rules for keeping pay competitive

“Rules for Keeping Pay Competitive”

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Motor Vehicle Maintenance 101

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Basic Maintenance Prevents Larger Problems

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Program Maintenance

• What are the major checklist items to maintain competitive pay?

• How frequently should I be monitoring these items?

• How will preemptively addressing these issues prevent larger problems?

Salary

Performance Incentives

Sales Incentives

Growth Incentives

Core Health & Welfare

Plans

Executive Benefit Plans

Qualified Retirement

Plans

Nonqualified Retirement

Plans

SalariesCompetitive with market standards?

Tied to strong performance management process (merit)?

Managed within a flexible but effective structure?

Performance IncentivesTied to productivity gains?

Clear, achievable and meaningful?

Self-financing?

Sales IncentivesChallenging yet achievable?

Reinforcing the right behaviors?

Differentiating your offering?

Growth IncentivesLinked to a compelling future?

Supporting an ownership mentality?

Securing premier talent?

Core BenefitsResponsive to today’s employee marketplace?

Allocating resources where most needed?

Evaluated to eliminate unnecessary expense?

Executive BenefitsFlexible enough to address varying circumstances?

Communicating a unique relationship?

Reducing employee tax expense?

Qualified Retirement PlansGiving employees an opportunity to optimize retirement values?

Operated with comprehensive fiduciary accountability?

Avoiding conflicts and minimizing expenses?

Nonqualified Retirement PlansOptimizing tax-deferral opportunities?

Aligning long-term interests of employees with shareholders?

Structured to receive best possible P&L impact?

An Aligned

Compensation

Strategy

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Salary Maintenance

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Lets Start with Salary

Salary always gets the most attention

Probably one of, if not the largest cost to run your business

With any large expense it needs to be closely monitored

Who should own salary management?

Individual Managers?

Finance?

Human Resources!

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Why a Salary Structure?

Pay scales determine employee salary

All companies need some form of a salary structure

Sensitivity around pay discrimination is at an all time high (Equal Pay Act)

Salary structures ensure that pay decisions are both proper and defensible

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Position Specific Structures

There are two common structure types

Position Specific Ranges

Found in organizations with fewer unique positions

Usually have narrowly defined ranges

Easy to explain progression to employee population

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Grade/Band Structures

Grade/Band Structure

Positions with similar market value and internal equity grouped together

Appropriate when you have significant number of unique roles

Grade Minimum Midpoint Maximum

8 52,270 71,863 70,939

9 48,398 64,163 65,684

10 44,813 57,288 60,818

11 41,494 51,150 56,313

12 38,420 45,670 52,142

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Checklist Item #1Review your structures frequently

Too many organizations have a “Set it and Forget It” mentality around pay structures

A structure that has not been adjusted, at least, on an annual basis is not keeping pace with the market

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Acquire Market Data

How Do I Ensure I am Not Falling Behind?

Salary ranges are commonly set and maintained using market data:

ERI

PayScale

Towers Watson

Mercer

Industry surveys

Ensure you have access to some market data

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Using Market Data

Market data can help: Validate ranges for positions you have difficulty

recruiting or with high turnover.

Determine how we should adjust the salary structure

Variance 3.1% -2.6% -3.3%

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Frequency

Should I be Comparing my Positions to Market Data Every Year?

Depends on your budget as well as staff size vs. number of positions

Organizations with limited budget and resources typically reprice all positions every 2-3 years.

However, the structure should be adjusted at least every year.

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Single Position Adjustments

What if I am Having Difficulty Hiring/Retaining Positions?

Any salary ranges that are presenting challenges in hiring/retention should be addressed immediately

Establish new ranges/adjust current ranges on a frequent basis

No need to wait until the end of the year to review

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Adjusting The StructureOption 1 – Use the Market Data

Measure the variance between your positions and the market data

Can use a random sampling of positions if you are not re-benchmarking your positions every year

If your structure is position specific each position may have a different adjustment

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Adjusting The StructureOption 2 – Using General Trends

Industry and geographic trends are commonly discussed and available

Ranges can be adjusted by a flat rate

Manufacturing – Kansas City – 2.3%

Cost of Living vs. Cost of Labor

Cost of Living – Price of milk

Cost of Labor – Price of hiring a new accountant

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Cost of Living vs. Cost of Labor

Price of Gas (Cost of Living)

Fort Smith, AR - $1.89/g Los Angeles, CA - $2.96 /g

+56.6% Higher

When adjusting your salary structure, ensure you’re intelligence is based on cost of labor

Software Developer Salary (Cost of Labor)

Fort Smith, AR – $81,235 Los Angeles, CA - $98,228

+22.6% Higher

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Employee Salaries

Why Do Employees Stay With You?

Employees typically stay because they value nonmonetary awards:

However, if salaries are not perceived as fair and competitive, employees with leave you.

Provide employees reasons to stay instead of giving them reasons to leave.

Enjoy the work Appreciate the culture

Coworkers are friends Feel Important

Believe in Company Comfortable

Flexibliity Other

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Internal EquityEmployee A vs. Employee B

Employee A has been a valuable employee with the company for 10 years

Employee B was just hired right out of college

Employee B’s salary is higher than Employee A

How will Employee A react when he/she finds out about Employee B’s salary?

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Best Practice Fix

Most of the time the focus is on Employee B

Employee B’s salary offer was too high

Ensure Employee B’s salary is beneath Employee A

The bigger problem in this scenario is Employee A.

10 years experience and is making less than a new hire?

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Problem’s Origin

What is the purpose of your salary budget? Merit/Performance Promotion New Hires COLA/Inflation

Can all of that be accounted for in 2-3% salary budget every year? After subtracting out promotional and new hire

considerations your budget may realistically be 1-2% for merit and COLA

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Compounding Effect

Best Practice - Pay For Performance

Don’t evenly “spread” your budget

Focus on high performers

If you only have a 1-2% merit/COLA budget, and its all focused on the top 10-20% of your organization (high performers), how will the salaries for everyone else track against the market?

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In Addition

Answer:

The average salary increase of Employee Ais less than the increase in cost of labor

Or you’ve created a culture where promotion with a significant salary increase (10-15%) is necessary every few years.

You’ve either incentivizedEmployee A to leave you

Is there a less expensive alternative?

You Can’t!

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Checklist Item # 2Separate Your Budgets

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Setting Your Budgets

Your Budgeting Should Reflect the Organizations Priorities for the Upcoming Year

Merit - Should reflect market conditions (market data or general trend info)

Promotions - Usually a constant number based on the promotional culture of your organization

New Hires – How will staffing next year compare to the present COLA – Are employees falling behind the market data?

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Implications

The cost of having separate budgets can be more expensive on an annual basis than having one combined budget

Philosophical change for Mgmt Merit, New Hire, Promotional Budget – Owned by Mgmt COLA Budget – Owned by HR

COLA adjustments should be initiated to reduce the actual cost of turnover Does not need to be spent in its entirety

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Lets Talk About Incentive Maintenance

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Incentive Trends

Major Changes in Incentive Plans

Increasing Plan eligibility

Historically – Senior EE’s and Management

Change – All Employees

Sends a message that all roles are integral and will share in company success

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Simplified Plan Design

Simplifying incentive plan design Incentive plans have historically

been very metric driven Potentially creates conflict of

interest

Should I do what’s in the Company’s best interest or should I just worry about performing my goals?

Should I be paid because the company succeeded or because I accomplished a list or tasks?

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Basic Structure

Plan funds at different levels based on achievement of company goals

The incentive pool is then disproportionately shared with employees

Higher level employees receive a higher portion of the incentive pool

Employee performance can “modify” the payout

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Advantages

Easy to understand All employees are tasked with achieving high

level goals No micromanaging No conflict of interest Simple to administer

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Checklist Item # 3Review Your Incentive

Most companies design a plan and fail to evaluate the effectiveness of the design

Incentives need to be reviewed on at least an annual basis

It may be time to simplify your plan

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Employee Communications

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Employee Awareness

How much do your employees know about pay? How much do you want them to know about pay? For a long time, employers benefited from

keeping pay practices behind closed doors

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Automobile Awareness

How much do you know about your car? How much should you know about cars? For a long time, mechanics benefited from

keeping automobile maintenance behind closed doors

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Do You Trust Your Mechanic?

Why do people not trust their mechanics?

Because until recently you have had to take their word

Why should your employees trust you around pay?

Compensation is just as important to your employees as transmission fluid

How do you instill trust in your compensation practices: Transparency

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Perception is Key

2015 PayScale Study• The main predictor of both “satisfaction” and “intent to leave

is whether employees feel they are paid fairly. • Even when people’s compensation was in line with their value

in the job market, two-thirds believed they were underpaid. Of that huge group, about 60% reported low job satisfaction, and said they plan to look for a new job within six months.

• By contrast, the researchers found that, even at companies that pay below-market wages, if employees know why they’re paid less than they could probably earn elsewhere, 82% say they’re “satisfied” with their jobs and plan to stick around.

- Fortune Magazine, October 10, 2015, “How Pay Transparency Can Keep People from Quitting”

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The Big Idea

The idea behind pay transparency is simple: Take the topic off the table

If employees don’t understand the basic’s around pay they will always be suspicious

There isn’t a need to turn everyone into a pay expert.

Most employees don’t want to be experts

Recognize the elephant in the room and explain why its there

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Checklist Item 4Provide Ongoing Comms

Schedule an annual Compensation Overview Meeting Can easily piggyback on benefits open enrollment

Open forum to discuss: General Compensation changes

Salary Budgets

Bonus Plan Structure

Retirement & Benefit programs

Invite employees to ask questions

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Provide Materials

1. Compensation Philosophy Statement

2. Personalized Total Rewards Statements

3. Incentive Plan Summaries & Benefits Materials

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Compensation Philosophy

Every organization needs a compensation philosophy

What is your competitive advantage in hiring?

High Salaries, Low

Incentives, Avg Benefits,

High Retirement

Vs.

Low Salaries, High

Incentives, High Benefits,

Low Retirement

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Compensation Philosophy Statement

Put it in writing Usually 1 – 2 pages Share with all

employees Provide it to new

hires

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Total Rewards Statement

Summarizes entire compensation package

Usually 1 – 2 pages Ensures all employees

understand your compensation investment

Software or self generated

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