020. CEOs have had to make tough choices to survive a recession not of their making. Change has been the norm.

Although flexibility and resilience will still be required heading into next year, CEOs and HR leaders surveyed about the critical issues they face are struggling with how to optimize talent and skills to deliver on their business strategies.

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In its annual CEO benchmarking report, The Predictive Index surveyed 160 CEOs about their top talent concerns. They wanted to find out: How is your organization’s health? How is senior management holding up? Is the team prepared for the work ahead? What kind of guidance are they looking for?

Surveying more than 800 HR leaders, the Gartner 2021 HR Priorities study sought to identify their key priorities to achieve business goals – namely, growth and cost optimization – in a sea of constant change. While the pandemic disrupted traditional ways of working, it also uncovered widespread skills gaps in the talent areas needed most today.

Here are each survey’s findings and their implications for the world of work in 2021:

THE PREDICTIVE INDEX 2021 CEO BENCHMARKING REPORT

  1. Many executives are leading all-new teams, as 69% of companies restructured during the pandemic. It is not surprising then that finding ways for employees to work well together is a priority. Also, new teams mean new people problems to solve. Sixty-six percent of CEOs say productivity is a major concern; this worry is an increase from 36% in 2019.
  2. Remote work is here to stay as 97% of CEOs will allow some degree of remote work going forward. Still, CEOs cite a large challenge in getting remote teams to work well together. This leads to conflict and leaders spending time mediating people issues. More important, CEOs whose operations are mostly remote believe their teams struggle to deliver on short-term and long-term strategic goals.
  3. CEOs have had to navigate entirely new business circumstances due to the pandemic. As a result, 96% overhauled their business strategy in 2020. Currently 53% of CEOS say strategy development continues as their number one priority. Moreover, 80% believe a lack of strategic clarity runs deep within their organizations. Making sure that employees understand the mission and strategy is essential to ensure teams are equipped for the work ahead.

KEY TAKEAWAYS:

  • Management of remote teams requires a people-first approach and great amounts of time coordinating and communicating to maintain company culture and to ensure teams are engaged and motivated to meet their goals. Communicate new strategic direction throughout the organization, making sure that each level thoroughly understands and can communicate the strategy to the next level.
  • Do not neglect talent strategy. This means taking inventory of current skills, minimizing those that are becoming less important, and focusing on new competencies required. Help employees learn those new skills and rework the performance management system to reflect those changes.
  • Ensure that each employee function in the organization is directly tied to company function which will anchor employees to the company’s strategic direction. Make sure incentive plan participants understand how program measures support company strategies.
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GARTNER 2021 HR PRIORITIES STUDY

  1. Building critical skills and competencies is the number one HR leader priority, cited by 68% of respondents. Gartner reports that the number of skills per job increases 10% each year and that fully a third of skills present in 2017 will not be needed in 2021. This rapid skills obsolescence cycle makes integrating effective learning into workflows challenging, especially when it may be difficult to determine future skill requirements.
  2. The second highest priority is organizational design and change management, a priority of 46% of HR leaders. Leaders report managers are not equipped to lead change, and employees are fatigued from all the change. A past focus on improving workplace efficiency has left many organizations with rigid structures and current roles that lack flexibility to meet evolving needs.
  3. A priority of 44% of HR leaders is developing current and future leadership bench strength. They comment that current leadership is not diverse, succession processes do not yield the right leaders at the right time, and leaders struggle to effectively develop midlevel leaders. Bottom line: the leadership management pipeline today is not working.
  4. Planning for the future of work is seen as a priority by 32% of HR leaders. Many say their organizations do not have a future of work strategy. They are struggling to adapt to changes in the market, such as how AI and automation will displace workers. The question that HR leaders face most often is where to start.

KEY TAKEAWAYS:

Update performance management programs to emphasize responsiveness to customer needs and build organization resilience. Make sure employees are learning the right skills. This may require more frequent and tailored revisions to learning programs throughout the organization.

  • Invest in technology and AI to improve corporate decision making and efficiencies.
  • Ensure that the diversity, equality and inclusion journey is manifested in the organization’s hiring, development, promotion and compensation programs through inclusive hiring, promotion, and compensation processes.

SUMMARY

We recognize that CEO and HR priorities cited do not apply to all organizations. Rather, you should consider your own priorities, using CEO and HR comments as a starting point, and develop solutions to address your priorities.

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 how these 2021 predictions may impact your compensation strategies, contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.

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Paying Remote Workers

The year 2020 has brought many changes to the workplace, not the least of which is a rise in remote work arrangements. According to a survey conducted in October by WorldatWork and Salary.com, prior to the COVID-19 pandemic just 13% of employees worked remotely. By April, as lockdowns became the norm, 67% of employees were working remotely. Even now, with more businesses open than not, 62% continue to work from home. About 9 out of 10 of these are working remotely full time.

As employees and companies adapted to remote working, both began to see the considerable benefits. And today’s technology advances made the adjustment easier. Organizations reconfigured company computer access for off-site staff. Zoom became the most popular platform for team meetings, cross-functional collaboration, and webinars.

The remote work relationship proved to be a win-win for employers and employees alike. Workers recaptured commuting time and costs, enjoyed more flexibility to attend to childcare and other family needs, and this translated into increased productivity. Employers maintained business operations while accommodating remote work.

Once the business disruptions from the pandemic fade, many are predicting remote work will be here to stay.

In fact, a new survey from U.S.-based Enterprise Technology Research (ETR) finds the number of employees permanently working remotely is set to double in 2021 to nearly 35%.

Businesses have many good reasons to support the remote working trend including:

  • Lower costs for commercial office space, utilities, and ancillary expenses
  • Increased diversity in hiring
  • Better employee retention
  • A reduced carbon footprint with fewer people commuting
  • Expansion of the available talent pool

On this last point, remote work allows companies to recruit from a much larger pool of candidates than they currently do, as most medium and small-sized organizations recruit talent locally. Now organizations can expand their recruiting base to the entire U.S.

One impact of the pandemic has been a reported flight from big cities as professionals seek less crowded urban environments and a significantly lower cost of living (COL). According to a new study by freelancing platform Upwork, 14 million to 23 million Americans intend to relocate to a different city or region because of telework.

If these trends do indeed become reality, employers have a strategic opportunity to reframe their basis for compensation decisions.

Even so, the current question that many employers are asking is this: Should I pay someone who is working remotely in a lower COL city the same as an employee working at our more expensive central business location? The traditional thinking goes like this: built into the corporate salary structure is recognition that larger population areas generally pay more. So, will I be overpaying if I do not reduce remote salaries to reflect these COL differences?

We believe that reducing salary simply based on COL is wrong for several reasons. First, employees will not like having their salaries reduced. How they spend their money is their own business. After all, employers do not care if an employee drives a 10-year-old Chevy or a Mercedes. So, why should they care what street the employee lives on? Second, paying less than the broader market rate increases the risk employees will be recruited away. Finally, administering and communicating separate pay programs for remote employees with multiple pay arrangements can be an organizational burden.

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A better approach is to define a larger geographic area and set compensation competitiveness targets for that area, then administer pay to one set of parameters. So, instead of using competitiveness survey information for the company’s immediate surrounding geography, expand the territory that is used to determine competitiveness.

For example, if you are recruiting from a Midwest talent pool, you may want to examine salary data for Wisconsin, Iowa, Michigan, Minnesota, Illinois, Ohio, and Indiana. Both state-level data and regional data can be used to determine pay ranges for each position or job level. If you are recruiting from coast-to-coast, you can use a national median. This can offer a great advantage to organizations with a highly distributed workforce.

In any case, it is important to weigh the benefits and risks for your remote workforce and to consider how pay may vary depending on the industry, occupation and skillset required. Using a broad geographic approach for your competitive salary information is easy to administer and avoids confronting employees with a pay reduction.

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 pay of remote employees, contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.

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