Tag Archive for: compensation strategy

Optimizing Your HR Spend

In today’s whiplash economic climate, short- and long-term strategic plans for many businesses have been disrupted as executives shift priorities. No doubt, the inconstancy we are seeing in market dynamics will challenge executive decision-making in the months ahead. Despite these risks — or perhaps because of them — now is the time to reassess your organization’s future HR investment optimization approach.

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To address important health and financial interests, organizations have rightly taken short-term steps to ensure their employees’ well-being, adjust spending to keep the business intact, respond to community concerns, and take care of their customers. These approaches should have a positive short-term impact as businesses seek to find the right balance in the current health crisis.

Over the long-term, forward-thinking organizations will focus on more than just getting back to business. They must also adapt to changing customer needs and consumer behaviors that will remain even after a recovery is well underway. And so, in manufacturing, for example, we may see an acceleration to AI and robotics for safety and economic reasons.

Under these circumstances, it may be tempting for CHROs to use traditional justifications for their HR investments: improving program costs, productivity gains and revenue increases. But such an approach is short-sighted. There is another way.

Systematic HR Investment Optimization

Gartner, Inc. has developed a Systematic Decision Framework designed to evaluate a full range of criteria to influence HR investment optimization strategies. For each option considered, Gartner uses eight criteria so that managers can weigh potential outcomes and prioritize each one. This tool provides a richer approach to decision-making.

In the example following we look at how the framework can be applied to a family owned consumer goods company based in the Midwest.

Background: As part of the company’s four-year strategic plan, the management team intends to launch several new products and shift its focus from restaurant services to the ecommerce consumer marketplace. This shift is based on a market research study finding that 70% of consumers in their product category prefer shopping online, while demand for their restaurant services is falling off. The company’s goal is to increase revenues 60% and EBITA 80% in the four-year span.

In addition, to jump-start its new business plan, the company will acquire a battery manufacturer and invest significantly in product engineering, new manufacturing capabilities and equipment, and a new consumer-oriented salesforce. Investments will also be made in new warehouse and shipping space. Manufacturing will also build on its prior robotics experience, a three-year investment.

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This will be a major transformation requiring strong leadership and new hires in product development, manufacturing, marketing, and sales. HR will be the pivot point for maintaining harmonious relations with labor, salaried and hourly employees.

An advisory board has approved the four-year strategic plan including business targets and financial requirements. Management now wants to gain board approval for implementing the executive long-term incentive plan.

Key Activities: The company has identified three objectives for its long-term incentive program:

  • Align long-term incentives with long-term company objectives.
  • Share financial success of the company with key employees.
  • Reward employees for their contributions to achieving the company’s strategic goals.

Analysis: To align with its new direction, we are using the Gartner Systematic Decision Framework to arrive at a sound strategy. The strategic analysis looks not only at cost savings and productivity gains, but also at the required investment, implementation time, associated risks, and the impact your choices may have on employee experience.

For our case study, an evaluation of one alternative HR investing optimization approach might look like this:

Benefit & Impact
Strategic RelevanceHigh. Initiative is critical for achieving strategic organizational objectives.
Cost Savings & Productivity GainsMedium. Strategic goals can be achieved without the long-term plan. However, incentives and communicating measures reinforce goal achievement.
Business ImpactPositive: Supports achieving long-term strategic initiatives.
Impact on Employee ExperiencePositive. For executives; likely none for other employees.
Investment, Time, & Risk
Investment RequirementLow/None. The program pays for itself when strategic goals are reached.
Time RequirementLong-term. Objectives will be realized upon full implementation.
HR Service Delivery RiskModerate. HR will be expected to communicate the plan and provide periodic updates. HR will be instrumental in supporting four-year plan achievement.
Stakeholder Buy-InLow/None. The initiative is initiated by HR with strong senior management buy-in. Board approval is encouraged and expected.

Takeaways: Much like a classic risk analysis, managers using this systematic approach for each alternative considered can carefully evaluate and prioritize each investment opportunity. This applies big-picture, three-dimensional thinking to a traditional analysis and sets the stage for a sustainable optimization roadmap that delivers on expectations. In fact, this approach is applicable to any HR initiative and a useful tool throughout.

Summary

During times of economic uncertainty, a top priority is to get your financial house in order. Still, it is important to assess cost optimization initiatives and their long-term ramifications in a smart, strategic way. Different cost measures carry different risks.

Taking a systematic approach that factors in both the positive and negative consequences of potential initiatives will help CHROs develop HR programs that maximize business outcomes while minimizing risks.

Gartner

To help business leaders and managers with advice, insights and tools, Gartner developed the Systematic Decision Framework to balance value creation with cost-cutting measures. You can learn more about the topic here.

Let’s Connect

If you have questions about this or another HR compensation topic, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com. In addition, please share or pass this article along to anyone you think may find it of interest.

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Answers to Your HR Questions

Sometimes great advice comes from our peers and respected colleagues. This is why networking, panel discussions and webinars are such powerful business education tools.

With that in mind, this issue of Compensation Alert shares expert insights from a diverse group of human resource (HR), management consulting, compensation and employee retention leaders. We asked them for feedback on three key questions impacting hiring and compensation management decisions in 2020. Our experts include:

  • David Gilmartin, managing director at Patina Solutions, a management consulting firm that partners with organizations to fill a key expertise or resource gap.
  • Jeff Kortes, an employee retention consultant, author and speaker. Jeff is founder of Human Asset Management.
  • Aaron Schneider, managing director of the Petenwell Group, an executive search and employee retention firm.
  • Rena Somersan, president of the Milwaukee Area Compensation Association (MACA). Rena also is the Newport Group’s managing principal, compensation consulting services.

Of course, HR compensation consultant Neil Lappley, founder of Lappley & Associates and publisher of this newsletter, also weighs in.

Here are Your Three Questions and Answers From our Top Experts:

1) What do you think will happen with wages, salaries and benefits this year?

Salaries will continue to increase; part of that is driven by what everyone is calling the “labor shortage.” Benefits will remain the same. Aaron Schneider

Wages and benefits will (increase) at a higher rate; lowest-worker wages will finally start to push the next tier of worker wages up. Middle-level managers will see wages go up at a rate lower than the lowest tier because (they) tend not to leave and (so) are subject to the “salary pool budget.” Jeff Kortes

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Wages will remain flat this year. With the state (of Wisconsin) not making changes to minimum wage, that alleviates the short-term risk.

Still, (there is) concern changes (will be) made for 2021 and beyond or at the federal level. David Gilmartin

Our market intelligence suggests that 2020 wage growth for production, professional (non-management), management, and executive job classifications will remain largely unchanged from the prior year, hovering between 2.8% and 2.9%. While we do not anticipate sweeping changes in benefit plan offerings for 2020, employers are modifying their benefit plans to entice younger workers. (Offerings include) tuition forgiveness, flexible schedules, and richer parental leaves of absence. Rena Somersan

Median salary increases will be flat at median 3.0% and average at 3.2%. Assuming the Consumer Price Index increases by 2.3% as projected by the International Monetary Fund, real salary increases will be .7%, the lowest level in 40 years. Neil Lappley

2) What are the biggest HR challenges facing your clients? What have you been hearing from them?

Recruiting and retention (are) the biggest challenge(s) and will be for the next decade at least. My manufacturing clients are still afraid to raise prices, but when they have gotten past that they have been making (prices) stick by telling clients they (can’t) keep talent if they are not competitive with compensation. When the argument is presented in this way, customers accept the increases. Jeff Kortes

No question the two biggest challenges facing management are retention and recruiting. Companies are expanding their sources for new workers and are paying more attention to taking care of current employees. For HR and compensation professionals, emphasis is being placed on pay equity and pay transparency. Neil Lappley

Photo courtesy Pixabay

Employee retention and hiring are my clients’ biggest challenges. The availability of skilled laborers is a significant risk in Wisconsin and beyond, especially with our strong manufacturing base. There is also concern for finding leadership and technology skilled resources. One example: Milwaukee Tool needs to find almost 800 (new) employees as they continue to expand in SE Wisconsin. David Gilmartin

Our clients and members of MACA are concerned about executive talent flight. The job market is hot for skilled executives who possess the managerial fortitude to lead organizations through major transformations in today’s increasingly competitive global economy. Rena Somersan

The pressure is on to review systems and processes. Many HR managers are under increased pressure to increase benefits, find candidates for job openings, and (improve) employee engagement. These managers are noticing that some of the same systems that worked for the last several years are changing. Aaron Schneider

3) What would you advise your clients – especially small and mid-sized businesses – who are having trouble hiring and retaining top talent in the current business climate?

As companies struggle to differentiate rewards and recognize excellent employee performance, they are increasingly turning to incentive compensation, both in number of programs and numbers of eligible participants. At the same time, employers are relying on gig workers to fill employment gaps in the tight labor market.

In addition, to capture and retain talent, employers are personalizing employee benefits – not necessarily high-cost perks – that align with their culture, offer greater flexibility and work-life balance. Neil Lappley

My advice it to take advantage of firms like (ours) who (can provide) experienced professionals who are willing to work in interim and project-based roles with clients. Businesses need to look beyond the Wisconsin state border; (Patina Solutions) has access to those resources and the ability to expedite the hiring process for our clients. David Gilmartin

Increasingly, executives at SMBs are being hired by larger companies. These larger companies likely have long-term incentive (LTI) programs in place to attract, retain, and reward executives for their contributions to the business. LTI programs provide actual or pseudo “ownership” in the firm and typically comprise a large portion of the executive’s total direct compensation package.

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To maintain a competitive edge, SMBs should determine whether their executive compensation programs provide a long-term incentive opportunity for key executives. The LTI opportunity should be aligned with the company’s strategic plan and future growth goals, and it should provide monetary rewards commensurate with performance and appropriate levels of risk taking. Even if SMBs cannot provide “ownership” in the traditional sense (i.e., equity), several cash-based program types might be considered. Rena Somersan

Hire where you are at. Meaning, in small and mid-sized organizations, it is important to hire people that fit your current organization, but maybe can take you where you’re going. (This also means not hiring) someone outside of your current capabilities. If you are focused on the ideal candidate and not getting jobs filled, shift to hiring candidates that fit the culture and be ready to train them up on the needed skills. Aaron Schneider

Focus on retention. In my case, I tell them to pay competitively and “Give their Employees C.R.A.P.”  (Caring, Respect, Appreciation, and Praise). Develop a strategy to retain people (versus) trying to recruit people. Jeff Kortes

Do you have more questions about where wages, compensation and benefits are heading in the current economic climate? Or would you like to connect with any of our Q&A contributors? If so, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.

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How to Invest in High-Potential Employees

Identifying the right talent for your organization’s long-term success is a business imperative. To tap into this talent pool, many companies invest in High Potential Employee (HIPO) compensation programs to develop and retain their most promising future leaders. Researchers from MIT and Harvard have found that companies can consistently identify 3-5% of their workforce as HIPOs.

High potential employee compensation programs typically share these priorities:

  • Building a pipeline of talent to fill future company leadership positions,
  • Expanding HIPO skills with new growth opportunities and experiences, and
  • Rewarding high potentials for their development and accomplishments.

As these priorities make clear, high-potential employees require much more than higher compensation to succeed in the workplace. Training and development are equally valued by high potentials. Likewise, employers who cultivate high potentials by creating structured learning environments that also support their business strategies build competitive advantage.

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Still, at the same time organizations are mentoring and coaching their high potentials, recruiters have your top performers squarely in their sights for their own critical positions. If they choose to leave, these ambitious and motivated employees are difficult and costly to replace. Not only do companies lose their investment in training and development for HIPOs to another employer, they also incur costs to recruit, hire, onboard and train a new employee at many times more than base compensation.

Turnover Takes a Toll

According to the 2019 Mercer Turnover Survey, U.S. companies had an average turnover rate of 22%. This turnover stat reflects s 15% voluntary, 6% involuntary, and 1% retirement rate. Although employers have little input when their employees leave for personal reasons or to pursue an entirely new career, they do have control over what they pay them and how they support growth opportunities.

Employees surveyed by Mercer gave the following reasons for their decision to leave:

To combat turnover and prevent employees from leaving, Mercer reports the two most prevalent employer practices are continuous compensation reviews and regularly looking at engagement.

Rethinking Retention Strategies

Many companies have programs in place to reduce turnover, especially for their top performers. But too often these programs rely exclusively on traditional compensation models designed to Attract, Retain and Motivate (ARM) employees. This plain vanilla approach may not be enough for future leaders and high potentials.

Instead, more businesses are rethinking their HIPO compensation programs to favor engagement and alignment with key strategic goals. These programs reward and promote employees who exhibit the desired behaviors and serve as role models for others. In addition, they include robust measures that address current performance, future potential and talent fit for the organization’s strategic direction and cultural values.

Many of the elements of a HIPO compensation strategy are like your company’s overall compensation approach. However, reciprocating your HIPO employees’ ambitions with greater opportunities for training and advancement helps build value for your firm.

Here are the key planning considerations:

1. Conduct a Competitive Compensation Analysis

For each participant in the high-potential program, conduct a compensation competitiveness review. First compare current compensation to the market for the participant’s current role. Then compare current pay to potential next positions for the participant.

Analysis should include base salary, recent salary increases, bonus/incentive opportunity and history of earnings, total cash compensation and, if currently or potentially eligible, long-term incentive and total compensation. The result of the analysis will highlight the gaps between current compensation, market and likely next positions.

2. Determine Compensation Program Elements

Not surprisingly, pay often determines whether high potentials either leave or stay at your organization. Here are four key areas to consider when putting together your compensation program:

  • Promotions – Promotions typically target an average of 8.5% for most organizations. The more appropriate target for HIPOs should average 12% to 16%, a 50% to 100% increase over current practice.
  • Base salary increases – Salary increases for 2020 for most companies are predicted to average 3.2%. According to PayScale, retention raises are the second highest reason for granting a salary increase. Therefore, for high potentials increase your 2020 salary increase budget from 6.5% to 13.0%, an increase between 100% and 200%. Consider developing a separate salary increase budget for high potentials.
  • Incentive/bonus opportunity – The incentive/bonus opportunity should be increased from 50% to 100%. If the high-potential employee is not currently eligible for participation in an incentive/bonus program, consider establishing a separate plan.
  • Long-term incentives – If the high potential is not currently eligible and a potential new position does include participation, consider including at an appropriate level during the current role.

3. Prepare Your High-Potential Compensation Strategy

Develop a compensation strategy that is unique for each high-potential employee. For most employers this means platforming from their current organization-wide compensation strategy. Most likely this will mean that competitiveness targets will be greater.

For instance, if the corporate targets for base salary and total cash (base plus incentive/bonus) are, respectively, median and 60th percentile, targets for high potentials might be 75th percentile for base and 85th percentile for total cash.

Next, for each high-potential program participant, select one or several options from a combination of promotions, salary increases, incentive/bonus opportunity and, if appropriate long-term incentive participation.

4. Help High Potentials Learn to Lead

From rapidly changing technology developments to managing multi-generational workers, the challenges facing high potentials require specialized problem solving, communication and people skills to bridge the gap between top executives and the front line. You may want to customize your training opportunities to include different elements for emerging and senior leaders. Development programs should build on current skills while strengthening areas for improvement.

High potentials being groomed for senior positions may move quickly between managerial and operational roles to learn other parts of the organization. Their performance feedback should be frequent and consider time in position and ability to make an immediate impact. If assigned to special projects, performance evaluation should include both leadership of the group and individual contributions. Group project quality, timeliness and results all need to be measured.

A variety of training methods ranging from individual coaching to seminars and workshops will help your high potentials make the transition from being an individual contributor to team manager and ultimately senior executive. On-demand resources through online learning and email communications will reinforce the new skills they have acquired as they put their new knowledge into practice.

5. Don’t Forget Performance Management

All too often, managers focused on their day-to-day responsibilities will lean on high performers to carry out their primary responsibilities while neglecting their role as mentor and coach. After all, high potentials are talented, energetic and highly productive contributors. Include a component in your compensation strategy that ensures managers of high potentials offer the guiding experiences so essential to their development.

Summary

High-performance employees are catalysts in the workplace, inspiring others to work harder and more effectively. Your investment in these top performers will have a ripple effect, setting a great example for their teams and raising the bar on performance for colleagues.

Contact Us

If you have questions about how to develop and reward your high potential employees or on other compensation topics, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com. In addition, please share or pass this article along to anyone you think may find it of interest.

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Pay Equity and The Rules of Engagement

From Wall Street to Main Street, the issue of pay equity and demands for a fair living wage are making headlines across the country. Despite the growing furor, the idea that employees performing substantially equal work should be paid equally is not new. The Pay Equity Act was passed in 1963, followed by the Civil Rights Act of 1964 and the Lily Ledbetter Fair Pay Act of 2009.

However, laws alone have not closed the gap in pay disparity in many industries, a trend that also impacts small and mid-sized businesses. One reason may be that most companies are reluctant to share in-depth salary information about their employees based on race and gender data.

Recently, chip maker Intel made the unprecedented move to publicly release this data for 51,000 U.S. workers. The report was sent to the U.S. Equal Employment Opportunity Commission (EEOC). This is the first year that the EEOC is requiring the same kind of pay data from all companies with more than 100 employees, though companies aren’t required to publicly disclose that data. Previously, the EEOC asked for race and gender data, but not pay information. Intel released its data after settling a pay discrimination lawsuit for $5 million in October.

As this example illustrates, organizations can face significant financial and legal ramifications if they are viewed as paying employees unfairly. And while most employers are motivated to do the right thing, what may be well intended with good workplace policies sometimes falls apart in actual practice.

Pay Equity Trends

Increased scrutiny of employer pay equity has made this a hot topic for companies of all sizes. For this reason, total rewards association WorldatWork conducted a Pay Equity Practices and Priorities Survey to assess the current state of pay equity related work. Key findings include:

Gender pay gap and broad pay equity analysis is becoming standard practice for organizations (79% and 71% respectively).

  • Additionally, 55% reported remediation strategy execution and remedial option evaluation (52%) are not far behind.
  • Interestingly, 32% of respondents are not looking at performance management practices. This is surprising since performance management programs tend to be subjective.
  • While employers are looking for potential biases that may influence pay disparities, benefits programs are not receiving the same attention.
  • Only 9% of organizations said gender pay gap analysis is not on their radar.

In another survey conducted by WorldatWork earlier this year in partnership with pay consultancy Korn Ferry, larger companies reportedly were more likely to take action on pay equity than smaller businesses. In fact, regulatory compliance and culture initiatives are key drivers behind pay equity management programs. So is the desire to improve employee engagement and build trust in organizations.

Still, the ultimate test of faith depends largely upon how pay equity is managed within the organization and how well pay equity initiatives are communicated to employees.

Changing Laws and Uncertain Politics

Employers navigating complex pay equity issues are just as likely to encounter a changing morass of state and municipal laws, some which assign rewards for liability and damages. According to some legislation, potential new hires are entitled to know what the pay range is during recruitment.

In addition, with national elections looming in 2020, public policies to address pay inequities could further expand. As a result, how organizations justify differences in employee pay based upon merit, seniority, or other factors may also need adjustment.

To land safely on pay equity issues in an uncertain political climate, companies are advised to:

Conduct comprehensive pay equity and pay gap analyses;

  • Identify diversity and inclusion priorities, then follow through;
  • Look into biases that may be discouraging promotions within the company; and
  • Define clear metrics for good performance, then ensure that unconscious biases don’t have an unwanted influence on performance evaluations.

Pay Transparency Pays Back

In today’s digital world, savvy employees have easy access to compensation information from online sources like Indeed, LinkedIn and GlassDoor. Therefore, they know what to expect to earn at a job. And The result is that companies can no longer avoid transparency when it comes to pay.

Being transparent about pay, at the same time, allows employees to understand their pay, how it relates to company values and how it compares to public information. The result is to strengthen the employee/employer relationship.

There are three reasons why compensation transparency matters:

  1. It’s important to employees. According to a recent survey by Mercer, reportedly only 19% of employees gave their employer an “A” for equity and promotion. In addition, data shows that in the past five years employee perception of pay has declined.
  2. Lack of transparency hinders organizations from achieving diversity in the workforce. It has been shown diversity in the workforce leads to higher performing organizations. Transparency supports holding companies accountable for compensation decisions made.
  3. Democratization of pay has made it easy for employees to have access to competitiveness information, taking compensation information out of employers’ control.

In Conclusion

Pay equity and equal pay for equal work seem like no brainers. But it’s not easy to change perceptions that are heavily entrenched in our society. Pay equity, however, is having an outsized impact on employer’s ability to hire and retain top talent in today’s highly competitive labor markets.

To discuss how pay equity and transparency can be addressed to attract and keep top talent at your organization, please contact Neil Lappley at (847) 921-2812 or nlappley@lappleiy.com.

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2020 Salary Budget Increases

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Despite uncertainty about where the U.S. economy is heading, recent salary surveys from compensation consulting firms reveal that salaries are expected to either increase slightly or hold steady versus 2019 salaries. In this issue of Compensation Alert, we look at how companies are planning to deal with 2020 salary budgets to remain competitive and retain top talent.

Survey information was gathered from human resource professionals facing an extremely tight labor market, increased investment in pay equity adjustments and climbing minimum wage rates. What’s more, many economists are predicting slower economic growth and greater risk for a possible recession within the next two years.

Under these conditions, participating organizations in this year’s salary surveys provide crucial insights into how companies are budgeting for salary increases in 2020.

WorldatWork

WorldatWork survey participants report that in 2019 salary budgets grew slightly to 3.2% average (median 3.0%) meeting last year’s projections. They expect salary budgets overall to increase to 3.3% in 2020. Specific pay increases are expected to be:

  • 3.2% for exempt salaried workers,
  • 3.3% for officers and executives,
  • 3.1% for nonexempt employees, and
  • 3.2% for nonexempt hourly.

In addition, pay equity continues to be a significant issue to organizations. The WorldatWork survey finds that 42% of participants plan to budget for pay equity increases in 2020, up from 37% in 2019. When pay equity adjustments are not budgeted, 46% of respondents report that company savings will be used for adjustments in 2020.

Promotional increases in 2020 are projected to average 8.9%, up slightly from 2019. The portion of salary increase budgets attributed to merit are projected at 3.0%. Not surprisingly, the largest increases in salary budgets are from the East Coast (Washington DC and Boston) and the West Coast (Denver, Portland, San Diego and San Jose). In 2019, the reported average salary structure increase was 2.2%.

Willis Towers Watson

According to the 2019 Willis Towers Watson General Industry Salary Budget Survey, salary increases are expected to hold steady in 2020. The survey reveals increases of:

  • 3.1% for exempt and non-management employees,
  • 3.1% for management employees,
  • 3.0% for nonexempt hourly workers,
  • 2.9% for nonexempt salaried employees, and
  • 3.1% for executives.

The survey finds that employers will continue to reward star performers larger increases than average performing employees. According to the survey, the highest performing employees were granted an average increase of 4.6% in 2019, about 70% higher than the 2.7% increase given to those receiving an average increase.

To retain your best workers, as compensation consultants we have long advanced a minimum increase for star performers should be at least two times the increase to average performers. Although the differential has crept up over the past few years, it still has not reached a minimum ideal level.

Mercer

Mercer’s findings are consistent with WorldatWork’s 2019-2020 Salary Budget Survey. While overall salary increases were 3.5% in 2019, they are projected to be 3.6% in 2020. Survey results show that merit increases for 2019 were at 2.9%, while mean and median merit increases are expected to be 3.0% for 2020.

Additionally, the Mercer survey found that there was no change in the number of employees receiving promotional increases in 2019. The average promotional increase was 9.3%, slightly more than the 8.9% increase recorded by WorldatWork.

Further findings reveal organizations continue to use performance ratings to differentiate salary increases, although a small portion do not use performance ratings (14%). Among this small group, the majority distribute merit pay based on manager discretion with oversight by business leader or HR/compensation.

The survey also finds that high performers received 1.6 times the salary increase of average performers.

Payfactors

The Payfactors salary survey provides detailed responses for U.S. and Canadian employers, with data broken out by industry, revenue, organization size, region and state.

According to the Payfactors survey, average salary increases in 2020 are expected to be:

  • 3.2% for exempt employees,
  • 3.2% for exempt (non-management) employees,
  • 3.2% for managers, and
  • 3.1% for officers and executives.

Industries reporting higher expected increases include professional services, pharmaceuticals, software, technology, metals, and oil and gas. Industries expecting lower increases include retail, not-for-profit, hotels and restaurants, banks and aerospace. The survey shows little difference in average increases by region.

Salary.com

According to its annual Salary.com Salary Budget Survey, median annual salary increases are expected to remain flat at 3.0% for 2020. The salary.com survey average salary increase is significantly lower than the salary increases predicted in prior cited surveys. Although different survey methodology may be present, also likely at play are different survey populations.

Variable Pay Programs Becoming More Important

After reviewing the results of these top-rated surveys, it is apparent that many organizations are struggling to remain competitive on salaries to attract and retain top talent. That’s why many are moving towards variable pay programs. Rather than investing in long-term, fixed salary programs, companies are focused on rewarding and retaining top talent via pay-for-performance incentive programs. Along with improving employee engagement and reducing turnover, another benefit to these programs is stronger market competitiveness.

How Do You Determine Your Salary Increase Budget?

Clearly, predicted market increase budgets are only one input to weigh when deciding on your salary increase budget for 2020. To begin with, it is important to distinguish between your competitiveness goal and your overall compensation strategy. Next, examine how far above or below that goal your current salaries are. Finally, evaluate how close your company can come to meeting your 2020 salary goal based on available funding.

One final point to consider: recessions are inevitable. Organizations that take strategic compensation and human resources actions in advance of these downturns will be better positioned when the economy turns around.

In Summary

Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss this topic further. In addition, you can read more on this topic at lappley.com. Please share this article with anyone who think may be interested.

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Managerial Training for Communicating Compensation

How well do your employees know your company’s compensation strategy? Chances are that without a clear understanding of your organization’s pay program, your employees will not appreciate their value to the company.

In a 2018 Conference Board survey, it was reported that only 43% of employees were satisfied with their wages. Worse still, a low 27% were satisfied with their bonus plan. Clearly, better communication about compensation creates an opportunity to improve employee satisfaction, which drives employee retention, productivity and performance.

Because managers are responsible for communicating compensation details to the workers they supervise, much of employees’ understanding of an organization’s pay program rests with them. Not only do your frontline managers play an important role in leading pay discussions, they give context to compensation decisions and are key to promoting employee engagement.

According to Gallup’s 2015 State of the American Manager study, managers account for at least 70% of the variance in employee engagement scores across business units. Therefore, how well they communicate your company’s compensation program can mean the difference between better performance or a demoralized workforce.

Communicating Compensation: No Small Matter

Facilitating pay conversations between managers and employees is no easy task. First, they are busy. After all, they are the focal point of performance of their group.

Second, they are likely to shy away from tough conversations. This is doubly true for employees who are difficult to manage. Anxiety can lead managers to provide insufficient explanations, shift the blame to others, or avoid the conversations entirely.

In fact, a 2015 Harris poll found 69% of managers are uncomfortable communicating with employees at all. As a result, communications regarding compensation are often the last item on their agenda.

To boost managers’ confidence for effective compensation discussions with their employees, here are five things to consider:

Prepare a Compensation Strategy and Communication Plan

Arguably the most important aspect of communicating pay is the organization’s compensation philosophy and strategy. It explains why and how employees are compensated. Prepare a written compensation philosophy and comprehensive strategy, then give your communication strategy the same, thoughtful preparation.

Your communications strategy defines the approach your company will use to communicate with all communities. It should include clear objectives, well defined timeframes for achieving them, an implementation plan and a monitoring process to assess results and pinpoint improvement areas.

Define Your Core Messaging

Consistent, top-down communication about the compensation strategy is critical to promote affinity and avoid confusion. Make sure your messaging reflects the values and philosophy guiding your company vision and how your pay program rewards performance. Determine what information should be shared with your respective employee groups and when. Invest time and resources to get it right, starting by gaining buy-in from the executive team before rolling communications out to managers and finally employees.

Identify Channels for Communication

Who is your audience and what are their preferred methods of engagement? Identifying who your stakeholders are can help you determine which communities may have similar information needs and the best channels to reach them.

Face-to-face meetings provide opportunities for real-time interaction and feedback, while the company intranet or newsletter lets employees read at their own pace. Use a combination of channels to communication often. Consider the timing of key events and company milestones to demonstrate progress and showcase achievements.

Develop Communication Materials

Start with a statement detailing the elements of compensation and highlight how each element works, why it was chosen and how it links to the company’s overall business strategy. Describe how survey data was used to arrive at salary ranges and incentive plans. In addition, explain how merit increases were designed and add detailed descriptions of incentive programs, including measures used to calculate incentive payments.

Tables and bulleted lists present information in an easy-to-read format, as do charts and graphs illustrating the value of employee rewards and compensation. Concepts such as range penetration (the level of an individual salary compared to the total pay range) or compa-ratio (the relationship of base pay to market expressed as a percentage of the midpoint of the salary range) should be defined.

Some measures are more useful than others when calculating salary ranges within your organization’s job grade ranges. Typically, which measures to utilize depends on your organization’s pay philosophy and how competitive your industry’s pay structure may be.

Finally, a frequently asked questions document serves as a primary resource to address anticipated issues, matters of concern and items for clarification.

Develop a Feedback Loop

The evaluation of your communications program impact is a continuous process. Use confidential surveys, focus groups and interviews to gauge the impact of your communications and provide employees with meaningful opportunities to contribute ideas for improvement.

Training Managers on Effective Communication

If your managers feel ill prepared to have discussions with their employees about your compensation strategy, you can expect the uncertainty and negative consequences of poor communication to have a cascading effect.

Misunderstandings can occur when an employee is feeling they are not getting the information that they need. And when conversations get heated, managers must know how to recognize when the discussion has become counterproductive or frustrating to the employee.

Different people learn in different ways, so consider developing multiple options for managers to learn. For example, you may want to incorporate:

  • In-person, instructor-led training;
  • Interactive e-learning courses;
  • Video, particularly having senior management describe how the organization’s compensation programs support achieving corporate objectives; and
  • Webinars.

Having challenging conversations is part of being a good manager. When handled in the right way, managers can avoid the difficult situations that come with the territory. Remember to:

A. Practice, Practice, Practice – Prepare what you plan to say and consider what the employee is likely to currently understand. For instance, does he believe he is a high performer and that a salary increase or bonus is on the way? Is the employee likely to have an up-to-date understanding of the organization’s compensation philosophy and strategy?

B. Establish a Sense of Trust – Conversations regarding pay are easier if the manager is already comfortable talking to the employee in general.

C. Have Straightforward Conversations – Communicators are most effective when they avoid jargon and get right to the point.

D. Anticipate Reactions – Effective conversations do not end with managers communicating decisions and then walking away. Allow time for employee questions and choose a private place without interruptions. When an employee has a negative reaction to pay decisions, a follow-up meeting may be necessary to address the employee’s expressed concerns.

To be sure, your managers are one of your most important links to a successful compensation strategy. By educating your managers about your compensation strategy and training them to communicate it clearly, your employees will have a better understanding of their real value to your company. That effort will translate into a better return-on-investment in your strategic compensation program.

If you enjoyed this or other articles I have written, 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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Addressing Pay Equity

Pay equity is a topic that isn’t going away. Rather, the spotlight is only getting brighter.

This makes understanding possible pay gaps between the men and women in your workplace and adopting proactive approaches to remedy pay inequities more important than ever. For instance, according to the American Association of University Women, 42 states as well as Puerto Rico and Washington D.C. proposed new pay equity legislation last year. Not all the measures passed, but enough did making it challenging for organizations operating in multiple markets to address the issue of pay equity in a comprehensive way.

A growing number of states and local governments have made it illegal for employers to ask candidates for their salary history. The rationale for the law is this: since females have historically been paid less than males, platforming a new salary over a low salary only perpetuates the difference. In response to this trend, a recent WorldatWork survey finds that 37% of companies have a nationwide ban on asking potential candidates about their past pay.

Additional legislative approaches to tackling pay equity include new laws promoting more pay transparency; others give employers protections for making “reasonable progress” toward pay equity. Clearly, the shifting landscape and impact of gender wage gap laws raise compliance and performance concerns for companies and their compensation policies.

What is Gender Pay Equity?

When we talk about gender pay equity, this often is confused with equal pay or these terms are treated interchangeably. However, there is a difference.

The gender pay gap is a broad measure between the aggregate pay for women and men across the organization. It is expressed as a percentage of men’s earnings.

Equal pay requires women and men doing the same or a substantially similar job to receive the same compensation and benefits. In other words, equal pay for equal work.

It is important for businesses to understand the distinction. Why? Both areas should be examined to better understand pay differentials within your organization and the factors at play impacting your talent management programs.

Understanding Gender Pay Equity

Several studies in recent years have looked at pay gaps to better understand the causes and impacts.

In a new article, “More Than a Pay Gap,” management consulting firm Korn Ferry examined its compensation data base for organization-wide pay differences within 110 countries. What they found is that the gap in the United States narrows considerably the more specific the comparison becomes. While women on average earn almost 18% less than men, the gap between a man and woman working in the same job level for the same organization in the same function is typically only .9%.

Korn Ferry researchers have concluded the reason women are paid less than men is not necessarily the result of unfair pay practices. Indeed, this may be the case in some organizations (after all, averages mask actual comparisons). Rather, the gap in pay is deduced to be the result of fewer women working in higher paying industries or leadership functions.

As the Korn Ferry study reveals, the solution to the organization-wide gender pay gap represents a complex and systematic challenge. We will focus on how to meet the challenge in a future issue of Compensation Alert. Meanwhile, companies have immediate opportunities to evaluate whether your organization is complying with equal pay statutes.

Conducting a Pay Equity Analysis

Inequitable pay practices can pose immediate risks to your business – including reputational risk. To help uncover possible issues driving any pay differentials within your organization, conducting a pay equity analysis is recommended. Following is a step-by-step process overview:

It may be prudent to consult with a lawyer, as audits of this type are often protected by lawyer-client privilege.

  • Identify the equal pay practices you want to investigate.
  • Gather data on employees grouped by comparable worth. Jobs should be examined regardless of job title, with the focus on work performed, the manner in which the work is performed, and the skills required for the job.
  • Determine what drives pay most, whether desirable factors such as performance and/or level or undesirable factors such as race, gender or age are involved.
  • Beyond the job-based analysis, the study should look function-by-function, manager-by-manager, and location-by-location to see if any equity trends emerge. Any pay gaps can then be closed.
  • Following the job-based analysis, it is important to dig into the causes of those gaps. For instance, salary structure and other compensation tools need examining.
  • Finally, leaders must be committed to change if undesirable factors influencing pay have been discovered. Change can only happen if commitment exists at all levels to ensure fairness, consistent communications, and organization-wide management practices.

Conclusion

The type of pay analysis described above will need to use comprehensive compensation market data, review and likely overhaul compensation administration guidelines, and update job grading systems. But smart organizations can turn it into an advantage. How? By looking beyond current law to build proactive policies and practices promoting gender equality (and diversity of employees) and embedding these values into the company culture.

Further, experts say that organizations that manage pay equity well and have diverse, inclusive cultures post higher returns and have more trust in leadership, greater employee engagement, and less turnover. Organizations that fail to manage pay equity well are subject to the inverse consequences, plus increased risk of litigation.

Let’s Connect

If you enjoyed this or other articles I have written, please share it with anyone you think may also find it of interest. For help or information on this topic, you can email me or call.

Contact me at (847) 921-2812 or nlappley@lappley.com.

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How Compensation Communication Promotes Employee Engagement

With unemployment at low levels and the economy continuing to expand, the need for compensation transparency is at an all-time high. Increasingly, employees are also making more demands for visibility into their rewards programs. If your employees aren’t asking directly for this transparency, they are likely seeking information elsewhere from peers, for example, or through websites offering compensation data.

The key to transparency is communication from the management team. However, managers at most organizations admit they struggle with how to explain the factors driving the company’s compensation decisions.

Employee Pay Perceptions

When employees believe they are paid fairly and equitably, they are more likely to stay with their current jobs and be more engaged in their work. However, a 2015 survey by compensation research firm PayScale shows there is often a wide gap between perceptions about pay and reality.

The survey of 71,000 employees found that most employees don’t understand how their compensation is determined or know if they’re paid fairly:

 

The survey results are clear: if compensation practices are not communicated, employees will not perceive the situation correctly or give the employer the benefit of the doubt.

Minding the Generation Gap

Laying the groundwork for a sound compensation communications plan begins with openness about how raises, incentives and promotions are handled. But changing workforce demographics may mean varying your communications approach and channels based on generational preferences:

  • Baby Boomers (Born: 1946-1964) – They tend to be longer-tenured employees with an attitude of loyalty and a strong work ethic. Boomers are used to pay discussions being private.
  • GenX (Born 1965-1979) – Having viewed the decline of employer commitment first-hand, they tend to be pessimistic about the workplace. They are conflicted in terms of openness to pay discussions. They’re willing to talk about the rationale of compensation, but less willing to talk about pay specifically.
  • Millennials (Born 1980-1995) – They are open with communication and are used to sharing information, believing there is little taboo in talking about pay. They tend to want fairness and career flexibility at work.
  • GenZ (Born 1996-Present) – Just entering the workforce, GenZ is comfortable with technology making it easier to communicate with them. However, we’re seeing the pendulum swinging back from the openness of millennials.

Millennials are now the largest group of employees. They are more open to compensation communications. This can be a problem for the other generation groups. But it is ultimately a good thing for everyone to be more open about pay as it will lead to greater trust which, in turn, will lead to higher engagement levels.

Consider Other Differentiators

There are other ways to think about grouping your workforce outside of thinking about generational differences. For instance, engineering employees may be less open about discussing pay, while sales teams may be more open. Or think of it in terms of job levels: entry-level employees may be very comfortable talking about compensation while senior managers may be less interested. Differences in how your employees prefer to get their information and the channels they are open to also influence your compensation communication strategy.

Are Your Managers Ready to Talk About Compensation?

According to PayScale, only about 19% of workers at organizations feel confident in their managers’ ability to talk about compensation. At the same time, managers are unlikely to recognize when an employee is feeling underappreciated. If an open dialogue is not developed and maintained, your company is more likely to experience loss of engagement, lower productivity and turnover.

We will return to the topic of compensation communication in our next Compensation Alert and look at how managers can improve their communications about pay to promote greater understanding of workplace compensation policies and practices. In the meantime, feel free to contact me about pay issues you are facing. I can be reached at nlappley@lappley.com or (847) 921-2812.

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[Comp Alert October 2018] How to Develop a Compensation Strategy

Last June in our Compensation Alert, we discussed how to develop a compensation strategy. As year-end compensation planning approaches for many companies, we think this topic is timely and worth revisiting with updates to address current trends.

Compensation strategy is part of a company’s human resource strategy and should be integrated with all other elements of human resource planning. A compensation strategy—a formal, written statement capturing the organization’s views and approach to compensation—serves as a guide and touchstone when designing new HR programs or evaluating existing ones. In addition, a clear compensation strategy lays a foundation for communication transparency when giving employees the rationale behind pay and benefit decisions.

Compensation Strategy Planning Elements

Like every strategy guiding your business, your compensation strategy should align with your business priorities.

Here are six elements to guide you through the design process:

  1. Gather Information: Obtain information and perspectives from your stakeholders, including directors, executives, managers, employees and customers. Take a close look at external and internal factors having a direct and indirect impact on your pay strategy. External factors include trends in supply and demand for talent, your relationships with your customers and challenges you are having in the current marketplace. Internal factors include your company’s business culture, values and strategic initiatives, as well as the core competencies of your current and future employees.
  2. Business Lifecycle: Consider your organization’s business strategy and human resource strategy, as well as where your business may be in its lifecycle.
    • Inception Phase – At this stage cash is tight and organizational structures and systems are informal.
    • Growth Phase – Here cash is tied up in growth; often developing the HR infrastructure becomes critical during this stage.
    • Maturity Phase – Mature organizations have cash and organizational structures are in place.
  3. Consider Demographics: Early career employees may need different incentives than those further along in their work lives. For instance, entry level employees may be willing to accept lower base wages in exchange for larger cash incentives or professional development opportunities. Employees nearing retirement may be willing to trade some amount of pay for greater medical and retirement benefits.
  4. Benchmarking: Gather information on salaries and wages so you understand how your organization stacks up against competitors and where your pay is relative to market rates. This approach involves understanding an organization’s relative positioning, but not necessarily blindly following. It also considers the economics of the business, so you can decide what’s best for the organization.
  5. Test Initial Strategy: Develop an initial strategy statement, then share it for feedback from stakeholders. When evaluating your compensation strategy, make sure it is equitable, fair, fiscally sound, legally compliant and provides a framework to effectively communicate with employees.
  6. Revise as Needed: Once you have implemented your compensation strategy, monitor and evaluate its internal impact – pros and cons – making changes as warranted. In addition, adapt your strategy to changes in the external business environment while keeping its intrinsic value.

How Competitive Do You Need to Be?

Understanding competitiveness begins by defining the markets where your organization competes for talent and business. Does your company recruit talent on a local, regional, national or global basis? Gather relevant salary data so that you can adjust your compensation strategy based on geographic differences in pay. Some industries, occupations and job levels, too, may be more competitive than others.

Establishing a market competitiveness target is a key element of an organization’s compensation strategy. Does your company plan to pay at, above or below market for the jobs in your portfolio? Based on your analysis, you’ll need to decide if you want to lead, lag or match the market.

For example, if you are currently paying below market median, your reputation is solid, business is good, or talent is plentiful, you may want to continue that approach. But if you currently have great employees and recruit only the best, need skills in short supply, are in a less desirable geography or the cost of living is high, you may want to target above the market median. These and other considerations must be weighed when developing your salary structure.

What Should be Rewarded?

Your compensation strategy should be tailored to meet your organization’s unique needs and circumstances. Most compensation strategies include:

  • Base salary has an important role in compensating employees as it establishes ongoing job worth and reflects employee performance. When deciding how wide to make salary ranges, make sure there is a clear purpose for each segment in the range. Also consider how you expect employees to move through the salary range as they advance in the organization.
  • Annual incentives are meant to reward annual performance. Once you determine who will participate in the incentive program and what the incentive opportunity will be, set performance measures and a feedback schedule so everyone is on track. Include financial and performance measures for both the operating company and supporting business units.
  • Long-term incentives, in contrast, are meant to reward a longer performance cycle and typically are part of an executive compensation program. The timeframe for these incentives is typically two-to-five years. Reward systems establish forward-looking performance conditions and include cash and equity.

What motivates employees can differ greatly, so use a mix of rewards.

In Summary

How your company spends its compensation dollars – often an employer’s largest expense – deserves a strategic plan aligned with business goals. In today’s rapidly changing employment environment, it’s time to leverage the most important asset your organization has: its people.

Contact Us

Please contact me at nlappley@lapppley.com or (847) 864-8979 to discuss any comments or questions you may have about how to develop a compensation strategy. Feel free to forward this email to anyone else who may be interested.

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[Comp Alert May 2018] Tax Reform’s Impact on Compensation

Late last year, Congress passed and President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The sweeping tax reform law reduces the marginal corporate tax rate at the federal level from 35 percent to 21 percent. This and other changes to tax law are boosting profits and will save businesses billions in taxes this year. So, how are they spending all that money?

Most companies are reinvesting their tax savings in strategic ways that drive business performance. So far, shareholders are reaping the greatest rewards, according to an analysis by investor Paul Tudor Jones’ Just Capital. Job creation is the second largest area for investment with 20 percent allocated. Jones’ nonprofit is tracking spending by companies in the Russell 1000; 133 companies have announced their intentions to date.

In addition, a recent Ernst & Young (EY) survey finds most employers are either planning to or have already made changes to enhance compensation through bonuses, salary increases and other pay benefits. Seventy three percent of companies surveyed expect to accelerate mergers and acquisitions.

Considering these and other trends, now is a good time to revisit your business compensation strategy to take advantage of opportunities that effect employee pay. Before making any long-term decisions, however, let your company’s business goals be your guide so that tax savings are invested where they will do the most good.

Making Tax Reform Pay

Tax cuts have contributed to growing optimism about the U.S. business outlook. And that optimism has translated into a strong economy.

Still, companies must be nimble to adapt to changes in the new tax law. Making the right strategic moves on where to invest tax savings requires thoughtful planning. Here are a few areas to consider:

1. Equal Pay – As more people keep a close eye on the pay gap, employers everywhere are working to eliminate wage discrimination based on sex, race, age, disability and other classes protected by federal laws. In this environment, they are evaluating how they can structure their compensation system so that it works for all employees. This means developing policies and compensation strategies that reward people performing well in the same jobs with similar work experiences, skills and education equally.

Yet, implementing changes means choosing a structure that pays internal employees fairly and is competitive externally. Consider using a portion of the tax break to identify any anomalies in your compensation structure. Then, develop solutions to pay disparity that can be implemented in phases over a reasonable time-period, as budget allows.

2. Shareholder Return – Shareholders who have invested in your organization expect a fair return. You can pass along tax savings to shareholders with an increase in dividends. This can take the form of a one-time payment or an increase in the quarterly rate. Another option: share buybacks.

3. Business Expansion – Companies who want to expand geographically, diversify product offerings or tap into new customers may choose to invest their tax savings in a merger or acquisition. With M&As, compensation programs must also be merged. Make sure your compensation strategy includes these important elements:

  • Competitive Pay Analysis – As the market for top talent gets tighter, attracting and retaining employees gets more challenging. This may be a good time to revisit the competitiveness goal defined in your organization’s overall compensation strategy. Consider using the tax reduction to fill in pay gaps. Look at national, regional and local market trends. Increases may be either to the entire organization or to select segments where compensation has increased faster than overall market wages.
  • Base Salary – The annual salary measures ongoing job worth and ongoing job performance. Under the TCJA, the performance-based compensation exception to executives $1 million pay cap has been eliminated. Now, compensation for the CEO, CFO and the three other highest paid executives is capped at $1 million regardless of whether compensation is performance-based or not.
  • Annual Incentives or Bonus Plans – These reward executives for reaching annual milestones or other incentivized, short-term financial goals. Cash is still the dominate incentive for private companies. Be sure to set goals for profitability or revenue growth as key performance measures. In January hundreds of companies announced employee bonuses resulting from the tax reform law. Although the pace of these announcements has slowed, more and more companies are following the national bonus pay trend.
  • Long-Term Incentives – This incentive rewards executives who create long-term value, a win-win for all when strategic objectives are met. You will also want to specify the length of the performance period, eligibility requirements, incentive opportunities, performance measures, and the payout or holdback schedule.

Whether your business is small and closely held or ranks in the Fortune 500, the new tax law will have wide-ranging implications for your compensation plans in 2018 and beyond. Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss further. Also, feel free to share this article with anyone who might be interested.

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