OVERCOMING MARKET PRESSURES: COMPENSATION DESIGN THAT BALANCES COMPANY GOALS & INDUSTRY SHIFTS

Transcription

1 OVERCOMING MARKET PRESSURES: COMPENSATION DESIGN THAT BALANCES COMPANY GOALS & INDUSTRY SHIFTS

2 Oftentimes when managers discuss pay with their employees, they encounter questions for which they may not have an answer. Employees want to know that they are receiving fair pay for their contributions, so they may wonder how their pay is linked to performance, how it compares to other salaries within the company, and likewise, how it compares to similar positions outside the organization. Answering these questions is important to retaining talent, which is why all organizations should be equipped with a compensation design that balances company goals and industry shifts. Establishing a clear and standardized compensation philosophy eliminates the guesswork when employees seek to find out why they are being paid the way they are, and it also enforces transparency across the organization. Moreover, a welldeveloped compensation strategy helps to support the execution of the business strategy while also maintaining competitiveness. With that said, designing a compensation strategy that balances internal and external factors requires the consideration of many complex variables. In the coming pages, we ll present ways for navigating these challenges successfully, including: How to link business strategy and compensation strategy Key compensation principles to consider Ways to develop a compensation philosophy and goals Example methodology for designing a compensation strategy How to maintain a competitive pay philosophy Let s begin by taking a look at how companies can use their business strategy as a starting point for developing their pay philosophy. Page 2

3 Linking Business Strategy & Compensation Strategy For a company s compensation strategy to be effective, it must be linked to the overall business strategy. Because compensation accounts for 30-60% of business costs, it is essential for organizations to identify the drivers behind pay. For this reason, the foundational step of creating any solid compensation strategy is linking it to the business strategy. The business strategy informs the direction in which the organization is going relative to its overall environment. It comprises both its short and long-range goals and objectives, and can encompass its SMART goals, pay for performance objectives, or any other goal setting methodology the company utilizes. Oftentimes, the jump from business strategy to compensation strategy is made without considering a crucial middle part: the human resources strategy. This entails the organization s overall plan for attraction, retention, and motivation of employees, and should therefore not be overlooked when developing a compensation strategy. The compensation strategy should include the principles that guide the design, implementation, and administration of the overall compensation program (including pay and benefits). To choose the right compensation approach, be sure to select a rewards system that supports and reinforces the strategy, goals, and objectives of the business. The strategy must also respond to external pressures, using pay as an opportunity to create a competitive advantage in the market. Additionally, because a business s strategy is only as good as the employees ability to execute it, the pay strategy should ultimately recognize and reward the performance that drives results. In the coming section, we ll take a closer look at the key compensation principles that can be used to formulate an effective pay strategy. Page 3

4 Key Compensation Principles For the majority of organizations, the core principles of compensation involve striking a balance between paying in a way that is externally competitive and internally fair. Yet, there are many different interpretations of what is fair. For this reason, it is critical to achieve clarity and agreement among key stakeholders on how the company should be paying its people. This will ultimately inform your rewards philosophy. A company s rewards philosophy is driven by a few key factors: its employee groups, including generations, locations, and ethnicities; its business segments and sectors; its business growth aspirations; and, its business life cycle. While each of these elements drives the rewards philosophy in unique ways, one of the primary factors to look at when designing a compensation plan is the business s life cycle. A business may fall into one of the following stages: launch, growth, shakeout, maturity, and decline. Assessing which phase the business serves as a critical building block of developing a pay strategy. According to an HRsoft poll, 48% of businesses are now in the growth phase, while the maturity stage is a close second, with 42% of companies in that category. A remaining 10% are in the shakeout phase. Because there are unique pressures and demands at each stage, compensation professionals must know where their companies fall in order to develop pay plans that support the needs of the business at that moment in time. The plan should answer the question: How do we tie in compensation to help the company through this particular stage? While this is an ongoing question to which there is no simple, definitive answer, revisiting it regularly will help to ensure pay decisions are always supporting the needs of the company. Forming your compensation philosophy and goals can assist in this process, so we will discuss this step in the following segment. Page 4

5 Compensation Philosophy & Goals A compensation philosophy aims to ensure pay is market-competitive and aligned to the business strategy. To support these two factors, there are six components, or goals, of compensation philosophy: Attract top talent from the market Retain difference-makers Inspire stellar performance Pay competitively in global operations Support the business strategy Balance profitability, growth, and expense control Compensation professionals must meet with senior executives to collect their insights on these key topics. It is essential to speak their language when discussing pay and present the information that is most critical to executives top priorities. When forming compensation decisions, some external questions to consider might include: Where does the company want to position itself relative to the broad and specific industry? Keep in mind that compensation data may need to be reviewed outside of your specific niche. If you are a nonprofit, for example, you may also need to factor in data from for-profit organizations, as the transferrable skills of top talent may be similar despite the differentiating characteristics of organizations. Who are our top competitors for business? Who are our top competitors for talent? The answers to these two questions won t necessarily be the same, so analyzing factors can help you take a more competitive approach to recruiting and retaining top talent. Are there geographical differences to consider? Consider how pay might differ across various locations and types of communities, including major urban cities versus rural locations. When basing compensation decisions on internal factors, consider how pay might differ: In the same role In the same level or grade In the same industry segment In the same performance category With an increasing demand for pay transparency, it is essential for companies to have a consistent methodology for determining compensation. These factors can be used as a starting point and may serve as a framework for discussions with senior management. Page 5

6 Compensation Philosophy Examples According to an HRsoft poll, 60% of organizations have a written compensation policy statement. For those that do not, reviewing examples may provide inspiration for developing a compensation philosophy that reflects a company s own unique business goals and corporate culture. Here is one sample of a compensation philosophy to review: COMPANY believes that it is in the best interest of both the organization and our associates to fairly pay our workforce for the value of the work provided, within its financial ability to do so. It is our intention to use a competitive system that will determine the current market value of a position based on the skills, knowledge, and behaviors required of a fully competent job incumbent. The system will be objective and non-discriminatory. It must also be flexible enough to ensure that the company is able to recruit and retain a highly qualified workforce. Of course, a pay philosophy must be upheld through action. To translate the above philosophy into an actionable process, here are the key steps which the company might take in this example: The compensation system will price positions using local, national, and industry-specific survey data. We will evaluate external equity, which is the relative marketplace job worth of jobs directly comparable to jobs within. All jobs will be placed in a hierarchy based on: 1) market rate, and 2) comparison to other jobs within based on skills, knowledge, training required, experience, responsibility, and accountability COMPANY intends to monitor the marketplace in which it competes for talent and when warranted, at management s discretion, increases may be made to the base pay of incumbents whose jobs are covered by the scope of this policy. Page 6

7 Methodology Following a prescribed process can help an organization achieve a balanced compensation design successfully. While each company may need to tweak their methodology slightly to align with their own specific requirements, this sample method may be useful in helping you establish a solid framework: Phase 1: Internal Assessment This initial analysis helps compensation professionals develop a clear understanding of business goals and ensures all parties, including key stakeholders, are in agreement about how compensation decisions will be made. Use the following steps to perform an internal assessment: Conduct management interviews Review roles and responsibilities Analyze current compensation practices Analyze the performance management program Identify the competitive marketplace Develop a communications strategy/ transparency Compile a feedback report Phase 2: External Assessment As its name suggests, this phase requires organizations to analyze external factors through the following steps: Select external benchmark jobs Phase 3: Design of Incentive Plans (Short & Long Term) In order for this phase to be executed properly, companies should have a system for tracking performance, as well as the effectiveness of their incentive plans. That way, they can verify that the plans they ve developed are actually supporting the business strategy as intended. Here are suggested steps for Phase 3: Determine appropriate levels of incentive awards Select performance measures Determine the incentive formula Present alternatives for consideration Phase 4: Communication Plans The final phase involves two steps for developing plans so the compensation plan can be effectively communicated to the workforce: Update the compensation policy manual Design communications meetings Conduct competitive analysis Determine the compensation structure Compare employees compensation levels Page 7

8 Compensation and Performance Management Study The overarching goal of the compensation strategy is to make sure an organization has the right amount of money necessary to motivate the types of performance needed to achieve the business strategy. To that end, compensation should also tie into the overall performance management strategy. Your practices must therefore be understood by employees and based on hard, objective data. It is essential to maintain an approach in which equal pay is given for equal work. These critical objectives can be achieved by: Standardizing pay practices and basing the compensation system on benchmarks Achieving internal parity Providing competitive hiring scales Reformatting or rewriting job descriptions Creating a meaningful performance management tool Many companies find rewriting their job descriptions to include more results-oriented and measurable information is beneficial in their compensation planning activities. Instead of simply including the specific tasks or duties of the job description, consider including why the duty is performed (or which results it aims to achieve) and how the performance will be measured. For example, for the role of marketing director in an assisted living facility, the roles and responsibilities might look like this: Facilitate the move-in process to build relationships with new residents, which will be measured by new resident satisfaction Ensure respite apartments are ready to show to ensure marketability, which will be measured by apartment turnover Develop and maintain a detailed marketing plan to great market share, which will be measured through competitive market data In the next section, we ll review some final best practices for maintaining a competitive pay philosophy and communication policy. Page 8

9 Maintaining a Competitive Pay Philosophy Only 36% of employers have a formal compensation communications program, according to an HRsoft poll. However, this is something all organizations should have, because a compensation plan is only effective when the workforce understands it. Developing a formal compensation communications program provides employees with an understanding of why pay decisions are made. To develop a communication plan, compensation professionals should consider what transparency means in their organizations. This will help them determine how much information will be shared and to whom. In addition to developing a communications program, employers must also ensure they are continuously maintaining competitiveness in their pay philosophy. Developing a compensation philosophy is not a one and done activity; it must be revisited as the business strategy evolves to reflect current goals. At a minimum, the compensation philosophy should be reviewed every two years to: Confirm linkage with the HR and business strategies Reevaluate where the company is in the business cycle (growth phase, maturity, etc.) Assess industry trends Raise and address any questions or issues before senior management does Here are some best practices to keep in mind for designing, reviewing, and updating compensation programs: Understand changes in job roles and responsibilities Confirm job matching process for internal and external comparisons Recognize that roughly half of jobs are typically more general industry while the other half is usually industry-specific Develop a planned timeline to do in-depth market survey matches with line management using selected groups each year Specialized compensation surveys are advantageous for employers because organizations are always changing. Each year, there are new products or services which demand new skills and abilities. Market surveys do not require a significant time investment to incorporate the jobs needed, but many organizations have a need for more customized reporting. As such, using data from a specialized survey can help companies make pay decisions based on accurate data. Page 9

10 Getting Started To determine whether an organization truly needs to reevaluate its compensation design, here are a few questions for consideration: Why do you want to design or redesign the compensation program? Why now? How does this fit within your overall business strategy? What is the business strategy? Where does this fit into the overall human resources strategy in particular If you don t do it now, what are the risks? What will happen? Here is an example of how the typical project methodology might look from start to finish: Internal assessment: review job descriptions and practices External assessment: conduct and review compensation surveys Job worth hierarchy: rank order from low to high Salary ranges: set parameters for pay decisions Compensation policy: ensure that it is fair and equitable Pay-for-performance: set and review performance standards Pay admin manual: review it to ensure consistent practices Communicate: decide what to say and to whom Implement the plan Remember that the compensation plan should be transparent, relevant, and current. To align the plan precisely with the needs and goals of the organization, compensation professionals must truly be students of their operation. They must also connect the dots to the mission, values, and operational objectives. This will help to ensure a comprehensive and effective pay policy. Page 10

11 Summary Many considerations for effective compensation design have been covered within this guide. Although weighing multiple internal and external factors to achieve a balanced, effective compensation plan can be complex, it can be broken down by following a standard process. While each company should tailor its approach to fit its specific demands, here are some key takeaways that are helpful across all industries and types of business: Know your business. Identify the driving factors behind your company s decision to redesign its compensation plan. Understand distinguishing characteristics of your company, including the business strategy, its current phase in the business cycle, and how your performance management and HR strategies will fit into your compensation strategy. Analyze the current state of your compensation program. Assess where your company is paying compared to the market by performing benchmarking. Determine to what degree outside factors will influence your pay decisions. Meet with senior management. Ensure coherence among key stakeholders in terms of what is fair and which outcomes are expected to be achieved through the compensation plan. Develop a compensation philosophy statement. Make sure that the statement supports the organization s mission and its overall business strategy. Communicate the plan. Make sure managers are prepared to discuss compensation decisions to reinforce the desired behaviors and business results. For many organizations, lack of information breeds mistrust among employees. By designing your compensation strategy in a way that balances company goals and industry shifts, you will have a defensible basis which can be used to explain why compensation decisions are made. While employees may not always agree with every pay decision that is made, becoming more transparent with a balanced and standardized approach to compensation is a powerful way to earn the trust and respect of the workforce. Page 11

12 Resources HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement. Phone: Web: hrsoft.com About the Contributor Don McDermott D. G. McDermott Associates Don McDermott is a recognized authority in the field of compensation with over 30 years of related experience as both an internal and external consultant. He has an MBA from Fairleigh Dickinson University and a B.A. from St. Mary s Seminary and University. Don served as a National Officer of the WorldatWork/ American Compensation Association and President of the New York Compensation Association. WorldatWork/American Compensation Association have granted Don its highest award, Life Membership, for his contributions to the field of compensation. Prior to his consulting experience, Don held senior positions in human resources and compensation and benefits at Bankers Trust Co., NL Industries, Gulf & Western Industries, and M&T Chemicals, Inc. Phone: DM@dgm.com Web: Page 12