IPMAWestern Region Human Resources Conference

April 27, 2011

Dianne Burt-Green, CCP, SPHRMBL Group, LLC

Building Your Compensation Road Map

Introductions!

Dianne Burt-Green, CCP, SPHR MBL Group, LLC

(503) 224-7249 x13 dianne@mblgroup.com www.mblgroup.com

Conference Attendees Name / Title Organization Job responsibilities

Road Map Agenda

Compensation Fundamentals

Key Signals of System “Distress”

Guiding Principles of a Compensation Philosophy and Strategy

Building a Compensation Philosophy & Strategy

Mapping Your Compensation Project

Hazards to Watch Out For

First . . .

Show of hands:

You have responsibility for the compensation system

You have a formal background in compensation

Drew the “short straw” and have no background in compensation but are responsible for the discipline

Compensation Fundamentals

position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable budget revenue target index survey data cut job evaluation classification total rewards position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable budget revenue target index survey data cut job evaluation classification total rewards position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable time

A Few Words about the Fundamentals

o Strategico Powerfulo Creativeo Systematic

o Complexo Mysteriouso Tediouso Divisive

The Compensation Discipline

Compensation Is:Check ( ) oneo An “Art” o A “Science”

Strategic

A strategic compensation system forms a visible link

between organizational objectives, strategies and business metrics, while balancing the expectations of its employees with the costs to the employer,

AND

Be fluid and flexible enough to meet changing economic and market conditions.

Powerful

As a system, compensation is: Communicating your culture and values as an

organization

Driving (and incentivizing) employee behavior

One of largest items on your financial statements (if not the biggest)

Creative

Every compensation system is unique! Directly tied to organizational culture, industry,

size, complexity

Each organization, even within the same industry, may have distinct goals which vary the system

Identifying how your goals will drive your structure requires innovation & ingenuity

Systematic

Designing compensation programs does require a logical methodology How and why design decisions are made

There is a framework, either explicit in published guidelines or understood by administrators

Ensures an equitable and defensible system

5 Reward Categories

Direct financial rewards (pay) Indirect financial rewards

(intrinsic/extrinsic benefits) Work content (the work itself) Careers (long term opportunities for

development / advancement) Affiliation (the feeling of belonging)

Key Signals of

System Distress

“Distress” Signals

Time

Metrics

Labor Market

Motivational Goals

Distress #1: TIME

Unchanged compensation plan Number of years, decades, millenniums since

compensation system underwent total review

HR / Compensation / Total Rewards Staff Resources Staff as “fire fighters” vs. “innovators”

Distress #2: METRICS

External Internal Ability to PayoTime to hire oCompa-ratio o BudgetoSalary offers oCompression o Benefits as a % of payroll

o Cost of turnover o Tenure/ Retentiono Market Index

o Salary distribution by division, dept, mgr, location

o Complaints

o Variable costs vs. fixedo Awards tied to organization

resultso Communicationo Compliance: salary

differences by gender, age or minority status

o Revenue / Operating Budget per employee

What do the Metrics tell us?

Distress #2: METRICS

Ensure evaluation & understanding of metrics

Benchmark your metrics against your region, industry and comparable organizations

Track your metrics over time

Distress #3: LABOR MARKET

What is the labor market doing? Economy Political environment Availability of talent

Variable in job categories; while some jobs have a flood of candidates others jobs have a scarcity of talent

Ease of obtaining comparable data

Distress #4: MOTIVATIONAL GOALS

Strategic Alignment Values of the organization / values of the

workforce Performance, productivity

Clarity and communication Transparency of the system Ease of administration

Guiding Principles

of Compensation

Philosophy

Compensation Philosophy . . .Who has one?

WorldatWork’s Compensation Programs & Practices research report (9/2010): 9 out of 10 organizations report having a

compensation philosophy 61% have a written philosophy 29% have an unwritten philosophy 42% reported that all or most of employees do not

understand the compensation philosophy

Compensation Philosophy . . .Why have one?

Foundation and guide for future compensation decisions Intentional practices Direct actions strategically in good times and bad times

Clear, consistent understanding and communication You, Executives, Employees, Elected

Officials, Union – On the same page!

Compensation Philosophy . . .What it should explain?

Who the organization defines as its competitors for labor

How the organization prefers to set pay levels for its various titles compared to market

What the balance is between internal equity and the external marketplace

What role performance plays

What role incentives play

The amount of transparency

Setting the Foundation

Building (or re-building) your philosophy sets the foundation for: Determining the needs and outcomes of your total compensation

system

Building the right mix of compensation components for your organization

Evaluating your compensation system through periods of change

Elementals of the Foundation

External EquityIn

tern

al Eq

uity

Ability to Pay

Mar

ket r

ates

& tr

ends

, eco

nom

ic fa

ctor

sW

orkforce, organization & industry factors

Budget, balance sheet & organization success

Where Your organization

Is

Where the Market Is

One Size Does Not Fit All . . . .

A Strategic Compensation Philosophy:

o Links to the unique factors of your organization

o Bonds to your values & culture

o Accounts for the overall market, industry and workforce

o Inseparable from your ability to pay

Not a “Best Practice”, your “Inspired Practice”

Compensation Philosophy &

Strategy in a

Public Sector

Organization

Differences between Public & Private Sector

Perception vs. Reality People speak as if there are distinct differences

Private sector = product innovation, operational excellence, nonprofit, publicly traded, business differentiation, market based, performance based, stock option rich

Public sector = homogeneous group w/o organizational variations, seniority based, general increase, entitlement style

Reality is compensation systems in public sector are varied; some reflect current private sector practices

The “Key”

The “key” to the successful development of a compensation philosophy/ strategy, in the public or private sector, is to follow a process from the initial business case through program implementation

Sponsorship

Sponsorship must be at the organization’s Senior most level Tie process to full Executive team vs. any one

Executive May take years and a charismatic Executive

Anticipate influence at the political level May stop or re-direct initiative (sometimes in a totally opposite

direction) Anticipation of this element may “justify” ultra conservative approach

which will offend no one, but accomplish little

4 Stage Process

1. Business Case2. Due Diligence3. Philosophy / Strategy Development4. Implementation

Step 1: Business Case

Research the business / organization and its workforceo Identify stakeholders (Besides management and employees):

Union? Political bodies? Media? Public? Peer organizations?

oIdentify why compensation strategy is critical to future organizational success

oCareful “costing” to include systems or process improvements

Step 2: Due Diligence

Create project team Comprised of individuals influential enough to “champion” the project

both within and outside the organization Guided / facilitated discussions

Stakeholder communications are critical, but must be carefully orchestrated

Too little information leads to apathy; too much information may lead to analysis paralysis

Determine what resources are necessary and what systems, policies and procedures will be affected

Assess your compensation system today What is working? What is not? Is the system well defined? Does staff understand the compensation system? Does the compensation system link pay to performance?

Longevity to pay? Skills to Pay? What are the goals of the Total Compensation System

Step 2: Due Diligence

Link to your organizationWhat stage is your organization in today?

Step 2: Due Diligence

Linked to your organization Who is your workforce?

Competition for talent Motivational drivers Perceptions of staff Investments in hiring,

orientation, training Turnover costs Union impact Generational influences

Step 2: Due Diligence

Bond to your culture & valuesWhat is your culture?

o Individual Pay for Performance or Team Based Payo Emphasis on base? Incentive? Benefits? Or all?o Emphasis on flexibility or structureo Reward performance, innovation, productivity, tenureo Transparent or closed systemo Ability to administer (simple, complex)

Step 2: Due Diligence

Bond to your culture & valuesWhat are your values?

o Work/life balanceo Family focusedo Stability o Career growtho Flexibilityo Living wageo Wellness

Step 2: Due Diligence

Step 2: Evaluating the external marketWhat (or who) do you benchmark to? Who are your market comparables?

o Geography: Local / Regional / Nationalo Industry Sector: Public? Private? Both?o FTE Sizeo Revenue / Operating Budget

General Rule:Where you recruit from / Where do you loose talent to

Step 2: Due Diligence

Positioning to marketLead, Match or Lag

What is the relationship to your Total Compensation Package? Should the market position be the same for each compensation

component of your system? Base Pay Variable Pay Benefits

Should the market position be the same for all employee groups? Vary by function (i.e., production, design, administration) Vary by level (entry vs. experienced)

Step 2: Due Diligence

Take Comfort

If at any point, you find the project and/or process is not ideal, take comfort, it never is.

Remember this is both an Art and a Science.

Carry on because once the development of a strategy is initiated, you will find it is difficult to stop the momentum.

The relationships you develop with the project members and stakeholders are the key to success.

Press on!

Break Time!

Step 3: Philosophy / Strategy Development

Written statement of philosophies, objectives and standards Not specifics on design or administration detail

Defines all the major elements of total compensation and how they will support the business strategy Base pay Additional cash Benefits TOTAL COMPENSATION Perquisites

Draft strategy “tested” stakeholders

“Sample” Total Compensation Philosophy

The City of Wagga Wagga, Department of Adorable Animals, is a newly created public agency focused exclusively on serving the needs of koala bears. We recognize that the people at the agency are our primary asset and our principal competitive advantage. To achieve the organization’s mission, we must attract, retain and motivate a highly qualified and competent workforce. Accordingly, we target our base pay at the market median (50th percentile) for other public agencies, while remaining internally equitable.

Wagga DoAA will utilize organization-wide, performance based incentive programs to supplement our base pay such that the average direct compensation will approximate market median + 5% (55th percentile) of cash compensation vs. our defined competitor group when our overall financial performance meets or exceeds target.

In addition to direct cash compensation, Wagga DoAA will provide a comprehensive benefits package for our employees to include health and welfare and income security. We value the components of the work experience including a positive and healthy work environment that addresses the physical and emotional well-being of employees and their families and is consistent with Fortune Magazine’s “100 Best Companies to Work For.” Total rewards shall not exceed 60% of Wagga DoAA annual revenues, including statutory benefit contributions.

Step 4: Implementation

Detailed assessment of existing programs, processes and CBA’s to determine how well they fit with the new strategy

Implementation / Budget Impact Analysis No compensation system works if you can’t afford it Caution about quick hits or low hanging fruit

May only result in confusing comp processes that do not gel well with overall system

Detailed listing of desired changes along with timelines, costing and measures of success Changes to CBA may take form of long-term negotiating agenda

Step 4: Implementation

Stay strategic by setting system goals first

No one is allowed to re-write the philosophy / strategy unless business conditions change

Keep the Total Compensation Philosophy “front and present” As you address balance sheet actions In reaction to the recession In recovery from the recession

Your Total Compensation Philosophy

Establish, Revitalize your Total Compensation Philosophy Set the foundation which will guide your decisions

A Strategic Framework which is Your Size: Linked to your organization,

industry and workforce Communicates your culture

and values Within your ability to pay

Mapping Your

Compensation Classification

Project

Tools for the Trek

Internal A Champion Data, data, data . . .

Org chart Budget / financial information Job descriptions Employee census data Employee Opinion / Climate Survey results

Time (and more time) Technical capabilities to perform analysis &

design programs

External Salary Surveys Industry Benchmarking Compensation Consultant?

When to Hire a Consultant

When the organization needs: Independent third-party objectivity Security / confidentiality Insight into the organization’s competitive market HR expertise to supplement in-house staff resources An expert opinion in a litigation support role Where internal or external resources are lacking

When internal resources are spread too thin, or when the nature of the initiative would benefit from an external perspective / voice

How to Choose a Consultant

Determine your specific needs: RFP / RFQ process

Formal process not mandatory, but is useful exercise to clearly articulate the needs of the organization and ensure that all prospective consultants and the organization are on same page about deliverables

Identify Pool of Experts Approach this as if you were hiring a top Executive

Background checking including industry experience, client lists, references, area of specialty, length of time in business

Web search to identify 6-8 “semi-finalists” to submit proposal

How to Choose a Consultant

Narrow the field Review proposals for

consultants: Methodology / approach to the

project Technical expertise Reputation Availability / stability Fee structure

Beware low-ball bidders

Interview the finalists Once the list is narrowed, it is

important to: Meet the project team

Beware bait-n-switch Evaluate consultant’s technical

capabilities; discuss real time challenges

Assess overall “personality” and “chemistry”

Check references

What Makes a Good Consultant

The value of independence: Direct link to the Client

Who owns the project? Either the Board or management, but not both Opinions without conflict of interest

Consultancies without multiple lines of business within a Client Knowledge Transfer

Ability to provide transparency and insight into the processes vs. “feeding tube” for future consulting services

Executive Session As findings and recommendations emerge, ability to conduct executive

session to answer questions Provide Expertise with Integrity

Consultant Bonus Points

Once the field is narrowed, “extra credit” for these qualities:

Ability to hear your concerns and deliver a customized solution Ability to earn and protect their role as trusted adviser Partner vs. vendor Passion for the profession Written and oral deliverables professionally prepared Well prepared Thought leader; proactively staying abreast of issues

Consultant Follow-through

Once chosen, the likelihood of the consultant’s success hinges on:

Providing clean data Giving honest feedback Introducing consultant to key players Acting on consultant’s recommendations

If advice is not feasible, work with consultant on alternative creative solutions

The best consultants truly care about the client and the success of the project – it’s their reputation after all!

When to Engage Stakeholders

Elected Officials

Senior Leadership

Management / Staff

Union

1. Buy-in / approvalIdentify leadership championIdentify strategic goals

2. System authorityPublic support

3. Participation (job descriptions)Setting expectations

4. Education / CommunicationNegotiationsFinalization

5. Training

Hazards to

Watch Out

For

Hazards To Watch Out For

“Don’ts” Compromise a “principle-driven” compensation system

It is essential to use consistent guidelines for all staff

Make compensation decisions in isolation without considering the interaction between compensation, benefits and intrinsic rewards as important components of the organization’s compensation philosophy

Distribute any documents to staff or elected officials without first carefully scrutinizing each and every word

Hazards To Watch Out For

“Don’ts” Allow for conflicting communications or vague / simplest

explanations such as “Compensation made this decision”

Communicate the mechanics of the system without communicating the philosophy, strategy and goals of the system

Hazards To Watch Out For

“Dos” Document your system design

Reference for future updates Foundation for challenges or claims

Anticipate that changes will occur regularly in the compensation system Review salary ranges annually along with merit budgets and incentive

plans Continually seek out new ways to propose new programs

Hazards To Watch Out For

“Dos” Expect to manage programs sometimes based on data and

sometimes based on principles; inequities will exist, and it is important to identify and minimize them

Ensure that the information provided is clear and specific

Provide training to all who will work to manage the system

Thank You!