Compensation Force

Data on Employer Costs for Total Compensation Elements

A news release issued by the U.S. Department of Labor Bureau of Labor Statistics provides some helpful data on employer costs for total employee compensation, including the average costs for different benefit elements.

A summary of the data-

Average employer costs for total employee compensation was $27.54 per hour worked in December 2006.  Of this hourly figure:

• Wages and salaries averaged $19.24 per hour (69.9% of total compensation costs), while
• Benefits averaged $8.30 per hour (30.1% of total compensation costs)

Within the $8.30 per hour cost of benefits:

• Insurance benefits (life, health & disability) averaged $2.26 per hour (8.2% of total compensation costs)
• Legally required benefits (including Social Security, Medicare, unemployment insurance and workers' compensation) averaged $2.20 per hour (8.0% of total compensation costs)
• Paid leave benefits (vacations, holidays, sick leave, and other leave) averaged $1.94 per hour (7.0% of total compensation costs)
• Retirement and saving benefits averaged $1.21 per hour (4.4% of total compensation costs)

The release contains a great deal of detail by occupational group, industry, bargaining unit status, etc.

New Disclosure of Perks Prompting Disappearing Acts

In the wake of the new SEC disclosure rules which have thrust executive reward practices into the spotlight, a movement away from the use of executive perquisites has emerged in early proxy filings.  In its March 2007 Newsletter, Equilar, Inc. offers an early glimpse of companies whose proxies disclose the elimination of all or some parts of their executive perk packages.

And no wonder.  In a related article CEO Perks See the Light of Day in World Magazine, AP Business Writer Rachel Beck gives special mention to practices deserving of what she dubs The 'Shareholders Paid for What?' Award, including:

• Coca-Cola Enterprises Inc. paid out $50,000 to cover the legal costs that its top executive incurred in negotiating his employment agreement with the company.
• Anheuser-Busch Cos. Inc. Chief Executive got an allowance that paid for beer for personal use and entertaining.
• UST Inc., the holding company for International Wine & Spirits gave its CEO an annual wine allowance.

Beck also suggests a Road Less Traveled Award for Berkshire Hathaway, for its clear-cut explanations of executive pay for CEO Warren Buffett and others.

"Best Place to Work" vs. "Best High-Performance Place to Work"

I just finished reading High Performance Pay by Patricia Zingheim and Jay Schuster.  While the book covers a lot of good ground about connecting pay to performance, what particularly resonated for me was a section in their final chapter about some of the better known "best place to work" designations.  They challenge the notion that the best employers are those which push family-friendly initiatives (while often working diligently in the background to pass health care and retirement costs on to employees). 

The authors say:

The most startling missing element from best places to work initiatives is that they are silent on issues such as creating a workplace where skill and competency growth is meaningfully rewarded.  Probably most important is a lack of recognition for organizations that are successful in really and meaningfully creating a workplace where performance excellence is transparently and consistently rewarded and encouraged.

And,

What comes first -- the performance or the programs?  Indeed, the usual route to trying to become a preferred workplace is to first be a successful enterprise and then or concurrently implement what leadership believes is an employee-positive work environment.  Few poor-performing organizations report that they obtained top performance from employees or attracted people of great value by a turnaround strategy driven by sabbatical leaves for employees.

The intent here is not to build a case against being a best place to work, but rather to ask some questions about what that goal entails, and whether it takes organizations in a direction that ultimately supports employee and employer success.

A client company of mine, whose management team I greatly admire, does not offer sabbaticals or massages or gourmet food on site, but they treat their employees with honesty and integrity and work very hard to tie rewards to performance (and it is a challenge for them, like it is for everyone).  As they are able to make incremental improvements to their compensation and benefits programs - even so simple a thing as adjusting salary ranges upward - they are careful to communicate that it is the hard work and results produced by employees that have enabled these changes and new offerings.  They make it clear that the continued availability of these improvements, and any additional ones made available in the future, are dependent on the ongoing efforts of all staff to help the company meet its mission.

I have to believe that this is the kind of partnership, employees and employer working together and sharing the benefits of their combined success, that Zingheim and Schuster had in mind when they coined the term "best high-performance place to work".      

Reward Lessons from the Fast Food Trenches

Jerry Newman, author of Compensation and My Secret Life on the McJob: Lessons from Behind the Counter Guaranteed to Supersize Any Management Style, conducted his study of rewards in the fast food industry by working undercover for seven fast food establishments in three states during a 14-month period. In a two part article for WorldatWork's workspan magazine, he shares some of the lessons gleaned from this experience, not the least of which is how to reward workers when pay dollars simply aren't available. As Newman puts it: "In a world where 25 cents is a big pay increase, obviously money can't be the central motivator" and fast food managers don't have the luxury of substituting financial incentives for good leadership.  A few of his insights are excerpted below:

Informal Recognition

My best managers all used role models for recognition.  Atith (not his real name) was a Cambodian with halting English.  But he was very meticulous in his mopping.  All new crew members learned about mopping from Atith.  And the manager made great ceremony of announcing how good Atith was, and that we would be learning from the best. A manager at Krystal used the same tool, telling me to watch Marge put burgers on the grill and flip them over.  "She is the best in the store," he said loudly and proudly announced.  It costs nothing and reaps huge jumps in self-esteem to reinforce good work in this way.

Social

There is growing evidence that people who get up in the morning and look forward to work do so because they like the people they work with.  No great surprise, right?  But good leaders don't leave this to chance.  My best managers spent an hour interviewing me.  My worst spent five minutes or less.  In one job I had no interview.  I was hired sight unseen.  What did these good managers spend time on?  They wanted to know what mattered to me and how I approached what did and did not matter.  When I asked my best managers if my interview was typical, universally they said yes.  Find people who fit.  Creat opportunities for fun and growth in friendships.  Social networks are the glue that ties workers to their jobs in a positive way.

Hours of Work

Fast food allocates hours of work as a reward.  Do a better job and you get more hours, if desired.  On a broader scale, some of the best managers I've seen understand that sometimes hours of work need to be flexible.  Even in environments where flexibility isn't the norm, good managers make exceptions for good employees.  Favoritism, you cary.  Yup, say the good managers.  Work hard and you too can become a favorite.

The Most Common Sales Compensation Plan Measures

In late 2006, WorldatWork conducted its second sales compensation survey, featuring the practices of 440 member organizations (the first survey was conducted in late 2004).  One set of findings from the survey is the most common sales compensation plan measures for different sales roles. 

Outlined below are the top five most popular compensation plan measures for four different sales jobs, including primary as well as secondary sales roles.

Primary Sales Jobs

New Account Seller

• Total revenue (33%)
• New revenue (27%)
• Key sales objectives or milestones (19%)
• New accounts (18%)
• Gross profit (17%)

Existing Accounts Seller

• Total revenue (47%)
• Gross profit (24%)
• Key sales objectives or milestones (20%)
• New revenue (18%)
• Select product sales (tied for #5 - 15%)
• Retained accounts (tied for #5 - 15%)

Blended New & Existing Accounts Seller

• Total revenue (54%)
• New revenue (27%)
• Gross profit (26%)
• Key sales objectives or milestones (25%)
• Select product sales (tied for #5 - 17%)
• New accounts (tied for #5 - 17%)

Secondary Sales Jobs   (e.g. inbound sales representatives, technical/sales support representatives)

• Total revenue (31%)
• Gross profit (16%)
• Key sales objectives or milestones (13%)
• Customer satisfaction (10%)
• New revenue (tied for #5 - 7%)
• Price realization (tied for #5 - 7%)
• Units sold (tied for #5 - 7%)

Various recruitment advertising methods include podcasting jobs.

More on Management: What Employees Want

Earlier this week, I featured a post on the important role that management plays in employee engagement and productivity.  As a follow-up, I thought it would also be interesting to look at what employees say they want from their managers.

Lore Institute recently surveyed 500 employees from all types of organizations and industries to learn about just that.  Their findings, as covered in the April issue of WorldatWork's April workspan magazine are highlighted below.

What Employees Want

• 91.5% want honesty and integrity from their manager.
• 89.2% want their manager to be fair and to hold everyone accountable to the same standards.
• 86.7% want to trust - and be trusted by - their manager.
• 84.7% want to respect - and be respected by - their manager.
• 81.2% want to be able to count on their manager.
• 77.4% want to be a part of their manager's team and be asked to contribute ideas and solutions.
• 76.2% want their manager to be a genuine person.
• 74.4% want their manager to appreciate them for who they are and what they do.
• 73.9% want their manager to listen, understand and respond.

What Employees Don't Want

• Only 2.9% want their manager to be a friend or companion.
• Not even 25% want their manager to care for them.
• Only 25.4% want emotional support from their manager.
• Not even 30% want a cheerful or happy manager.
• Less than 30% want their manager to be fun-loving or good-humored.

Do Perks Serve a Business Purpose?

An article, "Perk Place: The Benefits Offered by Google May Be Grand, But They're All Business" in this month's Knowledge@Wharton newsletter discusses Google's highly publicized array of employee perks and benefits.  These include, but are not limited to:

• Free gourmet food
• Fitness center & spa
• Personal trainer
• In-house doctor
• Nutritionist
• Dry cleaning service
• Massage service
• Wi-fi equipped shuttle bus for commuters

Is this generous array of offerings provided purely for altruistic reasons?  Of course not.  The article details the business purpose served by the perks package:

The company wants to achieve several goals:  Attract the best knowledge workers it can from the intensely competitive environment for high achievers; help them work long hours by feeding them gourmet meals on-site and handling other time-consuming personal chores; show that they are valued; and have them remain Googlers, as employees are known, for many years.

Stephen Gross, global leader of rewards consulting at Mercer sees this as the way in which Google is establishing its "employment brand".   Peter Cappelli, management professor and director for the Center for Human Resources at Wharton has a simpler take:  "These benefits help companies recruit people who are willing to spend most all of their time at work."

Want Engaged & Productive Employees? Try Managing Them!

Charles Green of the Trusted Advisor blog has a great post today which examines research that Gallup has done on employee engagement and the correlation between intrinsic motivation and profitable performance.

Gallup research results show the crucial role that supervisors play in worker well-being and engagement, particularly those supervisors who focus on employee strengths and positive characteristics.  In view of these insights, Green points out the fallacy of the often accepted business wisdom that people are primarily motivated by extrinsic rewards.

I have to agree.  Organizational interest in extrinsic rewards, particularly in incentives, seems to be at an all-time high today.  What's behind this?

Part of the answer, I believe, is what Bruce Tulgan (author of It's OK to Be the Boss), whose video appears in a recent post on the Brazen Careerist blog, calls "The Undermanagement Epidemic".  He talks about the trend to "hands-off management", which has taken us to a point where supervisory and management skills are undervalued and underdemanded, where supervisors and managers are treated and appraised more like individual contributors than leaders of people.  And we are racing to fill the performance gap that results from undermanaging with incentives, in the hopes that a well-designed reward plan will free us from the need to provide active and positive supervision to workers.

It all brings us back to a basic truth: there is no substitute for good management.  Extrinsic rewards have their place, and incentives -- I believe -- can play a powerful role, but only as a supporting player to, not in lieu of, strong management.

Has More Become Less? An Initial Look at New Executive Compensation Disclosures

Based on an initial review of a first set of proxies reflecting the new SEC executive compensation disclosure requirements, DolmatConnel & Partners, a compensation consulting firm, has published an analysis (here to download the detailed study) which notes that the new disclosures are lengthier than anticipated, but missing the information critical to a clear understanding of the company's overall executive compensation program.

Findings highlighted by DolmatConnel include:

• The median length of the Compensation Discussion and Analysis (CD&A) was 4,726 words, nearly five times longer than many original estimates.
• Only approximately one-third (36%) of companies chose to include exact financial performance targets (for short-term incentives) in their CD&A. The remaining firms did not disclosure specific targets, presumably because these firms believe such disclosure would cause competitive harm.
• There was a great lack of information and detail disclosed about the method of valuing equity paid upon termination or Change-in-Control, a component of executive pay currently under significant scrutiny, making comparisons between companies impossible. Have the new disclosures met the SEC's intended goals? Are they easier to understand than the old disclosures? Have more disclosure requirements become less helpful and more confusing to investors? The answers are varied and our conclusion is that the new rules have made a very positive step forward in some areas, and a serious step backwards in others.
• The new disclosures contain a much greater degree of detail than historically seen. Information on peer group companies, performance targets, bonus targets, non-qualified deferred compensation, and "other compensation" is available for the first time, and this adds significantly to providing a complete picture of compensation and enhances the ability to analyze the link between executive pay and firm performance.
• The "last-minute" revision to equity valuation rules (disclosing the FAS123R expense in the Summary Compensation Table instead of the previously disclosed initial grant value) obscures how most professionals in the field look at compensation for a given year. It is now aligned with accounting expense, but that is not how investors, executives, Board members and compensation consultants look at executive compensation. While this change was called a "win" for business by the media, our analysis found that this change only resulted in lower reported values 50% of the time (values are actually higher the other 50% of the time).
• The fact that a bonus, as we all know it, is no longer a bonus, but was changed to a non-equity incentive award, buried amongst the long-term incentive data in the Summary Compensation Table, was ill advised. Salary and bonus are always thought of together, and this change creates serious confusion for the average investor.

Leave Donation Programs Gaining in Popularity

Leave donation programs, benefit programs that allow employees to donate unused leave to co-workers in need (such as those needing time to care for an ill child or parent), are growing in popularity, as reported by a recent McClatchy news article. 

The prevalence of the programs was spurred on by Hurricane Katrina, when employees at national organizations sought ways to help their co-workers in areas affected by the hurricane.  Other programs have been around for a long time, including that of Jewelers Mutual Insurance Company in Neenah, Wisconsin, who has had a leave donation program in place for a decade.  Among the major employers with leave donation programs are American Airlines, Marriott Corporation, Kaiser Permanente, UnitedHealth Group, Charles Schwab and the U.S. government. 

Employers tout these programs as great recruitment and retention tools.  Carol Sladek, a principal at Hewitt Associates who was quoted in the McClatchey article, sees these programs as one more way -- and a cost-effective one at that -- to help employees with their work life balance:

Well-designed programs cost employers nothing or save a little money.  That's because donated leave programs usually stipulate that only time is given -- not hourly wages -- and the pay grades of donors tend to be higher than the pay grades of beneficiaries.

The article also provides tips for starting a leave sharing program.

A client of mine, a large health care institution, has had a leave sharing program for some time.  Based on discussions with their employees, I know that the program is seen as a reinforcement of the organization's culture of caring for its workers, and a very positive way to express its mission, which is rooted in Judeo-Christian values.

Why Job Evaluation Won't Go Away

Job evaluation continues to be an important topic in compensation, long after many compensation experts decided to ignore its existence to pursue more exciting and "hot" topics like incentive pay.  The truth is, however, that job evaluation exists, formally or informally, in every organization that pays employees wages or salaries.  Since beginning an informal series of posts on job evaluation here, I have noticed that these are some of the most widely viewed on the blog - further evidence that the topic remains relevant and of interest.  Or, as another (Dan Purushotham, Ph.D., on the WorldatWork website) has put it so well-

As long as there is work to do, there will be a need to establish the worth of work.  And as long as human beings do this work, there will be a need to establish the relative worth of this work.            

Performance Accountability a Must at Nonprofits

A terrific post Dear Executive Director, Please Fire Your Staff on the GiveWell blog begins with this inarguable truth: "It is important that everyone involved in a nonprofit's mission be accountable."  The author further states, based on his experience, regarding the most striking difference between the nonprofit organizations and the for-profit sector, that "nonprofits are much worse at doing internal evaluation of personnel, and most of the time it barely happens at all."

Why should this be true?

While there are many exceptions to every rule -- I do know nonprofits that are working hard to effectively manage employee performance and I also know of for-profit businesses that do a crappy job of this -- I believe there is also a kernel of truth here.  Performance management, which has at its heart the act of holding people accountable for producing good work results, is something with which many nonprofits struggle.  Some feel the process runs at odds with their mission, culture and values, while others balk at the necessity of having to act "like a business".  Many nonprofits understand the importance of performance management at the Board and leadership level, but encounter difficulty in implementing and sustaining these practices throughout the organization. 

The simple truth is that nonprofits must be accountable for using their resources well and wisely.  They owe it to the clients they serve, and they owe it to their funders (whether they be the public at large or private donors) to do so.  And this means proactively and assertively managing the performance of what is likely their largest and most costly asset:  their employees.   

Average Salaries for New MBAs Top $92,000

Salaries and signing bonuses for newly minted MBAs were the highest last year since the data have been tracked, according to research from the Graduate Management Admission Council in McLean, Virginia (see press release here).  The average starting salary was $92,360, up 4.2% from the 2005 average of $88,625.  Two thirds of job offers to MBAs in 2006 were accompanied by signing bonuses that averaged $17,603.

The survey includes responses from over 6,000 students at 147 business schools worldwide.

"Real" Pay Increases in U.S. to Lag China, India & Eastern Europe

New research from Hay Group shows that "real" pay increases (pay increases adjusted for inflation) for U.S. workers will substantially lag those in China, India and Eastern Europe in 2007.  According to Hay, U.S. administrative, professional and senior management employees are predicted to see real increases of just 1.4% versus increases approaching 8% in high growth economies.

Some details by region are presented below.  Additional information can be found in the press release, which also provides a link to the Hay 2007 Global Pay Day Analysis Tables (although the link did not appear to be functional today).

China and India

"The wealth created by rapid, focused development is resulting in a pay boom for Chinese and Indian workers, who will enjoy some of the largest real pay increases worldwide in 2007," says Hern Yin Goh, Director of Hay Group Reward Information Services in Shanghai.

Predicted real pay increases for China-

• Administrative workers - 7.9%
• Professionals - 7.8%
• Senior management - 8.9%

Predicted real pay increases for India-

• Administrative workers - 5.9%
• Professionals - 5.9%
• Senior management - 6.9%

Eastern Europe

"Growing pay packets in Eastern Europe reflect continued economic development in the region," said Scott Marlowe, General Manager, Hay Group Czech Republic.  "While wages are growing from a much lower level for manual and administrative workers, pay levels for managers are closer to Western standards.  The lower cost of living in the East means that as the management pay gap closes, senior managers in Eastern Europe enjoy a significantly greater purchasing power than those in the West."

Predicted real pay increases for Bulgaria-

• Administrative workers - 4.3%
• Senior management - 7.8%

Predicted real pay increases for Slovakia and Lithuania, overall, average 5.5% or better

Predicted real pay increases for Rumania, overall, average 3.1%

Cost of Benefits Now 44% of Payroll

According to the U.S. Chamber of Commerce's 2006 Employee Benefits Study of nearly 400 U.S. organizations, employee benefit costs continue to swell and now account for 44% of payroll expenses.  The survey, which has been conducted annually for more than 40 years, is based on actual 2005 benefit expenditures.

Some additional details from the survey:

• Medically related expenses cost employers $5,924 per employee, or 14.5% of payroll, up from 11.9% cited in last year's Study.
• Payments for time not worked, such as paid holidays and paid time off, increased by 0.6% to 11.1% of payroll expenditures.
• Retirement expenditures increased slightly to 8.6% of payroll, or $3,612 per employee annually.
• Nonprofit firms spent on average 34.8% of total payroll on benefits, considerably less than their for-profit counterparts.

The road to your job search leads to Job Central.

More on Transparency in Pay: Why "Secret Salaries" are a Bad Idea!

In follow-up to yesterday's post on transparency in rewards, here is a great link - courtesy of Paul Hebert of Incentive Intelligence - to a post titled "Why secret salaries are a baaaaaad idea" on the Chief Happiness Officer blog by Alexander Kjerulf.  He presents three major reasons why secret salaries are "silly" ...

1. It frustrates employees because any unfairness (real or perceived) can't be addressed directly.
2. They're not secret anyway.  People talk, you know.
3. It perpetuates unfair salaries, which is bad for people and bad for organizations.

... examining each of these in more detail, then presents his case for open salaries.  A very worthwhile read, especially the 96 comments that his post generates!

Should CEOs of Struggling Companies Volunteer for Pay Cuts?

An article "After Rejecting Pay, Some CEOs Find Less Can Be More" by George Anders in today's Wall Street Journal delves into this question and asks whether it represents "a publicity stunt or an act of bravery".  The cases of the particular CEOs described in the article suggest it could be either.

The author begins with the story of Steve Appleton, the CEO of Micron, a Boise, Idaho semiconductor company.  When Micron was hit by an industry downturn and had to make major layoffs in 2001, Mr. Appleton announced that his salary of $800,000 would be dropped to zero until such time as Micron returned to profitability.  As the author tells it:

Over the next two years, Micron posted more than $1 billion in losses.  Mr. Appleton and his lieutenants were working on a turnaround plan that involved diversifying into a new line of chips.  Progress was fitful, as new gains were undercut by continuing red ink from Micron's traditional product line of DRAM chips.

Mr. Appleton went for more than two years without a salary.  He got new stock options, but with Micron's stock sagging, they had no immediate value.  Most of his personal wealth was tied up in Micron stock, and he didn't want to liquidate any.  So he started raising cash the only way he could:  He sold his vacation home.  He sold several small planes he had bought for recreational flying.  And he told family members to cut back on credit card use.

In December 2003, Micron returned to profitability, and Mr. Appleton begain drawing a salary again.  Since then, Micron has been in the black.  Its stock currently trades at about $11 a share, up from a low of about $7 in early 2003.  Mr. Appleton says the struggle to get Micron and his own income back on track made him a better boss.  'I was deeply motivated, and people knew it,' he recalls.  'We needed to get a new product developed, and there was a lot of resistace.  This way, we made change happen at a faster pace.'

The author contrasts Mr. Appleton's story with that of the former CEO of American Airlines.

Don Carty, former CEO of American Airlines, won acclaim for going without pay in late 2001.  It was part of a bailout of the airline industry.  Things soured in early 2003, when financially strapped American negotiated more than $1 billion in pay, benefit and job cuts with its unions.  The package unraveled when the company disclosed that it had contributed $41 million to pension plans for top executives, including Mr. Carty.  He was criticized for the pension deal and resigned soon afterward.

The answer to this post's title, by the way, appears to be "yes".  Wall Street Journal Online readers had the opportunity to vote in response to the question "When a company is struggling, should the CEO take a pay cut?"  As of mid-afternoon, when I am posting this, out of the more than 2,200 readers who voted, 91% said "YES" and only 9% said "NO"!

Transparency in Reward Practices

Jeff Prouty, Chairman and Founder of the Prouty Project, a Minneapolis based consulting firm which serves clients in the areas of strategic planning and organizational performance, recently published a column in our local Business Journal about the importance of a transparent office culture to an organization's productivity and bottom line ("Boost Productivity, Bottom Line with Transparent Office Culture"). 

I've had opportunity to work with Jeff and his team, both as a client and as a member of the Prouty Partners, a group of independent consultants who contribute specialized expertise to Prouty client projects.  As a result, I have seen first hand the benefits of Jeff's absolute commitment to transparency.  His thoughts on this topic are worth noting.

The article discusses a number of suggested tactics for creating a more transparent culture; here are a few that relate more directly to rewards and performance:

Everyone sees complete financial statements.  No one within an organization should be kept in the dark in regards to how the business is performing.  Share the complete financial statements with all employees.  Allow everyone to read from the 'same hymnal' and weigh in with their individual perspectives.  While it doesn't make resource allocation discussions any easier, it helps make conversations more meaningful and productive.  <Note from Ann:  Many private organizations struggle with the decision to make financial information public.  Holding this information close, though, creates an environment where it is very difficult to engage people in improving the business.  Transparency is particularly key for the success of incentive compensation - or any kind of 'pay for performance' effort.>    

Everyone knows what everyone makes.  So much time is wasted with employees guessing or worrying about what someone else makes.  Cut through all that wasted time and speculation by publishing a document once a year that shows everyone's salary.  As Mikhail Gorbachev said, 'If the economics are right, the politics and peace will take care of themselves.'  <Note from Ann: This is a bit radical, but Jeff absolutely walks his talk in this regard.  It takes courage for business leaders to expose their compensation decisions to the harsh light of day in this fashion, but it does force honest and forthright discussion of why people are paid as they are.>

Everyone weighs in on everyone's performance.  Once a year have everyone evaluate each other's performance.  It's a simple 360-feedback tool that focuses on qualitative comments rather than quantitative data.  Compile everyone's comments and spend a day as a team or department reviewing the feedback.  This discussion is intended to be helpful and developmental, with an opportunity to clarify any questions and confusion.

I've seen teams take an entire day and the end result is that each individual creates three commitments from the feedback that they intend to live over the next year.  They frame these commitments and put them on their desk as a daily reminder. <Note from Ann:  This is a different multi-rater feedback approach than those highly quantitative and automated systems which many organizations use, but this more direct and personal approach ensures that the feedback is truly understood and absorbed in the context it was shared, and that there is a concrete commitment to put the feedback into action.>

Provide incentive compensation.  Make everyone on the team eligible for an annual bonus on top of base salary.  Fifty percent of that bonus is tied to team results and the other 50 percent is tied to individual results.  This helps foster teamwork and personal accountability.  Again, everyone sees everything: team goals, individual goals, and the bonus payouts.  No surprises.  <Note from Ann:  As Jeff points out, an incentive payment that comes as a surprise - in a good or bad way - is not an incentive payment that will have a positive impact on employee behavior and effort.  Transparency is critical to achieving ROI on an incentive/bonus program.>

 

Compensation Lessons from Major League Baseball

The March 2007 issue of WorldatWork's workspan magazine featured an intriguing article "Compensation Lessons from the Dugout" by authors Todd Manas and Josh Wilson of Watson Wyatt Worldwide, which sifts through the compensation practices of major league baseball teams to find some valuable lessons that any business can appreciate and apply.

After sharing a fact that won't surprise many people, that there is virtually no correlation between pay and performance in major league baseball, the authors proceed with an analysis that divides teams into four categories, the most favored of which are the "Underpaid Overachievers".  These are the baseball organizations that have produced the best results for the least cost.  The authors share some interesting anecdotes with respect to the teams that do and don't fall into this category:

Consider that the Detroit Tigers eliminated the New York Yankees in the first round of the 2006 playoffs, yet the Tiger's payroll was $116 million below the Yankees.  In 2005, the Chicago White Sox won the championship and their payroll was barely in the top half of the league.  And then there are the Florida Marlins.  They won the World Series in 2003 with the sixth lowest payroll in the Major Leagues that year.

How do these teams achieve such success while keeping their compensation costs low?  The authors highlight several key lessons that can be gleaned by looking closely at these "Underpaid Overachievers":

• They recruit thoughtfully and successfully.  In the words of legendary Olympic hockey coach Herb Brooks:  "I don't want the best players.  I want the right players."
• They work to create and keep a sense of team.  As the authors note, three of the recent world champions - the Marlins, White Sox and Cardinals - credit teamwork and "chemistry" as the reason for their success.
• They focus on how pay is delivered, not how much is given.  The "Underpaid Overachievers" understand the inefficiency of delivering too much fixed compensation, and consider all the potential elements of rewards that can help them attract and retain key players.  The authors use the example of the Houston Astros, who managed to persuade Roger Clements to return to baseball after he retired from the New York Yankees at 41 to spend more time with his family.  The Astros offered him the chance to play for his hometown team, and to limit his travel.  The result:  the team landed a Hall of Fame player who carried them to their first World Series appearance.

  Kudos to the authors for finding valuable reward lessons in an unexpected place!

House Ties Minimum Wage to Iraq War Spending

The latest on the Congressional minimum wage logjam; U.S. House of Representatives leaders have tied legislation raising the minimum wage to an emergency Iraq war spending bill, which reportedly includes a timetable for a 2008 troop pullout.  For more information, see UPI news release here.

Many HR Professionals Against Raising Minimum Wage

A new survey by Humetrics, a research division of Deploy Solutions, polled Human Resource professionals about the proposed Federal minimum wage increase to $7.25 per hour.  Study results reveal some of the potential ramifications (including a ripple effect across many pay levels) of the mandated wage increase and find that, when asked, 47% of the HR professionals polled are against raising the minimum wage while 31% are for it  (see press release here for more).  Respondents were primarily in the retail, restaurant, transportation and health care industries - those most likely to be impacted by an increase in the minimum wage.

Mel Kleiman, President of Humetrics, has this to say about study results:

Our survey findings reveal many hidden ramifications.  For instance, how will this higher wage impact inflation?  How will it affect jobs at the higher hourly levels, or at the professional level?  It appears that raising the minimum wage will push other salaries higher - companies will have to pay more for everyone they hire, not just the starting hourly staff.  We may be underestimating the ripple effect.

When asked how their organizations would absorb the increase in costs associated with the minimum wage increase, over 62% of respondents said they would raise prices, 42% said they would reduce labor hours, and only 27% felt that the organization would take the hit to the bottom line.  About 18% indicated that they would change their mix of part-time and full-time employees to compensate for the increased costs.

When is Job Content Based (e.g. Point Factor) Job Evaluation Appropriate?

Last week I published a post on market, or external-based, versus job content, or internal-based, job evaluation approaches (like a point factor system).  This included a discussion of why most organizations (outside the public sector) choose to go with a primarily market-based approach to determine the relative worth and pay opportunities for their jobs.

As promised, this follow-up post addresses some of the reasons why an organization might choose to swim against the tide and go with a job evaluation approach that is primarily job content focused.  I have had opportunity to work with a number of organizations that have made this choice; here are some of the reasons they believe an internal-based method is the right fit for them.

1. The organization feels there is insufficient valid external market information to construct and maintain a market based program.  In some cases, this is the result of being in a somewhat unique business - or developing a unique business model to serve their customers - and subsequently finding themselves with a lot of jobs that don't have counterparts anywhere else.  One case in point here, a large nonprofit agency I once worked with was probably ten times larger than the next largest organization in its industry.  That fact, along with its choice to pursue a number of highly specialized services for its clientele, meant that this organization had jobs that didn't seem to exist anywhere else.  As a result, the organization chose to benchmark the few jobs they could with external market pay data, and then rely on a point factor evaluation system to address the value of all other jobs.
2. The organization, typically because it is geographically isolated, has trouble identifying a relevant competitive labor market - often it is the only employer in the area.  Because of this, employees tend to stay with the business for a longer period of time than might be the case in a more active local labor market (which, of course, can be good and bad, but that is for another post ...).  While some attention is paid to tracking general market pay levels (particularly for entry level types of jobs), the organization believes that its best best is to use a job content based job evaluation method to set pay opportunities which reflect the business' own unique internal job relationships and career paths.
3. This reason is one I personally struggle to appreciate and justify, but I share it since I have heard it from more than one employer.  The organization finds tremendous value (usually in terms of organizational acceptance and buy-in) from the use of a cross-functional job evaluation committee.  This committee, typically comprised of managers representing the different major functional areas of the organization, meets on a regular basis to evaluate new and changed jobs.  Members may rotate on and off the committe in a regular, prescribed fashion, or it may be a longer-term appointment.  While the organization may strive to track and incorporate market pay practices into this process, the primary determinant of job value is the consensus of this internal group, using a job content based method to determine where a job best fits in the pay structure and hierarchy.  (My struggle with this isn't in the participation aspect; I get the value of that.  Rather, I am challenged to justify the time and resources - simple man hours - that a job evaluation committee must expend to get this work done in today's fluid and fast changing world.  I don't see the ROI.)

Are there other sound reasons to use an internal-based job evaluation method other than those mentioned above?  I'm certain there are, and I would welcome comments on this based on others' experience. 

Less is More: Performance Measures in Sales Incentive Plans

A recent WorldatWork survey of 440 organizations regarding key sales incentive plan elements found that three is the most popular number of performance measures in their sales incentive plans (for new account sellers).

Specifically, survey participants responded to the question "On average, how many performance measures are included in your organization's sales incentive plan for new account sellers?" as follows:

• Five or more - 10%
• Four - 14%
• Three - 32%
• Two - 28%
• One - 16%

Note that nearly half the respondents (44%) have only one or two measures on average, demonstrating a clear (and probably wise) preference for more focused incentive plans for salespeople. 

Free NFP Surveys Available for NYC and Washington DC

Professionals for Nonprofits (PNP), a staffing firm serving the nonprofit sector, has published nonprofit salary surveys covering New York City and Washington D.C.  The surveys, which appear to have been conducted with a more appropriate methodology than most done by search firms, are available to download free of charge from PNP's web site.

Market Vs. Job Content (Point Factor) Job Evaluation

My experience and informal research would suggest that most organizations use a market, or external-based, method (rather than a job content, or internal-based approach like a point factor system) to determine the relative worth and pay opportunities for their different jobs. (See earlier post for more information on the differences between external and internal job evaluation approaches.)  The exception to this would be the public sector, where many employers are mandated to use a point factor or other internal-based approach because of pay equity regulations.

Why is market trumping internal job content as a job evaluation approach in most organizations today?  Primarily because most organizations today do not have the same luxury of disregarding, or giving "second fiddle" status to the labor market in setting employee pay that they may have had in the past. 

Job evaluation approaches which focus on internal job content (like point factor plans, of which the Hay Group had the brand name product for many years) came into prominence in an era when people stayed with the same employer for years, often their entire career.  Most hiring was done at the entry level, after which employees typically progressed through the internal hierarchy as talent and opportunity permitted.  Sourcing and recruiting talent from the outside, while certainly important, was not nearly as widespread or critical as it is for today's organization. For these reasons, the most important pay relationships were the ones between jobs inside the organization and there was little risk if the internal job hierarchy that developed was out of sync with the external labor market.

Not true any longer.  The ability to attract and retain necessary talent is now a key business imperative for most organizations, so the employer who disregards market practices or even gives them "secondary consideration" status in setting pay levels is likely doing so at their own peril.  Most organizations today must pay attention to and provide market competitive compensation to their staff.  Period. 

So ... given the above argument, are there any reasons (other than government mandate) that a job content, or internal-based job evaluation system might be appropriate - or even optimal - for an organization?  Well, actually, yes!  I have clients who rely on this type of job evaluation approach and feel it is the best choice for them.  More on this next week.   

IRS Enforcement of Intermediate Sanctions Regs for NFPs (Section 4958) Paying Off

Dan Prives, author of the Where Most Needed blog on charities reports in yesterday's post that (according to the New York Times) the IRS has collected excise tax penalties for excessive compensation from forty individuals to the tune of $20 million. (See earlier post on Intermediate Sanctions regulations for more on this law and the reason for these penalties, and see IRS Report on Exempt Organization Executive Compensation for more details on the enforcement effort that resulted in these penalties.)

Prives also takes the IRS to task - rightly so, I believe - for the structure of Form 990 (where charities publicly disclose financial information including compensation to top officers) which makes it difficult to track and compare what nonprofits are doing in terms of executive compensation.  He suggests another model, more along the lines of the proxy statements issued by public companies, which provide not only a summary of compensation for top executives (versus the incoherent bits and pieces scattered throughout the current Form 990) but also describes the process by which compensation was determined.

I applaud this proposal and hope that it gains traction.  Unless it does, donors and the rest of the general public will continue to base their appraisals of this aspect of a charity's financial stewardship using partial and inconclusive information.

Encouraging and Rewarding Sycophants

An article, The Favoritism Test, in the February 27 issue of Strategy + Business' enews, states:

Not one <leadership> profile has ever included a desired behavior that reads 'effectively sucks up to management.'  Although given the dedication to fawning and sucking up in most corporations - and how often such behavior is rewarded - it probably should.

The article goes on to challenge readers to look more closely at the ways that they, as leaders and manager, may be unintentionally encouraging "derrier kissing".  I'd like to tag on to that thought by calling attention to reward practices that, for all intents and purposes, may do the same. 

I am not a fan of discretionary bonuses.  If a bonus, or incentive, is clearly predicated (and documented as such) on the achievement of predefined and objectively described performance outcomes, then the employee knows what must be accomplished in order to earn and award and can focus his/her efforts accordingly, doing the things within the scope of his/her role that will most likely impact those measures.  (Of course, with broad organization-wide measures, the employee may need some help and guidance to shorten that "line of sight" and grasp how his/her responsibilities tie to that bigger metric.)  If, on the other hand, the bonus will be determined and awarded at his/her manager's discretion, then the employee has no clear performance path to follow to earn the award, other than to please and delight the manager.

Certainly there's a chance the employee in this second scenario will identify the right things on which to focus their time and attention, but I would submit that there's also a good chance that you've devised and implemented a program for encouraging and rewarding sycophants.

Other thoughts? 

The Paradoxes of Today's Workplace

Authors Robert P. Gandossy and Nidhi Verma of Hewitt Associates published a wonderful article in the Q1 2007 issue of the WorldatWork Journal titled The Emerging Workforce Meets the Changing Workplace: Confronting and Managing the Paradoxes.  In their article they identify a number of important trends that are occuring in the workplace today, describe the paradoxical tensions that each of these trends generates, and offer suggestions for leaders and managers to help understand and confront these paradoxes.

The trends and paradoxes insightfully highlighted in the article are summarized below:

Workforce Trend 1: A Sharply Shrinking Workforce

• Paradox 1.  Despite an emerging talent crunch, organizations tend to hire and staff "just in time", when needs arise, rather than forecast and develop talent for the future in a planned, proactive manner.
• Paradox 2.  Downsizing during the last several decades has become common practice making it increasingly dificult to attract, retain and establish needed levels of trust.

Workforce Trend 2:  A Global 'One World' Workforce

• Paradox 1.  Globalization allows leaders to leverage their resources worldwide by working 24/7, but belies the new generation's employment expectations of maintaining a healthy work-life balance.
• Paradox 2.  The migration of work to low-cost labor markets heightens uncertainty for a workforce that is already disengaged.

Workforce Trend 3:  A Virtual 'Anytime, Anywhere' Workforce

• Paradox 1.  Technology connects people in cyberspace, but the lack of physical proximity limits them from building trust, strong relationships and a sense of community.
• Paradox 2.  The virtual work environment promotes autonomy and flexibility, but many managers are often control conscious and distrusting about employees they cannot see.

Workforce Trend 4:  A Diverse 'Melting Pot' Workforce

• Paradox 1.  An emphasis on consistent programs and policies and an egalitarian culture coexists with preferential treatment to individuals who deliver top performance or offer high potential.
• Paradox 2.  Diversity fosters innovation but at the same time it can cause conflict and disagreements that disrupt productivity.

Workforce Trend 5:  Autonomous and Independent

• Paradox 1.  Employees want to be autonomous and independent decision makers in the workplace, but stringent governance norms limit their autonomy.
• Paradox 2. The focus on top talent (high performing and high potential) is more on the individual, not the collective.

Addressing these trends and paradoxes are already impacting, and will undoubtedly lead to more pressure to recraft and redefine the nature of employment relationships.  Reward approaches and programs will have to be adapted to this new reality as it emerges.

In discussing employers' collective reaction to the paradoxes in this new reality, they offer a quote by author Charles Handy, from his book The Age of Paradox:

We need a new way of thinking about our problems and our future.  My suggestion is the management of paradox, an idea which is itself a paradox, in that paradox can only be 'managed' in the sense of coping with.  Manage always did mean coping with until we purloined the word to mean planning and control.