Compensation Force

Gender Pay Gap Continues to Narrow

The pay gap between women and men narrowed further in 2005, according to the report Highlights of Women's Earnings in 2005 issued by the Labor Department's Bureau of Labor Statistics.  The report shows that median weekly earnings for women reached 81% of men's earnings, up from the 80.3% ratio in 2004 and the highest in the 26 years that the BLS has tracked such figures.

Some additional interesting findings highlighted in the report:

• Among full-time workers who were paid by the hour, the gender gap was even narrower in 2005, with women earning 85% of median earnings for men.
• The ratio of female-to-male earnings varied by state, from a low of 63% in Wyoming to a high of 90% in California.
• The gender earnings gap was much larger for middle-aged and older workers than among younger workers.
• Women have fared better than men in terms of earnings growth over the past quarter century.  For example, the inflation-adjusted earnings of women with college degrees rose 34% from 1979 to 2005, while earnings of male college graduates rose 18% over the same period.
• Among racial and ethnic groups, the female-to-male earnings gap was larger for Asian and white women (about an 80% ratio to men) than for black and Hispanic women (about an 88% ratio to men).

How Much is a College Degree Worth?

... Approximately $23,000 a year, according to new information released today by the U.S. Census Bureau, which developed the figure by calculating the average gap in earnings between adults with bachelor's degrees and those with only a high school diploma.

According to the Census Bureau, adults 18 and older with a bachelor's degree earned an average of $51,554 in 2004, while those with a high school diploma earned an average of $28,645.

CEO Aircraft Perks Gain in Prevalence and Value

In a recent review of CEO aircraft perquisites at Fortune 100 companies, Equilar reports the following:

• From 2004 to 2005, the median value of Fortune 100 chief executive aircraft perquisites increased by 21.7 percent, rising from $89,246 in 2004 to $108,579 in 2005. (The Equilar report does not that part of this increase results from a shift in the methodology used to value the cost of air travel.)
• Along with an increase in the reported value of CEO aircraft perquisites, the number of companies disclosing the personal use of corporate aircraft rose, climbing from 59.4 percent of public Fortune 100 companies in 2004 to 68.4 percent of companies in 2005.
• In addition, among companies disclosing the use of corporate aircraft by CEOs, the prevalence of companies disclosing the value of this benefit increased from 82.5 percent in 2004 to 93.8 percent in 2005.

New Website to Help Employers with Benefit Law Compliance

The U.S. Department of Labor has introduced a website, the Health Benefits Advisor, that will serve as a resource for employers in understanding and complying with various federal benefit laws including COBRA, HIPAA, the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.

Senior Managers -- More Than Immediate Supervisors -- Drive Employee Engagement

In its recently released research study WorkUSA 2006/2007: Debunking the Myths of Employee Engagement, Watson Wyatt Worldwide reports that while employee engagement does have a strong impact on an organization's financial performance, a number of myths and misconceptions are leading employers in wrong directions when it comes to building that engagement.

In particular, many companies overestimate the importance of the supervisor in driving engagement. In fact, senior leadership and the frequency with which senior managers communicate with employees are far more important drivers of engagement, according to the Watson Wyatt research.   The study also notes that senior management is receiving lower marks than in the past from employees on instilling confidence in long-term business success, making decisions in a timely manner, making changes to enhance competitiveness and grow the business, and controlling costs.

Read more here.

Board Compensation Continues to Rise

In its just released report on Directors Compensation and Board Practices in 2006 which covers director compensation in 402 companies, The Conference Board reports that median total compensation for outside (non-employee) directors of U.S. boards is higher than last year in all major industry sectors covered by the study.

According to Charles Peck, compensation specialist at The Conference Board:

Demands on board members have increased markedly in recent years, and their compensation is increasing commensurately.  In particular, committee service, especially for those serving on audit and compensation committees, has become much more demanding.

Among the study's key findings:

In manufacturing, median total compensation (which includes fees, retainers, committee pay, and all forms of stock compensation) for outside directors is now $109,000, up from $91,250 in 2005. The service sector is $106,250 this year, up from $81,875 last year. Financial services increased from $64,500 in 2005 to $83,000.

Median basic annual compensation (the mix of fees and retainers for board service plus committee pay) is up in all three industry sectors. Manufacturing increased from $59,150 to $65,000; financial services increased from $48,000 to $50,300; and services from $57,000 to $60,500.

Learn more about the study here.

Incentive Plans: Support, Not Substitute, for Good Management

It happened again this week.  I often reach a point in the incentive plan design process with an organization when I realize that "they" (typically representatives of the organization's management team) are trying hard to cram every possible performance metric into the plan.  No stone is being left unturn in an effort to address each and every desired outcome or behavior.

This is when their unstated (perhaps even unconscious) agenda starts to emerge:  To design the plan so well that it will effectively manage their people for them.  That is my signal to put the brakes on the process and take time out to remind them of what an incentive plan can and cannot, will and will not do for them. 

Incentive plans, at their most successful, are all about focus.  Well-designed and well-implemented plans can focus employees on the few key things you really need them to pay attention to and where you want them to make a positive impact.  That's their special strength.  And that is why the most effective incentive plans -- the ones that really produce positive change in an organization -- are those with only a few (no more than 3 or 4) measures.  Too many measures leads to motivational dilution.  To focus on everything, really, is to focus on nothing at all. 

So organizations that expect their incentive plans to do their performance management for them are missing the point and, ultimately, bound to be disappointed.  Incentive plans can play a powerful role in an overall strategy to improve performance -- but as a support for, rather than in lieu of, strong management.

The "Declining Bonus": A New Tactic in Recruiting M.B.A.'s

According to a recent New York Times article, some companies have turned to a new approach to attracting M.B.A.'s in an increasingly competitive recruiting environment:  offering bonuses that decline in value or disappear unless the student accepts the job by a certain date.  These "declining bonuses", offered to promising summer interns, may be as high as $45,000 and will be cut in half or withdrawn if the student does not accept the job offer by an early deadline, typically the middle of October.  Organizations offering declining bonuses include Mercer Management Consulting, Microsoft and Kraft.

On the flip side, many other organizations are staying away from the practice, criticizing the declining bonuses as stressful for the students and disruptive to the hiring practices.  At least one business school -- Harvard's -- has decided not to allow the practice, citing the belief that their students shouldn't be making employment decisions under pressure.

Learn more here.

John Kenneth Galbraith on Progress Through People

Another pithy performance management quote, this one from economist John Kenneth Galbraith:

People are the common denominator of progress.  No improvement is possible with unimproved people.

Proxy Examples Available for Compliance with New SEC Disclosure Rules

The Security and Exchange Commission's (SEC's) new rules on executive and board compensation disclosure will become effective in 2007 for companies with fiscal years ending on or before December 15, 2006.  To help companies meet the new disclosure requirements, Equilar has released its 2006 Proxy Disclosure Examples Report, which contains actual examples from recent proxy filings that comply or closely align with the new rules.

LTI Practices Beginning to Stabilize in the Wake of Sarbanes-Oxley

In its recently released 2006 Top 250 Report, a summary of long-term incentive practices for executives at the 250 largest U.S. companies,  Frederic W. Cook & Co. reports that granting practices for long-term incentives are beginning to stabilize in the wake of the adoption of Sarbanes-Oxley in 2002.

Key findings from the report include the following:

• The prevalence of LTI grant types continues to change (including a shift away from stock options towards restricted stock and performance awards), but at a slower pace than last year.
• Stock option variations (such as "reloads" or "premium" options) have largely disappeared, with "plain vanilla" options the flavor of choice.
• Median long-term incentive values for CEOs have barely budged for the last five years, with 75th percentile grants flat after several years of decline.

Learn more about the report and findings here.

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Clean Teams: An Emerging Tool for M&A Integration

I just finished an article which introduced me to the concept of using "clean teams" to support integration planning (particularly in the areas of people and people programs) for mergers and acquisitions.  It was a timely piece for me, as I am in the final stages of helping a client integrate a key acquisition and this work has really reinforced for me how important understanding, planning for and addressing the human element of these transactions is for their success.

The article I read, "The Clean Team: An Emerging Tool for M&A Success" by John Koob, published in the 3rd Quarter 2006 issue of the WorldatWork Journal (Volume 15, Number 3) has the following to say about the role and work of clean teams:

A clean team is a group of individuals -- operating under certain protocols and prior to regulatory approval or consummation of the deal -- who assemble, review and analyze sensitive, competitive and other confidential data. The team is most effective during the period between when a transaction is first being negotiated to when final documents are complete and regulation approval is achieved.  Many integration issues -- at a detailed level that neither party to the transaction can legally work -- can be assessed and planned with the team.  The team's value to merging organizations can be measured in the hundreds of millions of dollars.  HR leaders, corporate board members and executive management would do well to consider and seriously discuss the strategic advantage of this approach.

Clean teams can be instrumental in identifying and planning for the integration of compensation and benefits programs.  Waiting until after the "deal is sealed" to begin this work extends the period of uncertainty for employees, with morale and productivity suffering while people wait to find out how they will fare under the new organization.

The article also highlights a survey of dealmakers done in 2005 which points to poor integration planning and implementation as a top reason for M&A failures.

More information on clean teams can be also be found in the following resources:

• Mercer M&A eBulletin "Capturing the value of your deal with a clean team"
• "The Intelligent Clean Team:  Ensuring Value Capture in Mergers and Acquisitions", Chanmugan, Ravi, Walt Shill, David Mann, Kristin Fiecry & Bill Bursche. Journal of Business Strategy, Volume 26, Number 3, 43-49.

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Health Care Providers Facing Staffing & Retention Challenges

As the U.S. population ages, health care providers are facing the dual challenge of increasing demand for services and a shrinking pool of health professionals, according to the 2006/07 Report on Strategic Rewards and Retention Practices in the Health Care Sector just released by Watson Wyatt Worldwide. 

According to the study, more than two-thirds (69%) of the 110 health care providers surveyed report having difficulty retaining critical skill workers to a moderate or great extent (compared 50 43% across all industries).  The most difficult staffing/retention challenges reported:

• Registered Nurses (84% of respondents list as among top 3 staffing challenges)
• Pharmacists (39% of respondents list as among top 3 staffing challenges)
• Rehab Therapists (33% of respondents list as among top 3 staffing challenges)

The Watson Wyatt study also reports that the health care providers surveyed are experiencing a median 14% voluntary turnover rate, considerably higher than in industry overall.

View the executive summary of the report or obtain a copy here.

Does Performance-Based Pay Undermine Teamwork?

A fellow consultant recently posed this question in response to a client situation.  The client organization in question had a merit increase policy in place; however, in practice all employees were being given essentially the same increase.  Their rationale for this practice:  That making performance-based pay distinctions would undermine employee teamwork.  (Note that this consultant wasn't trying to force them into or out of a pay-for-performance program, only to get them to line up their rhetoric with reality.)

I don't happen to believe that performance-based pay undermines teamwork.  To begin with, we shouldn't assume that performance-based pay is necessarily and solely tied to individual performance; in fact, performance-based pay can (and should) include some type of reward for what is accomplished as a group (e.g., a group incentive plan or a group recognition plan).  (See earlier post on Rewarding Teamwork for more on this topic.) 

More importantly, I fear that there is another issue at play here.  I fear that the reluctance to make pay-based distinctions is really a reluctance by leaders to "rock the boat", to do the difficult work of identifying, communicating and responding to differences in employee performance.  Its easier to be a nice guy or gal and treat everyone the same.  But this approach has its own risks; I believe that across-the-board equal pay treatment has the potential to undermine (or at least dampen) employee initiative and motivation.

As a consultant, I have frequent opportunities to hold direct discussions with employees (sometimes in individual interviews, sometimes in a focus group setting) in a large variety of organizations.  Pay-for-performance is a theme that comes up frequently, whether I ask or not, and whether the organization espouses performance-based pay or not.  Here are the types of comments I often hear from employees in situations where everyone is given the same increase - either because that is the policy or because, like the organization whose situation prompted this post, there is an unwillingness to truly differentiate despite the pay program's officially stated intent:

"There is no reason to perform well here, because it isn't recognized or rewarded."

"Why should I work as hard as I do, when I am treated the same way as those who are just putting in their time?"

I believe that the impact over time of a pay approach that doesn't differentiate based on performance is that the higher performers either eventually adjust their outcomes (downward) so that they feel better about how they are being treated pay-wise or they go somewhere else where the extra efforts that they make are recognized and rewarded.

And what you are left with is ... teamwork??

I would welcome the comments and thoughts of others on this question.

Pet Insurance Finds a Place in the Employee Benefit Package

According to a recent article in the Minneapolis News-Press, an estimated 1,300 companies, including Chipotle, Viacom and Ford Motor Company, offer pet insurance to their employees.  This may be a trend with legs, as the article also mentions a recent poll in which nearly 90% of pet owners report taking sick days from work to care for their pets.

Read more here.

WorldatWork Survey Confirms Benefits as #1 Differentiator

Yet another piece of research has emerged confirming that benefits have moved into the #1 spot in attracting and retaining talent.

In its most recent QuickQuestion survey, WorldatWork posed the question "Which of the five total rewards elements do you believe is your biggest differentiator as an employer" to 386 member employers.  Their responses:

• Benefits 32.1%
• Work-Life 22.5%
• Development & Career Opportunities 18.1%
• Compensation 17.4%
• Performance & Recognition 9.8%

My experience in working with my clients would confirm these results, that employee benefits are now a critical element in differentiating an organization as an employer of choice, and work-life offerings are playing an increasingly important role in that equation as well. 

Once you get that talent in place, however, it is the final two elements (compensation and performance/recognition) which give you the tools for aligning their efforts with organizational strategy and objectives, and reinforcing the initiatives that will make the organization successful.

Sales Compensation Practices of High Performing Companies

A new survey by Watson Wyatt Worldwide examines compensation and other factors that impact sales force effectiveness.  Survey results, based on the responses of 841 sales professionals at 500 companies with large sales forces, address the practices of high performing companies versus low performing companies, with the distinguishing criteria being superior sales growth and financial performance.

Key findings relative to sales compensation:

• High performing companies provide their sales forces with a mix of compensation more heavily weighted toward variable pay (or, in other words, more "at risk" based on performance) than their low performing peers.  Salespeople at high performing companies receive an average of 38% of their total compensation in variable form (incentive, commission or bonus) versus an average of 27% in variable pay at low performing companies.
• Twice as many sales professionals at high performing companies receive stock, stock options and other forms of equity pay as sales professionals at low performing companies (36% versus 18%).

Beyond compensation, the survey results also note distinguishing practices (between high and low performing companies) in the areas of sales force time allocation, attitudes and beliefs.

Learn more about the Watson Wyatt survey here.

Driving and Rewarding Innovation

In Viral Innovation an article featured this month in Fast Company, author Chris Trimble talks about incentives to spur innovation in an organization and proposes a very simple design principle to make it happen.  His suggestion, which he illustrates with the story of Chet, a successful senior executive at an unnamed restaurant chain, is this:  Reward actions one level up from the point of greatest individual control.

The problem, in Chet's eyes, isn't the need to create new innovations as much as it is the need to spread around the good ones that are already being invented and used in individual locations or business units.  So, rather than measuring and rewarding performance at the individual  or organization-wide level, Chet (and Chris) make the case that creating incentives at an intermediate level (in the case of Chet's organization, at the district or multi-district level) will not only drive innovation locally but motivate employees to help spread those locally developed innovations to their sister units.  The result:  Viral innovation!

Read more about Chet's story here.

Gender Pay Gap for Executives Appears to Narrow, At Least Among Nonprofits

For the fifth year in a row, female chief executives of nonprofit organizations earned less than their male counterparts, but the gap appears to be narrowing according to the 2006 Nonprofit Compensation Report just issued by Guidestar. 

The median compensation of a male chief executive in 2005 was 25.6% higher than the pay for females in similar positions; however, that difference is notably less than it was in 2000 when the pay gap was 45.7%.

Guidestar hypothesizes that part of the pay difference can be attributed to the fact that female executives appear to be more typically found at smaller organizations (women account for 57% of the top executives at organizations with budgets of $1 million or less, but only 36% at larger organizations).  It is true that compensation for executives (and this holds for the for-profit world as well) does tend to be closely linked to organization size and scope. 

Learn more about the Guidestar survey here.

Continued Rises in Health Care Costs Put Pressure on Employers, But Some Are Making Headway

Health care costs for U.S. Employers are projected to rise by 6% in 2007 (an average increase of $518 per employee, to an average total cost per employee of $8,748) according to the 2007 Health Care Costs Survey recently completed by Towers Perrin.  That cost increase, a full two-thirds higher than the Consumer Price Index (CPI) will exacerbate the pressure already felt by employers to maintain adequate and affordable health care coverage for their employees.  And this at a time, as reported here in earlier posts (The Second Most Successful Reward Strategy and Recruiting Challenges Lead to Benefits Improvements), when employers report that their benefits offerings are playing an increasingly important role in attracting and retaining talent.

The Towers Perrin study does note that some employers are making inroads (and gaining competitive advantage) by more actively managing their health programs and the associated costs.  Learn more here.

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Elvis Presley on Values

The King dispensing organizational wisdom?  Not exactly, but I think his words -- noted below -- are worth considering in that context.

Values are like fingerprints.  Nobody's are the same, but you leave' em all over everything you do.

The essential truth in this statement holds for organizations as much as, and in a similar way to, individuals.  Your organization may or may not take the step of formally acknowledging, articulating, documenting or reinforcing its values -- but those values exist nonetheless, and they manifest themselves in all aspects of operations.