rules for keeping pay competitive
TRANSCRIPT
“Rules for Keeping Pay Competitive”
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Motor Vehicle Maintenance 101
33
Basic Maintenance Prevents Larger Problems
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Program Maintenance
• What are the major checklist items to maintain competitive pay?
• How frequently should I be monitoring these items?
• How will preemptively addressing these issues prevent larger problems?
Salary
Performance Incentives
Sales Incentives
Growth Incentives
Core Health & Welfare
Plans
Executive Benefit Plans
Qualified Retirement
Plans
Nonqualified Retirement
Plans
SalariesCompetitive with market standards?
Tied to strong performance management process (merit)?
Managed within a flexible but effective structure?
Performance IncentivesTied to productivity gains?
Clear, achievable and meaningful?
Self-financing?
Sales IncentivesChallenging yet achievable?
Reinforcing the right behaviors?
Differentiating your offering?
Growth IncentivesLinked to a compelling future?
Supporting an ownership mentality?
Securing premier talent?
Core BenefitsResponsive to today’s employee marketplace?
Allocating resources where most needed?
Evaluated to eliminate unnecessary expense?
Executive BenefitsFlexible enough to address varying circumstances?
Communicating a unique relationship?
Reducing employee tax expense?
Qualified Retirement PlansGiving employees an opportunity to optimize retirement values?
Operated with comprehensive fiduciary accountability?
Avoiding conflicts and minimizing expenses?
Nonqualified Retirement PlansOptimizing tax-deferral opportunities?
Aligning long-term interests of employees with shareholders?
Structured to receive best possible P&L impact?
An Aligned
Compensation
Strategy
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Salary Maintenance
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Lets Start with Salary
Salary always gets the most attention
Probably one of, if not the largest cost to run your business
With any large expense it needs to be closely monitored
Who should own salary management?
Individual Managers?
Finance?
Human Resources!
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Why a Salary Structure?
Pay scales determine employee salary
All companies need some form of a salary structure
Sensitivity around pay discrimination is at an all time high (Equal Pay Act)
Salary structures ensure that pay decisions are both proper and defensible
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Position Specific Structures
There are two common structure types
Position Specific Ranges
Found in organizations with fewer unique positions
Usually have narrowly defined ranges
Easy to explain progression to employee population
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Grade/Band Structures
Grade/Band Structure
Positions with similar market value and internal equity grouped together
Appropriate when you have significant number of unique roles
Grade Minimum Midpoint Maximum
8 52,270 71,863 70,939
9 48,398 64,163 65,684
10 44,813 57,288 60,818
11 41,494 51,150 56,313
12 38,420 45,670 52,142
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Checklist Item #1Review your structures frequently
Too many organizations have a “Set it and Forget It” mentality around pay structures
A structure that has not been adjusted, at least, on an annual basis is not keeping pace with the market
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Acquire Market Data
How Do I Ensure I am Not Falling Behind?
Salary ranges are commonly set and maintained using market data:
ERI
PayScale
Towers Watson
Mercer
Industry surveys
Ensure you have access to some market data
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Using Market Data
Market data can help: Validate ranges for positions you have difficulty
recruiting or with high turnover.
Determine how we should adjust the salary structure
Variance 3.1% -2.6% -3.3%
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Frequency
Should I be Comparing my Positions to Market Data Every Year?
Depends on your budget as well as staff size vs. number of positions
Organizations with limited budget and resources typically reprice all positions every 2-3 years.
However, the structure should be adjusted at least every year.
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Single Position Adjustments
What if I am Having Difficulty Hiring/Retaining Positions?
Any salary ranges that are presenting challenges in hiring/retention should be addressed immediately
Establish new ranges/adjust current ranges on a frequent basis
No need to wait until the end of the year to review
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Adjusting The StructureOption 1 – Use the Market Data
Measure the variance between your positions and the market data
Can use a random sampling of positions if you are not re-benchmarking your positions every year
If your structure is position specific each position may have a different adjustment
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Adjusting The StructureOption 2 – Using General Trends
Industry and geographic trends are commonly discussed and available
Ranges can be adjusted by a flat rate
Manufacturing – Kansas City – 2.3%
Cost of Living vs. Cost of Labor
Cost of Living – Price of milk
Cost of Labor – Price of hiring a new accountant
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Cost of Living vs. Cost of Labor
Price of Gas (Cost of Living)
Fort Smith, AR - $1.89/g Los Angeles, CA - $2.96 /g
+56.6% Higher
When adjusting your salary structure, ensure you’re intelligence is based on cost of labor
Software Developer Salary (Cost of Labor)
Fort Smith, AR – $81,235 Los Angeles, CA - $98,228
+22.6% Higher
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Employee Salaries
Why Do Employees Stay With You?
Employees typically stay because they value nonmonetary awards:
However, if salaries are not perceived as fair and competitive, employees with leave you.
Provide employees reasons to stay instead of giving them reasons to leave.
Enjoy the work Appreciate the culture
Coworkers are friends Feel Important
Believe in Company Comfortable
Flexibliity Other
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Internal EquityEmployee A vs. Employee B
Employee A has been a valuable employee with the company for 10 years
Employee B was just hired right out of college
Employee B’s salary is higher than Employee A
How will Employee A react when he/she finds out about Employee B’s salary?
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Best Practice Fix
Most of the time the focus is on Employee B
Employee B’s salary offer was too high
Ensure Employee B’s salary is beneath Employee A
The bigger problem in this scenario is Employee A.
10 years experience and is making less than a new hire?
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Problem’s Origin
What is the purpose of your salary budget? Merit/Performance Promotion New Hires COLA/Inflation
Can all of that be accounted for in 2-3% salary budget every year? After subtracting out promotional and new hire
considerations your budget may realistically be 1-2% for merit and COLA
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Compounding Effect
Best Practice - Pay For Performance
Don’t evenly “spread” your budget
Focus on high performers
If you only have a 1-2% merit/COLA budget, and its all focused on the top 10-20% of your organization (high performers), how will the salaries for everyone else track against the market?
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In Addition
Answer:
The average salary increase of Employee Ais less than the increase in cost of labor
Or you’ve created a culture where promotion with a significant salary increase (10-15%) is necessary every few years.
You’ve either incentivizedEmployee A to leave you
Is there a less expensive alternative?
You Can’t!
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Checklist Item # 2Separate Your Budgets
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Setting Your Budgets
Your Budgeting Should Reflect the Organizations Priorities for the Upcoming Year
Merit - Should reflect market conditions (market data or general trend info)
Promotions - Usually a constant number based on the promotional culture of your organization
New Hires – How will staffing next year compare to the present COLA – Are employees falling behind the market data?
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Implications
The cost of having separate budgets can be more expensive on an annual basis than having one combined budget
Philosophical change for Mgmt Merit, New Hire, Promotional Budget – Owned by Mgmt COLA Budget – Owned by HR
COLA adjustments should be initiated to reduce the actual cost of turnover Does not need to be spent in its entirety
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Lets Talk About Incentive Maintenance
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Incentive Trends
Major Changes in Incentive Plans
Increasing Plan eligibility
Historically – Senior EE’s and Management
Change – All Employees
Sends a message that all roles are integral and will share in company success
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Simplified Plan Design
Simplifying incentive plan design Incentive plans have historically
been very metric driven Potentially creates conflict of
interest
Should I do what’s in the Company’s best interest or should I just worry about performing my goals?
Should I be paid because the company succeeded or because I accomplished a list or tasks?
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Basic Structure
Plan funds at different levels based on achievement of company goals
The incentive pool is then disproportionately shared with employees
Higher level employees receive a higher portion of the incentive pool
Employee performance can “modify” the payout
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Advantages
Easy to understand All employees are tasked with achieving high
level goals No micromanaging No conflict of interest Simple to administer
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Checklist Item # 3Review Your Incentive
Most companies design a plan and fail to evaluate the effectiveness of the design
Incentives need to be reviewed on at least an annual basis
It may be time to simplify your plan
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Employee Communications
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Employee Awareness
How much do your employees know about pay? How much do you want them to know about pay? For a long time, employers benefited from
keeping pay practices behind closed doors
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Automobile Awareness
How much do you know about your car? How much should you know about cars? For a long time, mechanics benefited from
keeping automobile maintenance behind closed doors
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Do You Trust Your Mechanic?
Why do people not trust their mechanics?
Because until recently you have had to take their word
Why should your employees trust you around pay?
Compensation is just as important to your employees as transmission fluid
How do you instill trust in your compensation practices: Transparency
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Perception is Key
2015 PayScale Study• The main predictor of both “satisfaction” and “intent to leave
is whether employees feel they are paid fairly. • Even when people’s compensation was in line with their value
in the job market, two-thirds believed they were underpaid. Of that huge group, about 60% reported low job satisfaction, and said they plan to look for a new job within six months.
• By contrast, the researchers found that, even at companies that pay below-market wages, if employees know why they’re paid less than they could probably earn elsewhere, 82% say they’re “satisfied” with their jobs and plan to stick around.
- Fortune Magazine, October 10, 2015, “How Pay Transparency Can Keep People from Quitting”
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The Big Idea
The idea behind pay transparency is simple: Take the topic off the table
If employees don’t understand the basic’s around pay they will always be suspicious
There isn’t a need to turn everyone into a pay expert.
Most employees don’t want to be experts
Recognize the elephant in the room and explain why its there
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Checklist Item 4Provide Ongoing Comms
Schedule an annual Compensation Overview Meeting Can easily piggyback on benefits open enrollment
Open forum to discuss: General Compensation changes
Salary Budgets
Bonus Plan Structure
Retirement & Benefit programs
Invite employees to ask questions
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Provide Materials
1. Compensation Philosophy Statement
2. Personalized Total Rewards Statements
3. Incentive Plan Summaries & Benefits Materials
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Compensation Philosophy
Every organization needs a compensation philosophy
What is your competitive advantage in hiring?
High Salaries, Low
Incentives, Avg Benefits,
High Retirement
Vs.
Low Salaries, High
Incentives, High Benefits,
Low Retirement
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Compensation Philosophy Statement
Put it in writing Usually 1 – 2 pages Share with all
employees Provide it to new
hires
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Total Rewards Statement
Summarizes entire compensation package
Usually 1 – 2 pages Ensures all employees
understand your compensation investment
Software or self generated
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