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Getting the Most from

Compensation Programs
Nine Methods to Ensure Value and Improve
Return on Marginal Compensation Investments
Table of Contents

Introduction 2

Salary is More Than the Cost of Doing Business 4

Getting More Value From Compensation Programs 5

Nine Methods of Proving Value in Compensation Programs 6

Conclusion 8

1 | www.workscape.com
Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

Introduction
Engaged, skilled and high-performing employees are essential to the financial
health of every organization. Even in the best of times, retaining and motivating
top performers is one of the biggest challenges facing most companies. In these
difficult economic times that quandary has intensified with many organizations
forced to institute layoffs, curtail bonus spending or ask employees to accept a
reduction in base pay.

While remaining employees may have felt lucky to have a job during a recession,
cutting pay and incentives is demoralizing and can lead to productivity loss.
Money is not the sole motivator behind why an individual works, but underplaying
the importance of compensation awards, increases, changes and promotions
is a mistake. Without the right mix of culture, fair pay, benefits and incentives,
organizations are risking a workforce that is not motivated to achieve business
goals and losing top performers to their competitors. As the economy rebounds
employees will expect not only the return of monetary rewards but opportunities
for individual growth and a more positive workplace.

Still, salary increases for the next year are expected to remain low across all
industries. WorldatWork’s most recent Annual Salary Budget Survey shows
budgets for salary increases at the lowest level in the study’s 36 year history, with
2010 projected increases averaging 2.8 percent.1 The Conference Board’s Salary
Increase Budgets for 2010 — Winter Update reports similar findings, noting that
salary budgets have dipped below three percent for the first time in more than
two decades (and following a year where many salaries were frozen), barely
staying ahead of The Conference Board’s forecasted inflation rate.2

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Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

If compensation is a primary tool to increase motivation and productivity, how can


organizations succeed with budgets lower than they’ve been in more than three
decades? By optimizing compensation spend and having processes and tools to
help allocate compensation resources wisely. In addition to improved processes
that ensure the right people are being rewarded, strategic communication around
total rewards can influence behavior and help employees better understand
exactly what their organization provides for them. Rethinking the approach to
compensation awards and adopting methods to use it more effectively will drive
greater value from any additional compensation investments.

1 WorldatWork, 36th Annual Salary Budget Survey, 2009


2 The Conference Board, U.S. Salary Increase Budgets for 2010 – Winter Update, 2010

3 | www.workscape.com
Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

Salary is More Than the


Cost of Doing Business
Employee compensation is one of the largest In a bad economy employers have more control
business expenses, if not the largest, for most in modifying pay and giving a lower amount for
organizations. In a strong economy, one of pay increases because of layoffs and intensified
the arguments for awarding incentive pay is competition for employment opportunities.
that it’s good for employee retention. When In a more positive economic climate, employ-
times are tough, incentive compensation can ees can set the tone because if they aren’t
keep employees motivated. Yet, during this rewarded appropriately, they can find other
past economic downturn, many employers opportunities and organizations to recognize
scaled back incentive pay, merit increases and reward their contributions.
or both.
Especially in difficult economic times organiza-
One reason is because executives view sala- tions need to manage rewards and marginal
ries as the cost of doing business, rather than compensation budgets carefully. By rewarding
seeing increases as a mechanism to inspire the most productive associates organizations
better performance. From an employee’s per- can make incremental improvements in perfor-
spective, they look forward to pay increases mance. That’s because getting value from an
and consider it part of their total compensa- employee is not necessarily contingent on the
tion. This is especially true since salaries that amount of an increase, but how those rewards
don’t keep up with inflation are, in real terms, are communicated across the organization.
being reduced. Companies that are paying incentives this year
can optimize compensation expenditures and
In addition employees are promised, usu-
drive greater value by spending scarce com-
ally by poor (or novice) managers, that when
pensation resources more effectively and im-
economic conditions prevent compensation
proving communication around total rewards.
awards there will be a time when the compa-
ny will “make it up to them.” After all, they’ve
been told if they work hard and do well they’ll
get it because they’ve earned it. Nonetheless,
over the last few years, employees who per-
formed well may not have received increases
or incentives because even though they put
forth great effort, their division or organiza-
tion didn’t meet its goals.

4 | www.workscape.com
Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

Getting More Value an increase needs to be put in perspective. A

From Compensation two percent increase is not very motivating un-


less it’s communicated effectively for the times,
Programs especially when an employee is used to high
single or double digit increases.
One way organizations can increase the ef-
The bad news is that total reward communica-
fectiveness of their compensation spend and
tions programs often fail because most organi-
achieve greater value is through clear com-
zations have not set up processes, technology
munication of pervasive total rewards. This
and reinforcement to match the ways in which
concept looks at all aspects of an employee’s
an employee is paid or rewarded for “desirable
engagement to the employer. It is a qualita-
work outcomes” such as aligning their goals
tive more than a quantitative measure of total
with positive business outcomes. Processes for
compensation. As a component of pervasive
determining compensation awards at year end
total rewards, employees must understand
or throughout the year are typically done with
their total compensation and how much
little governance, few rules, and on an excep-
money is spent on them by the company
tion basis, resulting in a lot of waste of compen-
outside of base salary. In addition to salary,
sation resources.
bonus, stock options and 401(k) contribu-
tions, compensation also includes health The good news is that these processes can be
benefits, culture, professional and career fixed so managers are empowered to make
development, environment and recognition. informed decisions and so compensation
When employees understand the commit- investments deliver the right value at the right
ment their organization is making to train, cost. One solution to fix the process is by imple-
retain, support and reward them it can be an menting technology to improve the stream of
eye opener that encourages higher levels information and facilitate conversations around
of productivity. compensation. Establishing wikis, blogs, and
SharePoint portals and implementing com-
Opportunities exist to find money in the
pensation planning solutions helps managers
programs from which employees are paid
and HR gain a holistic picture of compensation
as incentives to perform better such as sal-
versus looking at salary in isolation.
ary increase programs or traditional bonus
programs. With limited resources organiza- With technology in place, HR, managers and
tions need to use cash judiciously in order employees can have access to data that makes
to get the most value out of incremental it possible to have productive compensation
compensation investments. Incentive pay conversations on a daily basis. Then, when
can motivate better performance if organiza- decisions are made, organizations can effec-
tions are mindful of the law of diminishing tively and efficiently reinforce the pervasive
returns. In other words, the attractiveness of total rewards approach because reinforcement
comes at every interaction and at every level
of the organization. Armed with information,
senior leaders are able to make decisions that
align incentives with goal achievement and
employees have insight into how those deci-
sions are made.

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Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

To increase effectiveness and achieve greater Nine Methods of


value from total rewards initiatives organiza-
tions should consider the following:
Proving Value in
Have support from the C-suite. Executives Compensation
need to champion the company’s compensa-
tion philosophy and ensure pay practices are
Programs
applied consistently and effectively. Like all business expenses, compensation ex-
Consistency is a key. A clearly defined phi- penditures must produce a return that exceeds
losophy will have room for some exceptions, their true financial cost, whether that’s through
but it should define the elements that are improved productivity, increased sales or more
standard throughout the organization. These satisfied employees. To strengthen financial re-
standards should align with the business turns on compensation expenditures and add
strategy and the culture of the organization. value to the business, organizations should
strive to employ at least one if not more of
Promote global understanding. One of these nine methods:
the most important elements to a successful
compensation strategy is thinking outside
No. 1
your own culture. Look at global variations
and understand that different approaches
Avoid the pot roast syndrome
may prove more valuable in different regions. Ask questions because even though a rule
exists, it does not mean it is pertinent today.
Any incremental improvement in how organ- Case in point: a colleague was preparing a pot
izations spend compensation and benefit roast, and like his mother and grandmother, he
resources is likely to have a positive effect that began by slicing off the ends prior to roasting.
ripples throughout the company. By improv- His wife asked why that step was necessary
ing processes, technology and reinforcement, and after realizing he didn’t know, he called his
HR can begin to demonstrate its ability to mother who in turn phoned his grandmother
improve return on marginal compensation only to learn that she cooked with a small pan
investments.
and needed to trim the meat to fit her cook-
ware. Similarly, in business, there’s tendency to
do things the way they’ve always been done
even if outdated and inefficient. That approach
doesn’t work in a dynamic economy with
global and technological pressures.

No. 2
See what others are doing
Look at what successful organizations are do-
ing and identify the elements that will work
in your culture. Last year, Walmart, one of the
largest private employers in the U.S., awarded
approximately $2 billion to U.S. hourly associ-

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Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

ates through financial incentives, including No. 6


bonuses, profit sharing and 401(k) contribu- Information should be accessible
tions, and hundreds of millions of dollars in Make sure managers and employees are able
merchandise discounts and contributions to to access the right tools at the right time so
the associate stock purchase plan.3 Mod- they can be armed with up-to-date informa-
els for emulation can spur ideas for new tion to make immediate business decisions.
approaches to job design, management
practices, pay structures, rewards and other No. 7
characteristics that contribute to a produc-
tive environment.
Communicate more
Some conversations are hard to have such as
No. 3 explaining why increases aren’t available, but
it’s important to keep the lines of communica-
Understand that knowledge is
tion open in both bad times as well as when
power
things are good. When communication is clear,
Help managers make more informed deci- consistent and frequent, trust goes up and
sions by putting data at their fingertips. performance improves.
Provide them with tools and training that
enables them to have productive conversa- No. 8
tions around performance and improve their
ability to make more strategic decisions.
Demonstrate commitment
Provide the right messaging and the right rein-
No. 4 forcement so employees understand that there
is a commitment to them. Employees need to
Provide tools to improve decision-
know that the organization is committed to
making
being fair and that managers are dedicated to
For ethical and equitable compensation deci- responding to their needs.
sions, have tools in place to help support pay
decisions while allowing some flexibility and No. 9
discretion. These tools give the manager
all of the information discussed above and
Be consistent
ensure governance. Don’t allow managers to customize com-
pensation for their department or division.
No. 5 Instead, have a clearly defined compensation
philosophy to ensure pay practices are applied
Put governance in place
consistently and effectively.
Organizations that use technology can stan-
dardize rules, processes and provide insight
to HR and senior leaders to help them under-
stand why decisions are made or so they can
intelligently reject them. Good governance
ensures transparency, accountability and
ethical practices.

3 Walmart Corporate Fact Sheet, Walmart, 2009

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Getting the Most from Compensation Programs
Top Eight Considerations for Companies Choosing a
Nine Methods toManagement
Compensation Ensure Value andSolution
Improve
Return on Marginal Compensation Investments

Conclusion
Compensation awards, when spent wisely and with an eye on the future, can
have significant long-term impact on business success by increasing motivation
and performance. Organizations can use total rewards, communicated clearly
and consistently to employees, to prove the value of compensation decisions and
ensure the organization is efficiently spending their compensation and benefit
budget. By making incremental improvements, organizations will ultimately
achieve more engaged employees, better productivity, better customer satisfac-
tion and overall performance.

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About Workscape
Workscape is a leading provider of business-critical HR solutions that enable hundreds of
organizations to manage their two largest workforce expenditures: employee benefits and
performance-driven compensation. Workscape’s offerings share a common technology
platform, can be readily integrated with existing IT investments, serve millions of employees,
and are scalable and configurable to meet the distinct requirements of organizations ranging
from 1,000 to over 500,000 employees. One client uses the company’s award-winning multi-
lingual compensation solution to compensate hundreds of thousands of employees across 70
countries. Workscape’s outsourced benefits administration offerings are backed by U.S.-based
7 x 24 support for managers and employees on policies and processes.

Workscape Phone: 508.573.9000


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