7/11/2011

Trends in Compensation and Best Practices in the Current Economy

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Introduction
Edward R. Rataj R Managing Director, Compensation Consulting Certified Compensation Professional (CCP) Frequently quoted in national news publications such as the Wall Street Journal and Smartmoney.com

HR matters enormously in the good times. It defines you in the bad."

- Jack Welch

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Overview
Explore turnover in the rebounding economy Examine compensation economics 101 Offensive and defensive strategies Review steps for designing a market-based compensation system Recognition and sustaining high performance through a merit matrix Answer your questions

Unemployment in Improving Economy

Common perception supported by monthly reports from perception, the U.S. Bureau of Labor Statistics: 10% unemployment In reality, a strong negative correlation exists between unemployment percentage and education:
Bachelor s Bachelors degree or above Some college or an associates degree High school graduate Less than high school diploma 4.8% 4 8% 8.1% 9.8% 15.3%

BureauofLaborStatisticsTableA4:Employmentstatusofthecivilianpopulation25yearsandoverbyeducational attainment

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Projected Turnover as Economy Improves

According to a recent WorldatWork survey, more than survey half of employees intend to leave their current job as the economy improves. The survey asked: Do you plan to pursue new job opportunities as the economy improves?
60% 21% 6% 13% Yes, I intend to leave Maybe, Maybe so Im networking Im Not likely, but Ive updated my resume No, I intend to stay.

www.worldatwork.org/waw/adimComment?id=35633

Compensation Economics 101

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Compensation Economics
Why is a burger flipper no long an entry level job? Why does minimum wage negatively impact the employees whom it is designed to protect? Why are banking executives leaving the industry? If options are significantly under water and the board refuses to re-price, what is the potential outcome?

Supply of Labor
Supply of Labor

P3

C Cost of Labor

P2

P1

Q1

Q2
Quantity of Labor

Q3

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Demand for Labor

Demand for Labor

P3

C Cost of Labor

P2

P1

Q1

Q2
Quantity of Labor

Q3

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Supply and Demand of Labor Market Equilibrium

Demand for Labor

Supply of Labor

Market Equilibrium Supply = Demand

Cost of Labor t

P*

Q*
Quantity of Labor

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Effect of Minimum Wage

Demand for Labor Supply of Labor

Excess Supply of Labor

P3

Price Floor

C Cost of Labor

Q1
Quantity of Labor

Q3

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Effect of an Executive Compensation Cap

Demand for Labor Supply of Labor

C Cost of Labor

P1

Price Ceilng

Unsatisfied Demand for Labor

Q1
Quantity of Labor

Q3

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The Rebounding Economy

Supply Demand1

Cost of Labor

P2

Q2
Quantity of Labor

Astheeconomyrebounds,thedemandforallemployeeswillincrease.Accordingly,differentiationin Becausehighperformerscandriveanorganizationthroughthedowneconomyand Additionally,duetounemployment,thesupplyofaverageperformingemployeesisup. Becauseofthepooreconomy,thedemandforaverageperformingemployeesisdown. positionitwellforarebound,thereisanincreaseddemandforhighperformingemployees. compensationbasedonperformancewillbecomemoreimportant.

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Compensation Strategies in the Rebounding Economy

Offensive Strategies:
Top Grading
Poach top performers at competitors who would help drive your organization forward. This is especially true for sales staff. Pay the winners like winners and losers like losers.

Aggressively pay for performance via a merit matrix (further discussion in the following slides)

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Compensation Strategies in the Rebounding Economy

Defensive Strategies:
Total Rewards Statements Communication regarding other positive aspects of being employed by your organization Consider changing targets for sales staff to ensure that they are reasonable given the current downturn Re-price Options otherwise executives will

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Compensation Strategies in the Rebounding Economy

Merit Matrix is a blended strategy:
Offensive component of performance management = Helps attract key talent from outside the organization Defensive component of performance management = Helps motivate and retain high performers within the organization

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Designing a Market-Based Compensation System

Plan and collect data Ensure job documentation accuracy Complete market analysis Design pay structures Model implementation costs Assess internal equity q y Create procedure manual Report results

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Purpose of a Compensation System

Implement compensation philosophy Ensure efficient allocation of resources Provide rational basis for pay decisions Assist supervisors in evaluating and rewarding performance

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Job Documentation

Job Documentation

Market Matches
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Market Pricing Methodology

What is market pricing? Valuation of pay for jobs in the external labor markets Key considerations when determining labor markets:
Location
Local Region Nation at o

Industry
Industry specific Broad spectrum of employers

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Market Pricing Methodology

Reliable Data
Published survey data
Major consulting and surveying firms Statistically validated Standard deviation analysis of data

Unreliable data examples:

Self-reported data DOL Data from one or two competitors

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Designing Salary Structures

Range Spread

Midpoint Differential

midpoint

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Assessing Current State of Compensation Program

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Compensation Strategies in the Rebounding Economy

Merit Matrix Approach:
Affects pay increases, not pay structure Rewards performance Focuses dollars on employees that are most likely to leave because of pay

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Compensation Strategies in the Rebounding Economy Merit Matrix

Employee 1 ( 1 ) and Employee 2 ( 2 ) are both accountants with exactly the same tenure, experience, education and pay. Only performance differentiates them. To whom would you provide a higher pay increase, low-performing Employee 1 or high-performing Employee 2?
H High Low 2

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Compensation Strategies in the Rebounding Economy Merit Matrix

In this example all other factors are equal except current base example, salary. To whom would you provide a higher pay increase, high-paid Employee 1 or low-paid Employee 2?

COMPENSATION
Low 2 High 1

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Compensation Strategies in the Rebounding Economy Merit Matrix

Finally all other factors being equal to whom would you Finally, equal, provide a higher pay increase, high-paid/low-performing Employee 1 or low-paid/high-performing Employee 2?
Low High 2

COMPENSATION

High

Low

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Compensation Strategies in the Rebounding Economy Merit Matrix

Typical
Matrix

Performance Exceptional Exceeds Expectation Effective Development Needed Critical Need for Improvement

1 3.5% 3.0% 2.5% 2.5% 2.5%

Quartile in Range 2 3 3.5% 3.0% 3.0% 3.0% 2.5% 2.5% 2.5% 2.0% 2.0% 2.0%

4 3.0% 3.0% 2.0% 2.0% 2.0%

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Compensation Strategies in the Rebounding Economy Merit Matrix

Best Practice
Matrix Performance Exceptional Exceeds Expectation Effective Development Needed Critical Need for Improvement 1 6.5% 6.0% 5.0% 2.0% 0.0% Quartile in Range 2 3 5.5% 5.0% 5.0% 4.0% 4.0% 3.0% 1.0% 0.0% 0.0% 0.0% 4 4.0% 3.0% 2.0% 0.0% 0.0%

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Compensation Strategies in the Rebounding Economy Merit Matrix

Ultra-Aggressive
Matrix Performance Exceptional Exceeds Expectation Effective Development Needed Critical Need for Improvement 1 13.0% 11.0% 4.0% 0.0% 0.0% Quartile in Range 2 3 11.0% 5.0% 6.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4 3.0% 1.0% 0.0% 0.0% 0.0%

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Typical

Results

Matrix Performance Exceptional Exceeds Expectation Effective Development Needed Critical Need for Improvement Cost Summary Payroll: $30,400,917 Merit Increases: $1,071,120.86 Percent Increase: 3.5% Cost Detail Performance First Exceptional $83,979 Exceeds Expectations $109,175 Meets E M t Expectations t ti $108,116 $108 116 Development Needed $32,654 Critical Need for Improvement $0 Total Cost: $1,071,121 Employee Count Detail Performance Exceptional Exceeds Expectations Effective Development Needed Critical Need for Improvement Total Employees: 536 1 24 36 52 36 24 Quartile in Range 2 3 36 16 60 20 96 16 40 20 32 12 4 4 0 4 4 4 Quartile in Range Second Third $184,222 $88,669 $158,310 $58,617 $191,830 $191 830 $36,698 $36 698 $0 $0 $0 $0 Fourth $15,200 $0 $3,650 $3 650 $0 $0 Budget $: Budget as % of Payroll: $1,064,032 3.5% 1 8.0% 6.0% 4.5% 4 5% 2.0% 0.0% Quartile in Range 2 3 7.0% 6.0% 5.0% 4.0% 3.5% 3 5% 3.0% 3 0% 0.0% 0.0% 0.0% 0.0% 4 5.0% 2.5% 2.0% 2 0% 0.0% 0.0%

Model fits within budget

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Results
$600,000

Company XYZ Cost by Quartile

$500,000

Critical Need for Improvement

$400,000 M Merit Increase Cost

Meets Expectations
$300,000

Exceeds pectat o s Expectations

$200,000

Exceptional
$100,000

$0 1 2 Quartile in Range 3 4

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Results
$400,000

Company XYZ Costs by Performance Level

$350,000

$300,000

Fourth

$250,000 Third $200,000

Cost

$150,000 Second $100,000

$50,000

First

$0 Exceptional Exceeds Expectations Meets Expectations Performance Development Needed Critical Need for Improvement

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Employee Analysis

Last Name Brown Phillips Pence Pratt Beals Duncan

Name Stan Kevin Skyler Jason Susan Elizabeth

Job Title HR Generalist IT Analyst Construction Manager Controller Maintenance Manger President

Salary Grade Min Max $47,042 $53,058 $47,042 $70,169 $47,042 $153,058 $72,915 $84,892 $72,915 $112,270 $72,915 $229,587

Salary $46,000 $64,550 $76,000 $103,299 $59,000 $200,000

PerfMerit Quartile ormance Percent 1 2 4 4 2 3 4 4 5 2 3 5 6.0% 5.0% 5.0% 0.0% 3.5% 6.0%

New Salary $47,042 $64,550 $76,000 $103,299 $59,000 $200,000

Merit Increase $2,822.52 $3,227.50 $3,800.00 $0.00 $2,065.00 $12,000.00

Adjustment due to employee being below salary range

Lump sum increase due to employee being at top of salary range

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Compensation Strategies in the Rebounding Economy Merit Matrix

Cost neutral Rewards performance Targeted turnover Fair and efficient method for administering pay Accelerates employees to market competitive pay levels

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Compensation Strategies in the Rebounding Economy Merit Matrix

Common Pitfalls
Structures out of alignment with market
Garbage in, garbage out May improperly allocate limited salary increase dollars based upon the current competitiveness of pay

Performance scores not calibrated

Supervisors can learn to game the system Cheating is rewarded Top performers may not be properly rewarded

Matrix results outside of budget

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Additional Considerations
Nonprofit compensation Executive compensation in closely held businesses Fair pay based on race and gender Online performance management Sales compensation

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CBIZ CompCasts

How to Set Pay Ranges that are Fair and Effective

CompCasts

Nonprofit Quick Guide to Navigating Intermediate Sanctions Creating and Using a Salary Increase Matrix Fair Pay: Maintaining Equality in Todays Litigious Society

In development at: www.cbiz.com/hr/compcasts

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Questions?
Ed Rataj, CCP Rataj Managing Director Compensation Consulting CBIZ Human Capital Services (314) 692-5884 erataj@cbiz.com

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