Trends in Compensation & Best Practices in the Current Economy

7/11/2011

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Trends in Compensation and Best Practices in

CBIZ Human Capital Services

the Current Economy

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7/11/2011

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Introduction

• Edward R RatajEdward R. Rataj

• Managing Director, Compensation Consulting

• Certified Compensation Professional (CCP)

• Frequently quoted in national news publications such as the Wall Street Journal and Smartmoney.com

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“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 economyExplore 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

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Unemployment in Improving Economy

• Common perception supported by monthly reports fromCommon perception, supported by monthly reports from the U.S. Bureau of Labor Statistics:

• 10% unemployment

• In reality, a strong negative correlation exists between unemployment percentage and education:

Bachelor’s degree or above 4 8%

Bureau of Labor Statistics Table A4: Employment status of the civilian population 25 years and over by educational attainment

Bachelor s degree or above

Some college or an associate’s degree

High school graduate

Less than high school diploma

4.8%

9.8%

8.1%

15.3%

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Projected Turnover as Economy Improves

• According to a recent WorldatWork survey more thanAccording to a recent WorldatWork survey, more than 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% — Yes, I intend to leave

– 21% — Maybe so I’m networking21% Maybe, so I m networking

– 6% — Not likely, but I’ve updated my resume

– 13% — No, I intend to stay.

www.worldatwork.org/waw/adimComment?id=35633 7

Compensation Economics 101

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Compensation Economics

• Why is a burger flipper no long an entry level job?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?

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Supply of Labor

Co

st o

f L

abo

r

Supplyof Labor

P3

P2B

C

Quantity of Labor

C

P1

Q3Q2Q1

A

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Demand for LaborC

ost

of

Lab

or

Demandfor Labor

P3

P2

A

B

Quantity of Labor

C

P1

Q3Q2Q1

C

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Supply and Demand of Labor – Market Equilibrium

t o

f L

abo

r

Demandfor Labor

Supplyof Labor

Market EquilibriumSupply = Demand

P*

Quantity of Labor

Co

st

Q*12

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Effect of Minimum WageC

ost

of

Lab

or

Excess Supplyof Labor

Demandfor Labor

Supplyof Labor

Price FloorP3

Quantity of Labor

C

Q3Q1

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Effect of an Executive Compensation Cap

Co

st o

f L

abo

r

Demandfor Labor

Supplyof Labor

Quantity of Labor

C

Unsatisfied Demandfor Labor

Price CeilngP1

Q3Q1

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The Rebounding Economy

Co

st

of

La

bo

r

Demand1

P2

Supply

Because of the poor economy, the demand for average‐performing employees is down.Additionally, due to unemployment, the supply of average‐performing employees is up.Because high performers can drive an organization through the down economy and position it well for a rebound, there is an increased demand for high‐performing employees.As the economy rebounds, the demand for all employees will increase. Accordingly, differentiation in compensation based on performance will become more important.

Quantity of Labor

Q2

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Compensation Strategies in the Rebounding Economy

• Offensive Strategies: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)discussion in the following slides)

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• Defensive Strategies: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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• Merit Matrix is a blended strategy: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 dataPlan and collect data

• Ensure job documentation accuracy

• Complete market analysis

• Design pay structures

• Model implementation costs

• Assess internal equityq y

• Create procedure manual

• Report results

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Purpose of a Compensation System

• Implement compensation philosophyImplement 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?What is market pricing?

• Valuation of pay for jobs in the external labor markets

• Key considerations when determining labor markets: – Location

• Local

• Region

• Nationat o

– Industry• Industry specific

• Broad spectrum of employers

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Market Pricing Methodology

• Reliable DataReliable 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

oint

Midpoint Differential

midp

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Assessing Current State of Compensation Program

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• Merit Matrix Approach: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 ( ) and Employee 2 ( ) are both accountants1 2

Hig

h2

• Employee 1 ( ) and Employee 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?

1 2

HL

ow

2

1

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

Low High

COMPENSATION

2 1

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• Finally all other factors being equal to whom would you

2

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

Low HighCOMPENSATION

Hig

h

1Lo

w

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Typical

Matrix

Performance 1 2 3 4Exceptional 3.5% 3.5% 3.0% 3.0%

Exceeds Expectation 3.0% 3.0% 3.0% 3.0%Effective 2.5% 2.5% 2.5% 2.0%

Quartile in Range

Effective 2.5% 2.5% 2.5% 2.0%Development Needed 2.5% 2.5% 2.0% 2.0%

Critical Need for Improvement 2.5% 2.0% 2.0% 2.0%

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Best Practice

Matrix



Quartile in Range



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Ultra-Aggressive

Matrix



Quartile in Range



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ResultsTypical

Matrix


Exceeds Expectation 6.0% 5.0% 4.0% 2.5%Effective 4 5% 3 5% 3 0% 2 0%

Quartile in Range

Model fits within budget



Cost SummaryPayroll: $30,400,917 Budget $: $1,064,032

Merit Increases: $1,071,120.86 Budget as % of Payroll: 3.5%

Percent Increase: 3.5%

Cost Detail

Performance First Second Third FourthExceptional $83,979 $184,222 $88,669 $15,200

Exceeds Expectations $109,175 $158,310 $58,617 $0M t E t ti $108 116 $191 830 $36 698 $3 650

Quartile in Range

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Meets Expectations $108,116 $191,830 $36,698 $3,650Development Needed $32,654 $0 $0 $0

Critical Need for Improvement $0 $0 $0 $0Total Cost: $1,071,121

Employee Count Detail

Performance 1 2 3 4Exceptional 24 36 16 4

Exceeds Expectations 36 60 20 0Effective 52 96 16 4

Development Needed 36 40 20 4Critical Need for Improvement 24 32 12 4

Total Employees: 536

Quartile in Range

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Results Company XYZCost by Quartile

$600,000

$300,000

$400,000

$500,000

Me

rit

Incr

eas

e C

ost

Critical NeedforImprovement

MeetsExpectations

ExceedsExpectations

$0

$100,000

$200,000

1 2 3 4

Quartile in Range

M

pectat o s

Exceptional

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ResultsCompany XYZ

Costs by Performance Level

$400,000

$200,000

$250,000

$300,000

$350,000

Co

st

Fourth

Third

$0

$50,000

$100,000

$150,000

Exceptional Exceeds Expectations Meets Expectations Development Needed Critical Need forImprovement

Performance

Second

First

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Employee Analysis

Perf- Merit New Merit

Last Name Name Job Title Min Max Salary Quartile ormance Percent Salary Increase

Brown Stan HR Generalist $47,042 $72,915 $46,000 1 4 6.0% $47,042 $2,822.52Phillips Kevin IT Analyst $53,058 $84,892 $64,550 2 4 5.0% $64,550 $3,227.50Pence Skyler Construction Manager $47,042 $72,915 $76,000 4 5 5.0% $76,000 $3,800.00Pratt Jason Controller $70,169 $112,270 $103,299 4 2 0.0% $103,299 $0.00Beals Susan Maintenance Manger $47,042 $72,915 $59,000 2 3 3.5% $59,000 $2,065.00Duncan Elizabeth President $153,058 $229,587 $200,000 3 5 6.0% $200,000 $12,000.00

Salary Grade

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 neutralCost 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 PitfallsCommon 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• Cheating is rewarded

• Top performers may not be properly rewarded

– Matrix results outside of budget

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Additional Considerations

• Nonprofit compensationNonprofit 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

CompCasts Nonprofit Quick Guide to Navigating Intermediate Sanctions

How to Set Pay Ranges that are Fair and Effective

Creating and Using a Salary Increase Matrix

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Creating and Using a Salary Increase Matrix

Fair Pay: Maintaining Equality in Today’s Litigious Society

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

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Questions?

Ed Rataj CCPEd Rataj, CCP

Managing Director – Compensation Consulting

CBIZ Human Capital Services

(314) 692-5884

[email protected]

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Business

Trends in Compensation & Best Practices in the Current Economy