COMPENSATION STRATEGIES

Transcription

1 COMPENSATION STRATEGIES Ohio CUPA Meeting April 7, 2016 Copyright 2016 by The Segal Group, Inc. All rights reserved.

2 Today s Discussion Employee value proposition Elements of the total compensation structure Building your total compensation program 2

3 The Employee Value Proposition (EVP) Our experience suggests that compensation alone does not attract, retain, and motivate talent. Organizations need to consider a balanced approach to investments in their Employee Value Proposition All the direct rewards you receive Affiliation Values Market Position Organization Support Work Environment Community Citizenship Relationships The feeling of belonging to an organization that shares your values The Employee Value Proposition represents the deal or exchange the individual and company strike with each other for shared commitment to contribute to the organization s success Compensation Base Salary Incentives Short-Term Cash Equity/Ownership Compensation Process Employee Value Proposition Work Content Variety Challenge Structure Autonomy Feedback Impact The satisfaction that comes from the work you do Organizations that are talent magnets have EVPs that are distinctive, i.e., noticeably different than competitors and compelling to key talent segments All the indirect rewards you receive Benefits Health Retirement Recognition Perquisites Income Security Time Off Work Arrangements Career Advancement Title Personal Growth Training Employment Security Long-term opportunities for development and advancement 3

4 Total Compensation Architecture We work with many of our clients to improve the effectiveness of their compensation system. In our experience, this effectiveness is not just related to a tidy spreadsheet mechanic but rather is a function of intent, design, leadership, and execution. Reporting relationships Job levels/families Job/work design Titles Job Structure Pay Delivery Pay mix Merit Incentive Promotion People Strategy Total Rewards Strategy The Compensation System Execution Outcomes Workforce plan Employment value exchange Compensation elements Comparison markets Market positioning Oversight Transparency Compensation Structure Salary levels and ranges Linked to the market Control mechanisms Job evaluation/grading Performance Management Goal setting Measures Feedback Ratings Communication Calibration of actions Approvals Reporting Helps attract/retain qualified employees Considered fair and equitable Supports the desired culture and operations Understandable by leadership and staff Keeps overall staff costs competitive 4

5 Why Design or Redesign a Total Compensation Program? More than 10 years since program was developed Staff dissatisfaction with pay and/or benefits Salary compression Increasing cost of benefits High frequency of job re-classifications and/or promotions Competitive and/or actual pay is inconsistent with pay ranges Managers gaming the system or using favoritism No one understands it No data for guidance Perceptions of inequity There are two possible results: refine the current structure or start from scratch. Today we will focus our discussion on developing compensation programs from the ground up. 5

6 Developing a Total Compensation Program Total Compensation Philosophy Market Assessment Compensation Program Implementation Organizational Alignment Internal/External Valuation $ $$$ 9 10 Comparison Markets 7 8 Link to Performance Pay Components Program Model 2 3 Management 1 Communication/ Openness 6

7 Compensation Strategy Components A clear, detailed compensation strategy is an essential foundation for the compensation program. The strategy statement will address the following eight topics. Organizational Alignment The role of pay in supporting and aligning with the organization s mission and strategic plan. Compensation Base Salary Incentives Cash Recognition Premium Pay Pay Process Internal/External Valuation Comparison Markets Link to Performance Pay Components Program Model Management Communication/Openness The basis for valuing work and jobs and establishing a position evaluation system. Defines the emphasis of internal versus external factors in the job evaluation process. The markets against which the organization will benchmark compensation, the degree to which different markets are needed for different job families, and the position relative to those markets. The degree to which pay is linked to performance, and the criteria for determining levels of performance. The extent to which base salary will be supplemented with incentives, cash recognition, shift differentials, on-call pay, etc. and, if so, how and in what areas of the organization. The types of pay programs/delivery vehicles that are best aligned with the compensation strategy. The degree of customization that is needed to support the whole organization as well as its divisions/units. Clearly defined roles, responsibilities, and decision rights for the design, approval, and management of pay programs. The degree to which the compensation strategy, programs, and processes are openly communicated. 7

8 Market Assessment Steps 1 Identify appropriate peer groups/ comparison markets Market Pricing Steps 2 3 Identify appropriate survey sources Match jobs to market 4 Collect and analyze data 8

9 1. Identify Peer Groups/Comparison Markets Developing Peer Groups Illustration Look at the 16 diagrams in the figure and select 4 of the diagrams that you believe match one another most closely OBJECTS WITH VARIOUS ATTRIBUTES 9

10 1. Identify Peer Groups/Comparison Markets Developing Peer Groups Illustration continued The selection of any combination of 4 diagrams is correct in the sense that they will match on at least 1 criterion; they also are all incorrect in that they will be mismatched on at least one criterion If selected objects on the most salient institutional characteristics color, shape, or size (akin to industry, region, and size that constitute the criteria for many organizations) the average compensation and subsequent standard of comparison for Solid Blue, for instance, would be $151,250 Add or replace one criterion and the average changes: Distinguish Blue further by pattern, for example, and a new pair of standards emerges: $151,250 versus $191,250 OBJECTS WITH VARIOUS ATTRIBUTES AND MONETARY VALUES

11 1. Identify Peer Groups/Comparison Markets Developing Peer Groups Illustration continued Variables Primary Criteria Carnegie Classification Degree of Urbanization Geographic Region Secondary Criteria Admissions Yield Endowment Assets (Year End) per FTE Enrollment Full-time Retention Rate Graduate FTE Private Total Expenses Undergraduate FTE Graduation Rate (Bachelor Degree) Percent Admitted Total Tuition & Fees Student-to-Faculty Ratio Process Compile a list of possible peers Convert their values on each variable to a standard scale Compute averages and standard deviations for each institution across variables Compare means and standard deviations to target institution 11

12 1. Identify Peer Groups/Comparison Markets Peer Group Variables: What Really Matters PREDICTORS OF FACULTY SALARIES FOR THE TOP 100 LIBERAL ARTS COLLEGES AND NATIONAL RESEARCH UNIVERSITIES FRESHMAN RETENTION RATES INSTITUTUIONAL RANK AVERAGE FULL PROFESSOR SALARY Or Admission Rate AVERAGE ASSOCIATE PROFESSOR SALARY OPERATING EXPENSES P/FTE AVERAGE ASSISTANT PROFESSOR SALARY RESEARCH EXPENSES P/FTE 12

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14 2. Identify Appropriate Survey Sources Appropriate Sources of Data Data from reputable survey firms Consistent level of participation year over year Surveys with documented and sound methodology: Participant list Job descriptions Reasonable sample size Percentile data reported (in addition to average) Documented effective date Follow Safe Harbor guidelines Questionable Sources of Data Self-reported data Online data Magazine surveys Custom third-party survey (e.g., from search firms) Surveys reporting a line per participant Any source without documented methodology (see at left) 14

15 3. Match Jobs to Market Faculty By rank and discipline (CIP code) Instructional faculty only (50%+ of time) Staff Match on job content and requirement, NOT title Jobs are almost never a perfect match, look for approximately 70%-80% alignment Adjust match as needed (scope adjustment) Use multiple surveys where appropriate Don't force a match do not need to benchmark all jobs Hybrid jobs Match validation is critical in most institutions. 15

16 4. Collect and Analyze Data Age data to a common date Collect and review averages and percentiles range of data Calculate market competitiveness (aggregate, by level, job, function, department, etc.) ILLUSTRATIVE MARKET COMPETITIVENESS EXHIBITS AGGREGATE PERCENT TO MARKET MEDIAN Base Aggregate Market Data ($000 s) 215,605 Aggregate Client Data ($000 s) 215,064 Aggregate % to Market 100% Incumbents 3,752 Percent of Employees DISTRIBUTION OF INDIVIDUAL COMPETITIVENESS COMPARED WITH MARKET MEDIAN 17% 14% 33% 19% 16% Base Pay $2.3M $4.8M $4.9M $1.4M More than 120% of market median 110% 120% of market median Within 10% of market median 80% 90% of market median Less than 80% of market median 16

17 4. Collect and Analyze Data continued Example MARKET PRICING ANALYSIS EXHIBIT (Data in $ Thousands) Client Position Survey Survey Title Weight Adjustment 25 th Percentile Survey Base Salary 50 th Percentile 75 th Percentile Controller Survey 1 Financial Controller 1 0.0% $121.3 $161.3 $189.5 Programmer Market Average $ $ $ Job Average $ $ $ Incumbents as % of Market 116.8% 87.9% 74.8% Survey 1 Programmer III 1 0.0% $79.5 $88.9 $98.8 Survey 2 Systems Programmer 1 0.0% $57.1 $61.7 $65.4 Market Average $68.30 $75.30 $82.10 Job Average $70.10 $70.10 $70.10 Incumbents as % of Market 102.6% 93.1% 85.4% The market provides objective data, not just hearsay. 17

18 4. Collect and Analyze Data continued AVERAGE JOB RELATIONSHIP TO MARKET MEDIAN Average Percent of Market Median 81% 82% Base TCC 84% 85% 80% 83% 87% 88% 93% 98% 92% 93% 95% 96% 87% 86% 93% 93% 96% 97% 100% 100% 95% 95% 97% 96% 97% 99% 108% 105% 110% 108% 111% 117% 98% 103% 105% 110% 89% 88% 89% 100% A B C D E F G H I J K L M N O P Q R S T U Job You need to know the relationship of jobs (especially multi-incumbent jobs) to market Pay actions should differ depending on position relative to market and the desired positioning It may take several years to get to the desired positioning Variation within jobs is desirable in order to pay for performance 18

19 What Market Data Tells Us Indicates a range for the value of a job in the identified market Represents the cost to hire an employee in the market from which the organization recruits talent Illustrates trends in compensation year-over-year Is not a precise number Does not represent changes to the cost of living within a market Does not represent the appropriate pay rate for every individual in a job 19

20 Internal Versus External Focus Internal Emphasis Bands/levels are defined based on roles and responsibilities, organizational structure Job families and progressions Job evaluation emphasizing internal value Market data as secondary External (Market) Emphasis Salary bands developed around market value of benchmark jobs Rigorous, consistent use of compensation surveys and high number of benchmark jobs Market data highly valued by organization Salary emphasized within context of market 20

21 Compensation Structure $ Considerations Number of structures Number of grades within structures Range width, overlap, point(s) of alignment to market, progressions within grades Meaning of grades, link to titles and other issues (FLSA, benefits eligibility, etc.) 21

22 External Value is Primary Focus A salary structure is created based on external value. Base Pay Range ($000s) $160 $140 $120 $100 $80 $60 $40 $20 Jobs with similar market values are assigned to the same band Non-benchmark jobs are compared to benchmark jobs to determine band assignment Grade 1 Grade 2 Grade 3 Grade 4 Grade 5 Grade 6 Grade 7 Range Minimum Range Maximum Benchmark Job 22

23 The Shapes of Compensation COMPENSATION 75 th percentile 50 th percentile COMPENSATION 75 th percentile 50 th percentile COMPENSATION 75 th percentile 50 th percentile SALARY GRADE Multiple pay lines that might vary by division, department, or type of job (there could even be different lines for number of years in a position). SALARY GRADE Often used in capital versus labor intensive industries where pay tends to be high but there is a prolonged informal probationary period at an introductory wage to assure cultural fit and satisfactory performance. SALARY GRADE Represents a response to the acquisition of market relevant skills by employees usually in technologyrelated positions, in order to compensate for skills and protect against competitors; later career salary may be supplemented through bonuses. COMPENSATION COMPENSATION 75 th percentile 50 th percentile 60 th percentile COMPENSATION 75 th percentile 75 th percentile SALARY GRADE High risk high reward jobs such as found in firms, investment banks, or producer positions such as sales. SALARY GRADE Relationship denotes special bumps in compensation at select times in employees tenures or as a result of promotion into certain positions or levels. SALARY GRADE Discontinuity required to maintain internal equity and to keep certain positions attractive resulting from push of living wage, negotiated union contracts, response to new policies such as FLSA standards, and such applies to certain families of jobs. 23

24 Managing Pay for the Job and the Individual Salary structure and grade ensure that compensation range for a job is competitive with the market. An individual s skills, experience, and performance determine the actual salary for the position and pay vehicles are used to make adjustments. Job Role, Responsibilities, and Skill Requirements Knowledge, Skills, + Experience, and = Performance Pay Opportunity Grade + Position in = Grade Recommended Base Salary PAY VEHICLES Starting Rate Merit Increase Market Increase Equity Adjustment In Grade Advancement Skill Step 24

25 Control Grade Creep and Grade Jobs Fairly Pressure on job evaluation has become a particular problem as promotions slowed due to cost containment and lower turnover More organizations are getting away from point factor job evaluations because they are easily manipulated Instead, market pricing with internal comparison of nonbenchmark jobs is being used to make job evaluation more objective Structures with a moderate number of grades, total, make it more objective to determine the grade of a job Some organizations have joint HR and Senior Executive approval of changes in batches to maintain high standards Need to monitor grade creep and have a desired people pyramid 25

26 To Reward Performance, Goals Need to be Set and Aligned Individual goal and priority setting must be done in light of company and unit goals and priorities, and with cross unit alignment. If employees make up their own goals it is hard to differentiate. CEO and Executive Team Sets Company and Executive Goals; Reviews Unit Goals Business Units Cascade corporate goals into mid-managers and BU objectives Align goals across functional units Downward and Lateral Cascade and Alignment Individuals/Managers Employee goals and priorities linked to unit goals Expectations clear on what to achieve (results) Goals and objectives visible to others How to Make it Real: Improve visibility of goal setting, make goals documented and transparent. 26

27 Performance Measurement Accurate performance measurement entails: The right scale The greater the number of points, the more reliable the scale Scale may not be linear Multiple measures GENERAL LABELED MAGNITUDE SCALE BEHAVIOR 3 BEHAVIOR 5 BEHAVIOR 6 BEHAVIOR 1 BEHAVIOR 2 BEHAVIOR 4 BEHAVIOR Multiple times Multiple people 27

28 To Ensure Fairness, Calibrate Rating and Rewards Across Managers Calibration improves differentiation by reducing subjectivity of ratings and encouraging similar standards across groups. Peer managers meet to calibrate ratings and compensation decisions Leader Creates and reinforces performance norms and expectations Creates positive tension to differentiate appropriately Peer Manager Senior management approves decisions before they are final Employee 28

29 Updating Policies Reward Performance and Support Career Growth Job reclassification Promotion Transfers Performance rewards In-range adjustments Expansion of responsibilities Ensure Fair and Equitable Administration of Salaries Hiring rates Market adjustments Equity increases Grade minimum and maximums Temporary or interim assignments Compensate for Unique Situations Shift differentials On-call Call-back Premium pay for critical skills 29

30 Use Metrics to Track Compensation Department SAMPLE COMPENSATION SCORECARD Average Performance Rating (1 5) Average Merit Increase (3% Budget) Promotion Rate Compa Ratio Annual Incentive (% of Target) A % 3% 101% 100% B % 0% 98% 102% C % 12% 96% 105% D % 8% 99% 105% E % 17% 105% 115% F % 20% 104% 95% G % 5% 99% 100% H % 20% 97% 110% Compensation scorecards promote visibility and accountability. 30

31 Thank you! Michael O Malley SVP, Senior Human Capital Consultant momalley@sibson.com Carolyn Wong Senior Consultant cwong@sibson.com