Compensation Cafe

Large Employers Expected to "Hold Steady" on 2010 Increases

According to a recently released report from Hewitt Associates , a global human resources consulting and outsourcing firm, we can be thankful that most employers are "holding steady" on 2010's salary increases and bonus payouts.  In this survey released on November 19th, 555 large employers found that base salary increases for salaried exempt, salaried nonexempt, and nonunion hourly employees are expected to be 2.5% in 2010, slightly reduced from original projections of 2.5%.

Unlike this time last year, the majority of U.S. employers are maintaining their existing compensation budgets for 2010, making only minimal changes to salary increases and employee bonuses.  Better yet, the number of companies expecting to freeze or reduce salaries has "declined dramatically" compared to last year, as companies look toward the New Year with cautious anticipation and prudent planning to control labor costs.

In a year where most employees considered job security of paramount importance, the survey reported that actual pay raises for workers in 2009 were 1.8% for salaried exempt, 1.4% for executives and 2.2% for union employees. 

On another encouraging front, employers are no longer planning to freeze or reduce salaries next year.  The recession resulted in nearly half (48%) of employers took those serious steps to preserve jobs and control costs over the past year.  Yet only 17% are considering taking these measures in 2010.

"Many companies are still finalizing their 2010 compensation budgets, but the good news is that most don't seem to be taking the same types of drastic cost-cutting measures we saw at this time last year," said Ken Abosch, head of Hewitt's North American Broad-Based Compensation Consulting practice. 

"As organizations remain under enormous pressure to hold down fixed costs, we'll continue to see an emphasis on variable pay approaches.  These types of performance-based awards give companies more flexibility, allowing them to adjust payout amounts based on business and personal performance, without being tied to fixed costs associated with base salary increases."

Hewitt survey has found that variable pay spending as a percentage of payroll has almost doubled over the past 15 years, rising from 6.4% in 1994 to 11.2% in 2009.  Almost two-thirds (64%) of those employers link individual performance to variable pay.

It appears from a variety of corroborating reports from many compensation sources that 2010 will offer modest merit increases, increased use of variable pay, and a more stable employment picture for the 88-90% of people now employed.  Given where we've been over the past year, in my book that's plenty to be thankful for as we anticipate the new year. 

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

Retaining Your Top Performers

A local news station here in Denver ran a story this morning covering a report by Robert Half Technology which indicated that employee retention will the most important staffing priority in 2010.  I don’t doubt this as there will be a spate of employees looking for the proverbial “greener grass” once the economy turns around.  However, I think there was an important distinction missing in the news story.  It’s not just retention that companies should be worried about; it’s retention of the high-performers that really matters.

In order to be ready to really hit the ground running after the recession, it’s imperative to have high-performers in place.  The story listed some good ideas about how to keep employees, but if our companies aren’t already doing these things, it may very well be too late next year.  Here are some the suggestions from the news story:

1. Recognize good work
2. Provide opportunities for professional growth and career advancement
3. Sell your company by reminding employees of the unique benefits your company offers (see this previous post about Total Rewards Statements)
4. Communicate with your employees
5. Provide compensation if possible, use bonuses if base pay increases aren’t available
6. Prioritize projects to address workload issues

I particularly liked the suggestion about prioritization to help with workloads.  Many employees have been asked to take on more work due to layoffs and are seeing equal or less compensation for this additional effort.  If it’s at all possible to remove some of the workload that our employees are shouldering, that might really help people to feel more valued by their companies.  Steve Roesler has recently written a couple of good posts about work priorities, check them out here and here.

Here are a few more of my suggestions:

1. Eliminate low performers.  When there are both rewards and consequences for performance, it sends that message that results matter.
2. Provide supervisor training.  We’ve all heard the adage that employees leave their bosses, not their company.  So make sure that your employee’s supervisors are type of bosses that inspire loyalty.
3. Treat your employees well even when (especially when) there’s a surplus of labor in the market.  Your employment brand isn’t developed overnight; it’s made up of all of the decisions along the way.

What other thoughts do our readers have?  What are your companies doing to keep your top employees engaged and wanting to work for you?  Have you already started doing it or do you think next year is soon enough?  Hit us in the comments with your thoughts and ideas.

Darcy Dees works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has been working in Compensation for over 5 years now and recently attained her Certified Compensation Professional (CCP) designation.  She spends what little free time she has hiking and reading.

Image:  Creative Commons Photo "Greener Grass" by Dano

Let’s Count Our Blessings

Let’s give thanks for every smidgen of gravy—that is, hope—we find on our plate this week.  I thought I would pass along this finding from McKinsey’s Economic Conditions Snapshot, November 2009.  They report that based on their Global Survey:

“For the first time in a year, a majority of respondents—51 percent—say economic conditions in their countries are better now than they were in September 2008, according to a survey in the field during the last week of October, a volatile week for stock markets. A larger share of executives also expects the good news to continue, with 47 percent expecting GDP growth to return to pre–September 2008 levels in 2010 or 2011, compared with 40 percent six weeks ago . . .”

Things are still mighty wobbly, of course, and you can check the Economic Conditions Snapshot for all those gloomy details.  But this week, let’s keep an eye out for as many things as possible for which we can be grateful.

Margaret O’Hanlon is founder and principal of re:Think Consulting.  She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results.  Margaret brings deep expertise in total rewards communication to the dialogue at the Café; before founding re:Think Consulting, she was a Principal in Total Rewards Communications with Towers Perrin.  Margaret earned her M.S. and Ed.S. in Instructional Technology at Indiana University.  Creative writing is one of her outside passions.

One Step Forward, Two Steps Back (Part 2)

(This is the second part of a four-part post on the state of white collar pay-for-performance in the federal government.  Part I was published on Friday, November 13th.)

Following enabling legislation in 2002 to develop new pay-for-performance systems for the Department of Defense (DOD), Department of Homeland Security (DHS), and the government-wide Senior Executive Service (SES), the agencies and the Office of Personnel Management went to work on design and implementation.

DOD and DHS had some differences in their new personnel systems, but they were similar in that they replaced the highly structured General Schedule (GS) grades and steps with broad pay bands.  The SES pay system was changed from 5 fixed rates to two broad pay bands - a higher one if the agency had an independently certified pay-for-performance system, and a lower one if the PFP system was not certified.

Further, new performance management systems were established based on the following bipartisan approved design criteria:

1. Accountability - participants are held accountable for performance
2. Alignment - individual performance plans are clearly linked to those of the agency
3. Measurement of results - at least 60% of a rating is based on measurable results
4. Balance - performance measures include the use of employee and customer/stakeholder feedback
5. Consultation - employees must be involved in development of performance plans
6. Organizational assessment and guidelines - a paper trail is required to document the plan and outcomes
7. Oversight - head of the agency ensures the system operates as designed
8. Training - employees and evaluators are trained on the performance management system
9. Performance differentiation - meaningful differentiations are made reflecting organizational and individual performance
10. Pay distinctions - pay adjustments and awards are differentiated based on performance differentiation

By 2008, OPM reported that most of the federal agencies had their SES performance management systems independently certified.  Those of us in the federal sector that believe in the concept of pay-for-performance for federal workers had the audacity of hope that a new era of federal performance was in sight.  What can go wrong with such well-reasoned, bipartisan design concepts? 

When the Bush administration tried to implement the changes in the DOD and DHS authorized by the 2002 Homeland Security Act for General Schedule non-executive white collar workers it was met with stiff resisitance.  The changes called for a new performance management system, labor relations, adverse action and appeals systems.  The changes also would have featured a market- and performance-based pay approach to replace the decades-old General Schedule system under which most civil servants work.  Federal employee unions in both DOD and DHS objected to perceived unilateral changes in personnel systems, filed grievances, and initiated litigation.

Further, a shift in the political mix in Congress created a greater opposition to President Bush's initiatives to reform performance management in the federal government.  By 2007, the 110th Congress had a majority of Democrats in the House, and an even split of Democrats and Republicans in the Senate.

A month before the 2008 presidential election, the DHS personnel system was killed.  In a compromise with Congress, President Bush signed into law a bill that discontinued funding for the DHS personnel system, formerly called MaxHR.

With pay-for-performance now dead at DHS, there was still hope that the DOD initiative would succeed.  Furthermore, the SES system had a foundation of 4 years under their new PFP system.  Next week we'll see what happened with PFP under the new Obama administration in Part 3 of "One Step Forward, Two Steps Back."

Guest blogger Paul Weatherhead is a Pay Program Manager for the US Postal Service.  His primary pay program is their award winning Pay-For-Performance program, but he also is involved with other pay and benefit policy issues at the USPS.  Paul actively participates in the WorldatWork professional association as an instructor, author, speaker, reviewer, and blogger.  In his spare time he teaches human resource management courses for the University of South Carolina.  He can be reached at cpaulwd@yahoo.com

 

Are There Alternatives To Pay Increases?

I’ve seen several articles recently listing alternatives to pay raises.  Some of these articles have some good ideas for how we should treat our employees at all times, and some of the articles have some ideas that should never be used.  But they all miss the point; you can’t replace a pay raise.  None of the ideas presented will help anyone buy more groceries or increase their charitable giving, or however our employees would like to spend more money.

Many of these articles talk about providing recognition for a job well done.  That is good advice about something we should do all the time, anytime an employee performs well we should be acknowledging it and thanking them for it.  Another idea I’ve seen is to provide employees with meaningful work.  Again, this is the type of thing that will keep employees happy and retained at all times, and is actually more important when the job market is strong and people have more options for employment.  Providing opportunities for job growth is another idea listed.  This is a great idea as most people enjoy learning new skill sets, but you may have to be prepared for an employee outgrowing your organization if you teach them new skills but don’t have a higher-level position for them to eventually move into.

Nearly every article that I’ve read about “alternatives” to pay raises lists providing a new title.  This is a dangerous game for several reasons.  It can create issues with your compensation system when it becomes difficult to match the job to the market data.  It can also create an issue when an employee who doesn’t understand that the title was a form of compensation and not a real promotion walks into your office with a Salary.com printout that shows how underpaid they are for their new title.  This is one of those ideas that people think of as “free” without thinking through the implications and unintended consequences.

Our employee’s costs continue to rise every day, some will argue that CPI is flat so our employees shouldn’t be having any problems keeping up, but I can guarantee you that most of your employees are seeing their cost of insurance, daycare, etc. rise.  People grow and learn every day when they’re on the job, so if we don’t provide regular pay increases, eventually they’ll outgrow their current salary and find that they can do the same job elsewhere for more pay.  There is simply nothing that we can provide other than pay increases that will address these situations.

So what do we do when the economy makes it difficult if not impossible to provide pay increases?  Be honest.  Explain the business reality to your employees.  For many businesses, especially those in the service industry, compensation is the single largest business cost, so it may become necessary to freeze pay increases to contain that cost.  There are often other things that we can do that will also help, but if the economic conditions are bad enough (like they are now), we may have to effect change on our largest business cost.  If we are truthful with our employees about this reality it can go a long way to building acceptance.  It may be unhappy acceptance, but most employees are smart enough to understand the reality of the situation.  They are also smart enough to know that providing recognition isn’t a replacement for their pay increase.  So be honest with your employees and treat them like adults, don’t try to pull a bait-and-switch with them to distract them from the fact that they aren’t getting more money.

Darcy Dees works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has been working in Compensation for over 5 years now and recently attained her Certified Compensation Professional (CCP) designation.  She spends what little free time she has hiking and reading.

Creative Commons Photo:  Money, Money, Money by borman818

Coffee's for Closers

Last night I watched the powerful scene from the movie Glengarry Glen Ross where Alec Baldwin stands up in front of a room full of real estate salesmen and tells them they’re nothing if they can’t sell.  ‘Coffee’s for closers only,’ he tells Jack Lemmon, who hasn’t been meeting his sales quotas, ‘and you’re not a closer.’  

There have been plenty of studies that show monetary rewards don’t motivate employees.  Money won’t keep someone working for a terrible boss, for example.  Nor does money inspire lasting gratitude.  But money can and does influence short-term behavior if there is a clear link between business outcomes and rewards, which makes designing compensation a very important job.

Sales incentives are a case in point.  They influence behavior because they are clearly tied to objective performance measures.  If a salesperson knows they will get $10K for every product they sell, they will try to sell as many products as they can.  If the commissions are weighted so that the salesperson receives $10K for Product A and $8K for Product B, it’s  no surprise when they try to sell more units of Product A.

Change the money, change the behavior.  It’s beautiful. 

Unfortunately, sales is one of the few areas where we objectively know who’s a closer and how much coffee they can have.  In other areas, it’s not so clear.

For comparison purposes, let’s take a look at non-sales incentive compensation.  The relationship between desired outcomes and rewards is less straightforward because you no longer have a single objective measurement like units sold.  One company might rely on manager discretion.   Another company might use a rewards matrix that takes performance, job, potential, separation risk, market data, objectives and locations into account and recommends a rewards package that is prorated by some sort of company performance factor. 

The details don’t actually matter because everyone does compensation a bit differently.  What does matter is that the further you move from a clear association between business outcome and rewards,  the more difficult your compensation plan is to understand and communicate, which in turn weakens its influence over behavior.  In fact, it can have a negative impact if people don’t see any connection between performance and rewards.

Let’s say that a marketing manager has a number of goals or key business objectives to meet, such as creating marketing data sheets, organizing events, competitive analysis, corporate messaging, lead generation, etc.  Once all of this is factored through some sort of pay for performance process, the result might look something like this:

Below Expectations = 0% increase, no bonus
Meets Expectations  = 2-3% increase and 4-5% bonus
Exceeds Expectations = 4-5% increase, 6-7% bonus

This reward model is nice but not likely to materially impact behavior because the link between outcomes and rewards is vague.  We’re basically saying that if people do all the things they’re supposed to do, their manager might give them a higher rating, which might result in a 1-3% difference in rewards.  I don’t know about you but I’m not feeling it. 

Does this mean people aren’t motivated by money?  Of course not.  But instead of saying, ‘Money doesn’t motivate people,’ it might be more accurate to say, ‘Money doesn’t motivate people if they don’t understand how to get it.’

Defining incentive compensation plans requires a holistic approach that creates a clear link between desired outcomes and compelling rewards, be they monetary or non-monetary.  Call it goals based pay if you like but the ‘Coffee is for Closers’ approach only works if everyone understands what it takes to be a closer, what kind of coffee closers get and how much they can have. 

And some people may prefer tea.

Laura Schroeder is the Product Manager for Compensation Solutions at Workday, headquartered in Pleasanton, CA.  She has more than twelve years of experience designing, developing, implementing and evangelizing Human Capital Management (HCM) solutions in the US, Asia and Europe.   Her articles and interviews on HCM topics have been published in national and European trade journals.  She currently lives in Munich, Germany and enjoys reading, writing and spending time with friends and family.  

Can't You Just Convert the Currency?

It is human nature to look for simple solutions to perplexing problems.  Simple avoids confusion, keeps you "on message" and helps create greater employee awareness and appreciation of programs and policies.  However, when you are dealing with the diversity and complexity of international compensation it is just not that easy - nor should it be.  For those seeking the simple life it can be difficult to understand and accept that each country operates in a different environment from the next.

Perhaps because of their long history of isolationist tendencies (check your History books), or perhaps it is due to a bit of Yankee arrogance, but US Managers tend to struggle with the challenge of this concept more than other players on the world stage.

For the most part US Managers do not want to hear that pay levels in Finland, or Argentina or Tunisia are different from the US.  They would rather treat everyone the same, call it globalization and consider themselves a one-world player.  Many push an agenda of blind simplicity that is in fact a misleading distortion, will also be a costly strategy to implement and its results will more than likely irritate key talent within their workforce.

Consider the senior manager who simply wants to convert a foreign national's base salary into US Dollars - based on a concern with what they call "internal equity."  The assumption is that everyone pays approximately the same for an "XYZ Manager" - only the currency differs.

In their drive for administrative ease they tend to ignore several warning flags:

• If a simple conversion was a viable approach, why are such formulae not prominently displayed by salary survey vendors?

• Employees will be skeptical of this conversion strategy, as in their minds too many local realities would be ignored in favor of what is perceived as the Company somehow saving money

• Lacking a strong correlation you will either needlessly increase your compensation costs, or under-value your employee talent and risk disengagement - or worse

While working overseas several years ago I developed a formulaic approach that explained to my COO why he could not (should not) establish internal equity between the US and the UK by simply converting GBP into USD.  I factored in a host of elements, including local taxation, competitive pay levels, incentive practices, cost of living, required social charges, benefit costs, etc. to make my case.  My point was that a simple conversion would be a distortion of the economic realities that drive pay levels in both countries.

Sad to say, but the explanation was ignored and the COO, though he acknowledged the logic of my argument, continued his preference for a simple conversion to establish relative values in his own mind.

As anticipated, this type of head-in-the-sand thinking created a host of costly pay decisions and numerous employee relations issues on both sides of the Atlantic.

To operate successfully on a global basis management needs to understand and firmly believe that each country operates as a separate and sovereign national entity, with distinct economies, taxes, competitiveness, employment laws, culture, statutory benefit requirements, etc. that make a 1:1 rewards correlation with any other country a distortion that will cause you to either over spend or under spend your reward dollars.  Either result should be avoided.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Editor's Note:  We are pleased and proud to welcome Chuck to our Cafe team of core contributors!  

Image: Creative Commons photo "Currency Signs" by nicolasnova

Cafe Welcomes Two New Regular Contributors

The Compensation Cafe is very pleased to announce that - effective this week - two new very talented bloggers have joined our team of regular contributors:  Chuck Csizmar and Laura Schroeder. 

Learn more about Chuck here and Laura here.  Chuck's debut post will run today, and Laura's tomorrow.

We are excited to add their voices, perspectives and particular areas of expertise to the caffeinated mix here at the Cafe.  Please join us in giving them a hearty welcome!

One Step Forward, Two Steps Back (Part 3)

(This is the third part of a four part blog on the state of white collar pay-for-performance in the federal government.  In Part 1 of this blog a bipartisan Congress in 2002 approved the design concepts for federal pay-for-performance at the Department of Defense (DOD), Homeland Security (DHS), and the Senior Executive Service (SES).  In Part 2 these federal entities developed pay-for-performance systems using design concepts approved by the bipartisan Congress.  This blog will review the now unsteady state of federal pay-for-performance.)

November 2008 comes along and a new President is elected.  Within days of the election, federal unions stiffened their resistance to the Department of Defense's (DOD's) National Security Personnel System (NSPS).  American Federation of Government Employees Union President John Gage said, "Our position has hardened on NSPS ... We are not just looking for a legislative fix to NSPS, but actively looking at those units to pursue some litigation strategies that we think look pretty good.  Our lawyers are looking at these groups as a vehicle ... to jump into litigation probably pretty soon on NSPS." 

Barack Obama was inaugurated on January 20, 2009.  Initially, PFP proponents were heartened by how smoothly the Agrigulture Department (USDA) got approval for their demonstration project for General Schedule pay-for-performance announced January 28, 2009.  USDA launched a five-year pay-for-performance demonstration project covering 2,900 non-bargaining-unit employees in the Food Safety Inspection Service in July 2009.  Employees in the USDA demonstration project will move from the 15-grade General Schedule system to a series of six broad bands.  Those rated "fully successful" or better during the evaluation process will receive performance-based pay increases.

Further hope for federal pay-for-performance came in the form of the first major speech by President Obama's new Director of the Office of Personnel Management John Berry on June 2009, "We're hoping to develop a performance appraisal system that gives substantial rewards to our very best workers, recognizes the good work of the vast majority of our employees, and disciplines and removes the few bad apples who have been given the chance to improve but have either failed or refuse to do so!"

But since that June 2009 speech everything seemed to stop cold on the federal pay-for-performance front.  The White House and OPM have made no new initiatives following OPM Director Berry's promising remarks.

Then in October 2009 the final nail was placed in the coffin of DOD's National Security Personnel System when the President signed the Defense Authorization Bill which repealed the NSPS.  The legislation requires the Pentagon to begin returning the 200,000 employees covered by the NSPS to their previous pay systems within six months of the law's enactment.  All affected employees must be back in their previous pay systems by January 1, 2012.

To put some sugar-coating on the retrogression to the General Schedule the law requires the Defense secretary and OPM director to work together on a new personnel system for DOD.  However, before that can occur, the DOD and the union need to come up with a transition plan to return employees back to the GS system.   

Next week we'll summarize lessons learned from the past decade of federal pay-for-performance.

Guest blogger Paul Weatherhead is a Pay Program Manager for the US Postal Service.  His primary pay program is their award winning Pay-For-Performance program, but he also is involved with other pay and benefit policy issues at the USPS.  Paul actively participates in the WorldatWork professional association as an instructor, author, speaker, reviewer, and blogger.  In his spare time he teaches human resource management courses for the University of South Carolina.  He can be reached at cpaulwd@yahoo.com

 

The State of Pay for Performance, the Future of Salary Increases

If recent research is right and prevalence is any indicator, merit pay is still riding high ... for now.  The question is, for how long?

Hewitt Associates has an outstanding presentation online from its recent webcast series (you can also replay the webcast in its entirety here) assessing the aftermath of the recession on compensation spending.

A few particularly notable facts from that presentation are worth pointing out and reflecting on here:

• Base salary increases are still the most popular approach for rewarding performance (95% of research respondents), but variable pay may be coming in close behind (70%).
• Most organizations (52%) rate themselves as only "moderately successful" in differentiating pay based on performance, 26% as "minimally successful".
• More than half (60%) are taking no action to increase pay differentiation in merit increases.
• Less than 30% are training managers on differentiating performance.

It is clear that we continue to experience only limited success in using salary increases to reward performance.  And while the recession has driven some employers to sharpen their performance differentiation teeth, it has led others to temporarily abandon all efforts in this regard.

It is for this reason that a number of experts, including Hewitt's own Ken Abosch, took a stand at last summer's WorldatWork conference and predicted that the future of paying for performance would lie with variable pay.  Given the evidence here, it is difficult to argue with that conclusion.  Unfortunately, this does not get us off the hook for base pay management ... or even merit pay. 

To the extent that ...

(a) the purchase price of talent in the market will grow (and it will)

and that

(b) the pace of that growth will be quicker for talent with critical skills and proven performance results (and it will be)

...the problem of managing our investment in base salaries will be with us - in some shape or form - for the foreseeable future.