PAYING PEOPLE RIGHT HOW TO ATTRACT & RETAIN GREAT EMPLOYEES ON A BUDGET

Transcription

1 PAYING PEOPLE RIGHT HOW TO ATTRACT & RETAIN GREAT EMPLOYEES ON A BUDGET

2 In order to retain and attract top talent, organizations need, at a minimum, to pay competitively. Yet, it s not always easy to pay competitively or effectively with a limited budget. Today, companies must find ways to work within tight budgets to develop strategic, equitable compensation plans that align with their company goals. Because there are so many important pieces in the compensation puzzle, it s challenging to make it all come together in one cohesive, effective plan. This guide aims to help you tackle compensation challenges while staying within budget to ensure you can pay your people fairly. We ve broken it down into the following main sections: Looking at market realities and how they affect you The core principles of paying people right How to build a powerful compensation system in your company Using analytics to look at internal pay factors for more informed decision making Specific pay delivery options to consider Page 2

3 Market Realities The realities of today s market affect the way we pay our people. Over the last seven years, the average annual salary increase budget for most companies has been roughly 3%. An HRsoft poll confirms this finding for the most recent year s salary increase budget, as 33% of professionals said their budget was between 2 and 2.9%, and 30% responded that theirs was 3.0%. Just 13% of professionals responded that their budget was greater than 3%. As difficult as this reality may be for compensation professionals, there are tactics available to work around the issue. By using available resources and carefully selecting our pay strategies, we can pay our people fairly, even in the face of the limited salary increase budgets we re faced with today. Pay Transparency & Compliance Considerations Of course, budgetary limitations aren t the only factors impacting pay today. With online resources like Salary. com, Glassdoor.com, and Payscale.com at employees fingertips, the demands for both pay transparency and pay equity have risen tremendously in recent years. However, it s important to note that the data collected from some of these sources is often self-reported. This leaves room for discrepancies and/or inconsistencies, and may not always take into account certain critical differentiating factors such as education level, amount of applicable experience, company size, etc. Despite the varied applicability of readily available salary data, employers need to be aware of this information and how it s collected, validated, and consolidated and to be able address employee concerns and to speak to the quality of the data the company gathers. Employers can use their own pay strategy to describe how company market data represents their labor market and then how that data is used to determine pay. In addition to the abundance of pay information available online, compensation professionals must also account for developing compliance concerns. For instance, the timing and specifics of any future changes to the Fair Labor Standards Act (FLSA) are unclear, and a number of states and cities have recently enacted policies prohibiting employers from asking interviewees about past pay. Additionally, the minimum wage is a hot issue, with many states and cities continuing to increase the minimums despite expected inaction at federal level. States with higher minimums include about 61% of the nation s working-age population! Page 3

4 While these policies are put in place to protect employees from pay discrimination and may ultimately prove to be beneficial for workers and organizations alike, they still require close attention, and thus, time, from compensation professionals. Hiring Trends Today, the pressure to hire continues to grow. Compared to less than a decade ago, the jobs outlook has strengthened, according to a ManpowerGroup Employment Outlook Survey. And there is no sign that hiring trends are slowing, according to NACE s Job Outlook 2017 Spring Update. Yet, hiring people is a time-consuming process, and while there may be a large talent pool available today, it s not always easy to find employees with specific, in-demand skills. To adjust to these hiring, pay, and compliance pressures, it s more critical than ever for employers to pay their people right. This can be achieved by refining pay programs to make them more consistent, systematic, and welldocumented. We ll discuss this in greater detail in the upcoming section. Page 4

5 Paying People Right When you re paying people consistently through a well-documented, well-communicated, and systematic program, you re likely to be using an approach that is simple and understandable. And, hence, easier to act upon. Simplicity and transparency are important, because these qualities allow employees to understand what their opportunities are and why pay decisions were made, typically resulting in greater trust in the compensation system and the leaders who put that system together and both maintain and communicate it effectively. Many companies are striving for increased levels of transparency across the board today in efforts to build more positive cultures and greater engagement. To achieve better outcomes, however, it s essential for employers to not only provide more information, but to also make sure that information is accompanied by a digestible explanation. Employees don t just want to know what the pay structures or their own pay levels are, they also need to know the how and why behind them. Ultimately, more effective transparency will ensure that pay programs and levels stand up to review and scrutiny and are built on healthy dialogues about pay and performance. Another pillar of paying people right is making sure your pay strategy is aligned with the organization s overall culture and mission and is an integral component of a well-understood total reward strategy. Your pay policies should flow from your company s business and people plans. Page 5

6 Finally, an effective pay structure is appropriately competitive, ensuring that, at the very least, pay is not a dissatisfier that gets in the way of a satisfactory employment relationship. We ll cover strategies for achieving the right level of competitiveness for your company in upcoming sections. All in all, paying people right requires that you revisit the basics: document what you are doing; determine if what you are doing is working for you or not and revise, as needed; then let it play out and analyze to make sure you are on track. And repeat! For now, let s explore the nuts and bolts of paying people right. Planning For starters, you must make sure your rewards philosophy and compensation strategy are meaningful, consistent, and connected to your company strategy and business needs. To create a compensation plan that works for your company, you ll need to consider the various talent segments in your organization, whether functions, jobs, or people, and determine if different pay targets, compensation levels, or salary adjustments are appropriate for different segments. At the same time, you must also balance these considerations with the need to maintain consistency. Documenting & Analyzing A critical step in creating a robust compensation plan is thoroughly documenting your job content (first ensuring, of course, that your organization Page 6

7 structure and job design reflect the company s business and operating needs). Having a clear understanding of your company s jobs and market data allows you to take a focused, accurate approach to benchmarking. While market assessments should be performed every two to three years at the very minimum, many jobs may require more frequent assessments. This may be especially true for specialized or hot skills jobs or positions/people whose work is strategically essential. Considering how difficult it can be to fill these roles (along with how easy it is to lose this type of in-demand talent), yearly or even more frequent benchmark assessments are well worth the effort. As an outcome of benchmark assessments, you will want to analyze your current compensation structure, internal pay positioning, and overall competitiveness. These activities, too, should be performed annually or more frequently, if needed. Paying based on performance in some fashion is also a common component of many companies compensation philosophies. For the most effective results, make sure you re evaluating performance fairly and consistently and that expectations are clearly communicated to employees. Additionally, many companies are incorporating more timely performance management tactics in an effort to turn what is often viewed as an ineffective, timeconsuming process into a communication-focused process designed to enhance employee development and both individual and team performance. Employees don t want to be told how their performance could have been better last summer; instead, they want to know precisely what they can do to improve moving forward (and thus, how they ll be rewarded). Training & Applying To ensure an effective pay system, be sure to create and communicate clear standards for hiring, promoting, offering lateral and progressive job opportunities, and making pay adjustment decisions for situations related to job enrichment, internal or market inequities, demotions, evaluated performance evaluations, and so on. Well-trained managers are a critical component of a successful compensation program. Such managers know how to manage pay and communicate about compensation and performance effectively, helping to ensure that employees are invested in their work with the company and the rewards that accompany their actions. Page 7

8 Building Your Compensation System Every pay philosophy is different from one company to the next, because each employer has a significant number of unique factors to consider. From industry to location to size, employers have to carefully consider these factors when determining the competitive position they d like to take on specific pay components like base salary, incentives, benefits, and retirement. They must also think about how these pay components factor into hiring, retention, and engagement strategies. For instance, base salary is clearly a foundational element used to identify a core competitive value and provide a baseline level of security. Salary is often appreciated for its ability to attract and retain, though it may not have as much power to engage employees as, say, annual incentives or benefits. Most companies aim to pay around the 50 th percentile (by definition!) for base salary to help send the message that they re committed to maintaining a fair and equitable workplace. With performance-based components like annual incentives, however, some companies target pay at above the 50 th percentile, depending on their emphasis on performance and the extent to which they want compensation to be truly variable and, hence, often more aligned with financial results. Compensation Strategy One s compensation strategy comprises two key elements: your desired level of competitiveness, and your target labor markets. The desired, or target, competitiveness is typically based on how high or low a company believes it needs to pay in order to attract and retain the type and level of talent it needs to help drive business success. As discussed earlier, it is entirely reasonable for employers to fine tune competitiveness by various talent segments within the organization. About 80% of companies say they target the 50th percentile, though it s up to each organization to decide how competitive they d like to be. Defining the target labor market is just as essential. The ultimate decision answers the question Where do you hire people from and to whom do you lose people? Labor markets are generally defined using criteria of company size, recruiting geography, and industry sector, though how these are applied differ by both type and level of job. For instance, since company size (whether revenue, assets, or number of employees) affects complexity and scope, CEO pay levels almost always vary by size. Similarly, searches for CEO and other top executive positions are generally national or even international in scope. Page 8

9 On the other hand, the job of an accounting clerk does not change based on company size; hence, size is not usually considered as a labor market criterion. Given the typical pay levels of this type of job, most candidates aren t willing to commute very far, and there is often a strong supply of candidates in many local (especially if urban in nature) areas meaning that the labor market will be largely local. As is probably clear by now, you ll likely have to look at labor markets and competitive strategy on a job by job basis and not simply overall. In fact, if you re not adjusting your competitiveness for different types of jobs, you re likely over- or underspending. Salary Structures The salary structure represents the range between the minimum and maximum values you re willing to pay for any given job. Each job will have its own place in the structure. After developing salary structures, you can then begin to think about how you re going to use it to hire, engage, and retain talent. The typical hiring range tends to fall within the first and second quartile of the market value. In the first quartile, you generally have employees with limited experience or training, while the second is often populated by individuals who are qualified and experienced but whose skills are still developing. The third quartile typically comprises employees who are fully qualified, experienced, and who perform well consistently, whereas the fourth quartile typically includes talent with even more experience, training, and longer service, though the prime determinant should be sustained performance and contribution. Keep in mind that most compensation practitioners build symmetrical ranges, most often the traditional 80/120 range, in which the minimum is 80% of the midpoint (the midpoint is typically viewed as the market target or going rate ) and the maximum is 120% of that same midpoint. Perhaps a better way of designing a structure is to set a minimum that approximates a hiring range for that particular job and to set a maximum that approximates the most a company is willing to pay above market (midpoint) for a top performer who is still doing that job. This means a range doesn t need to be symmetrical, but it does need to suit the company s need to hire, develop, and reward employees appropriately. We can have a similar discussion on the subject of the distance between adjacent ranges or range midpoints. One model is to have the same percentage distance between each range across the company (say, 7.5% or 10%). A more flexible approach and one that is more consistent with the realities of jobs at various organizational levels is to start with relatively small shifts (say, 10%) at the lowest levels of the company and increase those distances (perhaps to 15%, 20%, and 25%) as job size increases. Page 9

10 Analytics We ve talked about assessing market competitiveness and internal equity in a variety of ways. While such assessments are essential and typically form the analytical backbone of good compensation programs, it pays (pun intended!) to look both a little deeper and broader to test whether your current program is truly competitive, whether you are spending your money wisely, and whether you are managing and rewarding your talent as effectively as possible. For example, you would probably expect, all things being equal, that your longer-tenured and higher performing people would be paid higher in their market-based ranges than employees who are lower-performing and/or were hired more recently. Counter to that expectation, a recent study showed a situation in which the highest paid people were also the shortest-tenured and lowest performers; and the reverse was also generally true. This study is not necessarily reflective of typical practice the key take-away is how useful such an analysis can be in determining if your company has put its money where its proverbial mouth is! Each company should test its pay strategies to see if they are really working. As another example, you might find that overall you are paying competitively, as indicated by how closely the market target line matches your company s policy (midpoint) line or your actual pay line. And you might decide you re good to go end of story! On the other hand, you might take a look at a particular job family (say, biochemist) and dive into the staffing allocation as it compares to the market that is, how do your staff proportions (number of employees in a job family by level) across, say, 6 levels compare to practices in the marketplace? If you find that your population skews to the high side (you have more level 5s and 6s and fewer levels 1s and 2s), that indicates much higher overall costs, despite the fact that your jobs are paid competitively. If your business model is such that you need that type of skew to be successful, then you can be comfortable that your pay levels and staffing allocations are well aligned with your strategies. If, on the other hand, this skew came to be more from loose promotion policies and ineffective management than from a clear business need, your costs will be out of line and in need of fixing. Page 10

11 Pay Delivery There are many shifts taking place within the workplace with a goal of better facilitating an effective pay-for-performance approach to compensation. Many organizations, especially those with knowledge workers, are moving away from a focus on tasks and related performance measures to an emphasis on facilitating individual and team performance and the employee development needed to help achieve those levels of performance. Additionally, to make performance more of a future-focused endeavor than a what have you done for me lately conversation, managers are having more frequent conversations with their people, and additional feedback structures have been implemented to support a two-way dialogue. This is in sharp contrast with the once-a-year, quantitative rankings of the past. While pay for performance is still favored, it is becoming much more nuanced than formulaic. Studies show there s still lots of room for organizations to improve their pay-for-performance and performance management models. In an HRsoft survey, 48% of respondents said they were moderately dissatisfied with their current systems, while 19% said they were completely dissatisfied. That said, while some employers may want to start from scratch to redesign their programs, many organizations may not need to completely overhaul their pay-for-performance system. Some companies have decided to take what works from the existing system and simply integrate those components with new strategies and tactics. For instance, one increasingly popular tactic is giving managers more power to make pay decisions within broad guidelines. After all, they re the ones who are most familiar with their employees performance and their own budgetary parameters, so giving them more of a say can help ensure more informed pay decisions. And may also help employees better understand the whys and wherefores of their own pay and performance. Options to Consider In low-budget situations, many employers (and managers!) are naturally weary of merit increases. Here, we ll explore a few specific options for paying fairly while also working within a limited budget. Page 11

12 One approach could be to distribute the budget evenly, but as you might imagine, this option is not typically wellreceived by high performers. Such an approach is much less problematic in situations where budgets are tiny, e.g., in the 1 to 1 ½ % range, but less palatable when managers have 3% or more to play with. Another approach might be to eliminate a salary increase altogether except for your A-players. Again, however, this could be a difficult message to deliver, and might have a seriously negative impact on your company culture. A third option is to take not an either/or approach, but instead to focus on broadening your overall employment value proposition or total reward offering and integrating compensation into that package. With this approach, your company will have the benefit of explicitly and implicitly providing both tangible and intangible rewards for attracting and engaging employees. A fourth option is to provide salary increases only where you identify market gaps. To do this, you can identify a target market reference point and provide increases only when employees who are performing well are being paid below that point. In this model, performance-based payments are made using only variable dollars. As in any pay-for-performance system, this approach will work only if the company has well-defined goal setting and performance evaluation processes supported by clear and effective communication between manager and employee. Ultimately, the option(s) you select will depend on your company s current retention, engagement, and performance goals, as well as its culture and salary increase budget. Page 12

13 Summary We ve discussed many aspects of paying employees fairly throughout this guide, so let s take a moment to review a few key concepts. Today s market realities impose certain challenges on employers. With tight salary increase budgets, the easy availability of pay information of varying quality online, and an increased demand for transparency, compensation professionals are facing more pressure than ever before to make careful pay decisions. There are also many quickly evolving compliance and regulatory factors to track and consider. Paying people fairly can be broken down into three main steps: planning, documenting and analyzing, and training and applying. Because the market changes constantly and some high-skill positions are difficult to fill, it s important to develop a routine for performing regular and accurate benchmark assessments. For most companies, an effective compensation system must start by being appropriately competitive. Oftentimes, the target is to pay at around the 50 th percentile, although companies need to take into account their different talent segments, which might require more frequent adjustment, higher market targets, or both. Reviewing internal pay equity is as important as analyzing the market. Your salary structure is where those two components meet, so make sure your structure is well-designed, clearly communicated, and supports your hiring, retention, and performance strategies. You might also want to take a deeper and broader look to test things like your staffing allocation and your overall relationship between performance, experience, and pay levels. This can help ensure you are able to clearly see both the forest and the trees! The majority of companies are in favor of linking compensation to performance, but it s clear there s room for improvement in terms of how this is implemented. Employees are seeking more frequent and futurefocused performance feedback, which may help them grow, contribute to the success of the company, and stay engaged. When it comes to pay delivery, most companies will need to take a holistic look at total rewards and be sure to factor in intangible elements to create a more powerful employee value proposition. As such, all aspects of reward need to be considered. The precise methods you choose to implement to pay people fairly is still up to your organization, but now you have many options to consider. By looking at both internal and external pay factors and weighing these against your company goals, you can create and apply a more powerful compensation plan to benefit both your skilled high performers and your organization overall. Page 13

14 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 Contributors Andy Rosen Principal, Andrew Rosen Consulting Andy Rosen is a highly-experienced management consultant, consulting firm executive, and board member with more than 40 years of business experience. He is principal with Andrew Rosen Consulting, a compensation/reward consulting firm, and a member of the advisory board of Plus3 Network, a company that encourages employees to become more active by directly linking their activities to charitable contributions. He earned an MBA in Finance from the Wharton School. Deb Grigson Founding Partner, econsultingnetwork Deb Grigson is a founding partner at econsultingnetwork, a compensation consulting and technology firm founded in She is co-developer of JobBlox, TM, a simple yet powerful web-based job content/job description management solution. Prior to establishing econsultingnetwork, Deb was an Assistant Vice President at Aon Consulting, providing compensation and related technology consulting to a wide range of organizations. She earned a Master s in Education, Psychology/Education from Bucknell University. Page 14