Tag Archive for: compensation strategy

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.

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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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The Future of Pay

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary

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

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

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

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Winning the War for Talent

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

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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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Post-Pandemic Compensation Considerations

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

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

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

1) Hiring & Retaining Key Employees

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

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

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

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

2) Targeting Pay Equity

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

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

3) Enhancing Benefit Programs

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

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

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

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

4) Compensating Remote Work

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

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

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

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

Summary

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

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

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Pay Transparency Approaches

Pay transparency is a hot topic for employers navigating how best to meet growing demands to close gender and race-related pay gaps, as well as satisfy loyal employees. It can be a difficult needle to thread. How much pay transparency is too much? Should an organization adopt a pay transparency standard?

A new study by compensation software provider Beqom reveals employee perceptions about pay equality have eroded further in 2020-21 as many businesses adapted to the pandemic with work-from-home strategies, reduced work hours, and even temporary furloughs. In its survey just one year earlier, Beqom reported one-third of employees believed their companies had a pay gap, a view that negatively impacts employee retention.

During the latest economic downturn, many pay equity programs had to be put on hold as companies faced growing financial constraints.

Businesses that embrace pay transparency benefit in a variety of ways, not the least of which is by establishing a higher level of trust with employers and co-workers. Trust promotes respect and improves employee retention and loyalty. Top performers know their accomplishments are being recognized.

Pay transparency also helps employers make meaningful progress toward achieving Diversity, Equity, and Inclusion (DEI) goals. And when employers are more open about pay ranges for roles and job levels within their companies, employees can shift their focus to career growth and how to support organizational success.

Arguments against pay transparency include concerns that employees may have resentments if co-workers make more than they do or that failings in the company’s compensation, hiring and development systems may be exposed. Furthermore, pay communications can make employees vulnerable to being hired away. As a result, many organizations have rules against discussing pay. It is the author’s experience, however, that even with company restrictions, many employees continue to discuss pay among themselves.

Pay Transparency in Focus

When your company decides to proceed with a pay transparency program, organizations have three key decisions to make. The first decision is Why or determining the results to be achieved when communicating compensation. The second decision is What information will be communicated. Finally, the organization must determine the How, which focuses on the ways that pay information will be disseminated to employees.

Why options that define goals of your transparency program range from describing compensation strategy to linking company purpose with employee purpose. Other goals include improving understanding of compensation programs, increasing compensation ROI, enhancing employee engagement, and reducing turnover.

Initially, establish only one or two why goals to make your transparency approach straightforward. Be sure to put specific measures in place to determine if goals are met.

Next, determine What will be communicated, which depends on the degree of pay transparency planned. Some organizations only communicate the salary range and position in range for specific roles. Others seeking complete pay transparency reveal all salaries for every employee in the organization.

Additional choices include pay opportunity relative to market, sources of competitiveness information, how pay is determined, your overall compensation budget, specific groups’ pay relative to company average pay, and employee pay communication restrictions.

Finally, the How depends on the way the organization typically communicates. Options include one-on-one meetings, group presentations, manager training to enhance ability to explain programs, leadership videos, intranet, email, employee handbooks, and the annual total rewards report.

Summary

Although there can be challenges to successfully implementing pay transparency programs, the dangers of standing pat are even greater. Organizations need to have their compensation programs in order and pay transparency is a growing priority. In fact, the Beqom survey finds 51% of employees would consider switching companies with more pay transparency than their current employer.

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If you found value in this article, please share it with anyone you think may also find it of interest. For help or information on this topic, you can email me nlappley@lappley.com or call (847) 921-2812.

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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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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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A Recruiting Opportunity for Private Companies

Changes to executive pay packages during the COVID-19 pandemic have been swift, revealing stark differences in how boards approach compensation for public and privately held companies. Many executives at public companies reliant on annual and long-term incentives (LTIs) are facing significant pay cuts in the wake of dwindling profits with more economic uncertainty ahead. For stable or growing privately held companies, this presents a buying opportunity to attract and capitalize on executive talent with the right compensation strategy.

Executive Pay Practices

Media coverage based on filings and disclosures required for public companies along with say on pay votes ensures most people are familiar with executive pay practices at public companies. This publicity and the large role played by proxy advisors has resulted in a standardization of executive compensation in public companies as no one seems to want to stand out. To play it safe, public companies typically target the market median with stock performance the largest component of pay results.

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Private companies, on the other hand, without the limitations of public exposure can implement more creative pay programs that are crafted to each organization’s unique circumstances. With stock performance a non-factor, other innovative measures including non-financial metrics can play a more meaningful role.

Although pay practices for both public and private companies vary significantly depending upon the industry and type of ownership, all are designed to attract and retain top-notch talent. For private companies, this means making pay sufficient for the quality of executive they are seeking and aligned with the values and goals the organization has established.

However, in our current, challenging business climate, private companies have the distinct advantage of being more flexible, agile, and inclusive than their publicly traded counterparts. In that sense, it may be a golden opportunity to seek where the grass may be greener to upgrade or expand executive ranks.

The Elements of Executive Pay

Public company executive compensation is comprised of three components: base salary, annual or short-term incentives (STIs) and long-term incentives (LTIs). In public companies, incentives dominate executive pay, including annual incentives and long-term, equity-based incentives. Further, in public companies LTIs are the largest component of compensation.

In contrast, private company pay centers on cash compensation, emphasizing base salary and annual incentives. Cash pay is often positioned above the market median, with low or no LTI opportunity. However, this trend is changing as more private companies offer more incentive-based compensation as reported in the Compensation Advisory Board (CAP) and WorldatWork 2019 survey of Incentive Pay Practices.

Executive Pay Components

  Base Salary Annual or Short-Term Incentives Long-Term Incentives
Public Companies 1) 20% of compensation package
2) Some are temporarily reducing base salaries 		1) Financial incentives tied to key performance metrics
2) Sustainable Impact measures: Environmental, social and governance
3) Seeing reductions of 25% to 50% of the current plan target opportunity 		1) Some adjusting targets on a year-by-year approach
2) Others extending the performance period
Private Companies 1) Stressed
2) One-third to half of compensation 		1) Financial measures: profitability and revenue
2) Individual performance common
3) Threshold payment about 50%; maximum payout is 150% to 200% of target opportunity 		1) 60% offer LTIs
2) Cash-based plans most common
3) Phantom stock, or real stock vehicles added by minority of companies

Add LTIs to the Pay Mix

Long-term incentives are fast becoming a growing element of executive compensation for private companies. They are essential to attract talent in competition with public companies where LTIs are common. In addition, LTIs play a major role in company retention strategies and to motivate executives to achieve long-term objectives.

Photo courtesy of Pixabay

For owners at private companies, they must thoughtfully consider if and how they are willing to share ownership in the enterprise with other executives. In addition, they should consider succession plans and future liquidation or merger opportunities depending on their long-term plans for the business.

A typical sharing percentage range is between 5% -10%. Phantom stock is another vehicle often used, although these programs require sophisticated valuing studies and strong communications support. A final option is a long-term cash plan. This requires solid financial planning and transparency of key financials.

Benchmark for Success

Executive pay has come under increased scrutiny in the current business climate. New attitudes about work and pay practices are being shaped by the pandemic, as well as social and cultural trends in an election year like no other. Executives seeking to make meaningful contributions may find even greater opportunity at private companies embracing innovative strategies and pay practices. Private companies recruiting new talent can cast a wider net and utilize benchmarks for non-traditional sources and their market competitors.

Photo courtesy of Pixabay

Still, benchmarking in a rapidly changing business environment can be challenging, making salary projections more obscure. Regardless, the quality of survey data obtained for an executive search must meet high standards. Survey sources should be carefully examined to ensure data cuts are available based on industry and size, which are closely related to the level of executive compensation.

Summary

With less public scrutiny and fewer regulatory hurdles, private companies have more freedom to make proposed changes in creative ways that balance stakeholder interests, improve employee morale and boost the bottom line. Executives at public companies may be ready for a change if an opportunity promises a promotion or broader role or one with more autonomy and more responsibility.

Yes, pay will certainly be an important piece of the equation. However, at a time when job losses in the top ranks may be considerable, enterprising private companies should view this as a recruiting opportunity to build on for the future.

Contact Us

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

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New 2020 Compensation Planning Priorities

When we look back, 2020 will long be remembered as a year of massive change for business and industry on a scale not seen before.

The COVID-19 pandemic has plunged our economy into a global recession and put health and wellness at the center of workplace conversations. Worldwide protests supporting the #BlackLivesMatter movement have joined #MeToo voices urging meaningful community action on discrimination, pay equity, and inclusion.

In response, organizations are making significant changes to their business models and accelerating the adoption of Environmental, Social and Governess (ESG) criteria to guide business investment and decision-making. They recognize that their organizations’ stakeholders are motivated by more than a goal for increased revenues and profits; other success metrics include environmental, social responsibility, gender, and racial diversity measures to track progress on social and economic purpose. Some are calling this new integrated approach to corporate governance stakeholder capitalism.

In tandem with these changes, proactive CEOs and HR professionals are taking a step back to reassess their compensation programs, so they align with a more purpose-driven business model. This is an opportunity to transform massive challenges into meaningful change, but it will require a thoughtful and strategic compensation approach that looks at the following:

1) Assess critical job skills. Quite likely, as the result of an updated business model, critical skill jobs have changed. They should be identified and monitored for pay competitiveness. These employees are most susceptible to being recruited away.

For instance, purchasing professionals are dealing with disruptions in their supply chains, especially in manufacturing. Sourcing from India and China has become problematic during the pandemic. Employees that can fill supply chain gaps are highly valued and in great demand. Employers may need to prioritize their investments in these job skills even when resources are scarce.

2) Revisit your compensation strategy. This flows from the company’s purpose and business strategy and is part of the organization’s overall HR strategy. To the extent that your business model has changed, compensation strategy must also follow the organization’s purpose or why it exists. A recent Compensation Alert here takes you through the elements of establishing your strategy. A critical part of your updated strategy will be to reestablish your benchmark of competitive and comparable organizations, update your current competitiveness levels and determine your targeted level of competitiveness.

3) Take a fresh look at pay equity. Many employers have implemented pay equity analyses to identify whether they have gender or race-based compensation gaps. They have done this to promote fairness, retain talent, and mitigate risk. If you have not done a pay equity analysis already, you should begin the effort soon. If you have, dig deep into the data to determine what is driving pay disparity: the actions of certain managers or decision-makers; out-of-date policies or business practices; or unconscious biases within a division or department. You can learn more about Pay Equity and The Rules of Engagement here.

4) Review base salary and incentive plans. Many companies have taken salary actions in the wake of the COVID-19 health crisis. These include pay cuts, cancelled salary increases or freezes, delayed or deferred annual salary increases, and adjusted planned average salary increases. In addition, organizations have suspended promotional increases or added additional pay for essential work (often called hazard or hero pay), while others have reduced or suspended benefit programs. As the economy improves, business leaders must determine when and under what conditions salary actions taken during the health crisis will be lifted or withdrawn.

It is too early to forecast levels of average merit increases for 2021. It is more likely, however, that more companies will not be giving salary increases next year. Even more, this will vary by industry and region, so it is prudent to develop a good idea of what your competitors will be targeting.

Incentive plans have also taken a hit from the pandemic, as organizations have modified their short-term and annual incentive programs by reducing opportunity, deferring or delaying payments, and adjusting performance targets. Changes to long-term plans have been less prevalent. Consider the following actions:

  • Short-term plans: As you plan for the second half of the year and revenue and profit expectations crystalize, consider: increasing the use of management discretion in determining 2020 incentive/bonuses; changing performance measures consistent with repurposing of the company; and lowering performance targets, maximums and thresholds. Additionally, revisit base payouts on second half performance against second half goals.
  • Long-term plans: Take no actions for the next several months. Consider adjusting performance targets if goals become unattainable.

5) Do not overlook your sales force. The COVID-19 pandemic had a great effect on sales organizations. Orders for commercial and industrial goods were curtailed. Falling orders meant less revenue for sellers for sales compensation credit. Our work with clients indicates that most companies have implemented pay protection methods to replace some or all lost sales incentives for sellers. The most popular methods include pay guarantees, quota reductions and formula changes.

It is time to reset for the balance of the year. Sellers need to be reengaged to reactivate suspended opportunities and find new revenue. A good time to start fresh is July 1st, the start of the last half of the fiscal year for many organizations. But at the same time, discontinue pay protection programs. The sooner you are beyond pay protection programs the better. Consider the following actions to fast-track sales revenue:

  1. Redo quotas: Continued uncertainty will make it difficult to project expected revenue for the second half of the year. However, take into account new avenues for revenue based on your adapted business model as well as revenue purchasing customer patterns. Develop stretch goals.
  2. Review payout formulas: Thresholds, incentive rates, accelerators and caps should be reviewed.
  3. Jump start incentives: As an add on, use a combination of contests and spiffs to add excitement, and motivation. Provide both cash and non-cash awards. Keep the jump start short – a maximum of three months.

In Conclusion

Uncertainty and change will be the hallmarks for organizations during the remainder of 2020 and into 2021. Short of a crystal ball, prudent planning to address the workplace issues of our time is your best bet to make your culture stronger and better equipped for future growth.

Despite current economic hardships, visionary business leaders who understand where and how to prioritize investments in talent will seize the opportunity to recruit the best and the brightest for the road ahead.

Contact Us

To discuss how to adjust your organization’s compensation strategy and develop more meaningful benchmarks and metrics to make your workplace stronger, please contact Neil Lappley at (847) 921-2812 or nlappley@lappleiy.com.

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