Just Don't Call it a Cost of Living Increase

We are all feeling the pressure of rising prices, and our friends at the Economic Research Institute predict that this will soon translate (and for many of you, perhaps already has) into pressure from employees to address the increase in cost of living.

Step carefully, for this is slippery territory.

I have posted before on the distinction between cost of living and cost of labor, an absolutely critical one when it comes to compensation philosophy and compensation communication.  It speaks - I believe - to the very purpose of your pay program.

Is it...

1. To reimburse employees for their cost of living, or
2. To pay employees the market cost of their labor?

Cost of labor reflects what a particular geographic market offers as compensation for a specific type of work.  Cost of living reflects the cost of goods utilized by a typical consumer (i.e., housing, transportation, groceries, etc.)

More on the cost of living and cost of labor from Linda Lampkin, ERI's Research Director:

What you spend -- your specific cost of living -- depends on how you choose to spend your money. And what you earn depends on what you do for a living and where you do it. The reality is that different people have different expenses, even though cost of living is often discussed as if it were a single discrete universal number.  The federal government tries to measure the changing prices of a fixed market basket of goods and services over time, but there is no one single cost figure that accurately measures individual expenses. The real 'cost of living' is based on decisions by individual consumers on how to spend the money they have.

Setting and adjusting wage/salary levels in light of today's dynamics is a tricky thing.  It must be done thoughtfully, with clear intent and informed by the right set of data.

And so, repeat after me:

We pay cost of labor, not cost of living.

We pay cost of labor ...

Recognize and Reward Those Who "Keep the Light On"

A commenter self-described as a "Steady Eddie" in a support role, shared some great thoughts on the importance of recognizing and rewarding performers at all levels of the organization, not just the "fast trackers" or those in management jobs.

From "Niblet" in the comment stream of Can There Be Too Much Pay for Performance?

Not every employee desires to be in management or on the fast track, but that should not relegate a committed steady performer to the dustbin without recognition. There must be some way to recognize those essential cogs in the wheel of any organization.

I love what I do & the people I work with. I just wish that I did not feel like I was recognized as much as the furniture - that is to say "not at all". I may not earn millions, or even thousands, for the company, but I keep things running just like many of my fellow Steady Eddies. After all, someone's got to "keep the light on for you".

A great reminder for all/any of us involved in reward program design and management.

Creative Commons Photo "Keep the Light On" by Vox Efx

What HR Needs to Do NOW. In THIS Economic Downturn

A must-read.  Frank Roche, author of the KnowHR Blog shares his list of the ten things HR needs to do in this economic downturn.  Can you guess my personal favorite?  Number 7, naturally:

Listen to comp consultants who link metrics to company performance. And boot out anyone else who’s trying to sell you the comp plan du jour. When times get tough, fundamentals matter and gimmicks have to get kicked to the curb. Make sure you know the difference.

Really, this is solid advice in any economy, but critical now.  Are you paying attention?

Compensation Philosophy Plays Key Role in Family Businesses

Some of my favorite clients are family businesses.  These settings can make for some interesting twists and turns in reward plan development.  One area that can present particular pay challenges is setting the base salary levels of family members who work actively in the business.

I take the position that it is critical to establish and stick to a particular philosophy here.  The examples presented below - by no means an exhaustive list - represent a couple of alternatives that I have found to work well in this particular setting .

• Classic market-based salary ranges.  In the same manner that all jobs would be addressed in a classic market-based pay structure, the formal roles and responsibilities of active family members are defined and benchmarked, with base salary opportunities established accordingly.  With this philosophy, family members' base earning opportunities are set in line with what their skills and responsibilities will earn in the external market for talent.  Undeniably rooted in outside reality.  This may seem obvious, but in my experience this approach - probably the most straightforward and defendable - is often overlooked.
• One team, one salary range.  In situations where family members may have different specialties and roles, but function - largely or entirely - as a governing team, it may make sense to have a shared salary range for the group.  This serves to emphasize the importance of their shared interests over their individual contributions and assignments.  Practically speaking, we will typically set this range one of two ways - by finding the average of the market salaries for all of the different member roles, or by simply selecting a representative job to use in salary range development.   (This philosophy has application beyond family businesses; I have seen this particular approach used for the executive teams of private non-closely held, public sector and non-profit organizations.)

The appropriate philosophy is identified and adhered to in establishing base pay opportunities.  If adding a family "premium" is desired, then set and apply the premium consistently.  Ownership differences shouldn't need to factor into salary setting; presumably these are handled through distributions and the like.  To the extent that other special needs and circumstances must be addressed via base salary, my preference is to identify and define them separately. 

Pay is a sensitive and emotional subject in any setting; with family members working together under the same "roof", it can potentially be even more so.  A clear and transparent compensation philosophy can be a solid step in support of equity and harmony.

A Quiet Pink Pay Revolution Underfoot?

I find it interesting to observe trends - demographic, political, economic - and consider their impact on compensation.  (And yes, I probably do need to get a life.  But anyway...)

Business Week Online has an interesting article on this week: "The Slump: It's a Guy Thing".  The article opens with the following:

They eat from the same dishes and sleep in the same beds, but they seem to be operating in two different economies. From last November through this April, American women aged 20 and up gained nearly 300,000 jobs, according to the household survey of the Bureau of Labor Statistics (BLS). At the same time, American men lost nearly 700,000 jobs. You might even say American men are in recession, and American women are not.

What's going on? Simply put, men have the misfortune of being concentrated in the two sectors that are doing the worst: manufacturing and construction. Women are concentrated in sectors that are still growing, such as education and health care.

The difference may be attributable to more than just the different sectors that men and women are concentrated in.  Some analysts argue, according to the article, that women are better suited to knowledge economy jobs than men (where supposedly feminine traits like sensitivity, intuition and willingness to collaborate are highly valued).

The article also points out, and rightly so, that the news isn't necessarily all good for females.  Much of the job growth in the sectors where women are concentrated - like child care workers and home health aides - offer lower wages and few, if any, benefits.

But I think there is a ray of sunshine here.  In my experience, market pay rates are heavily influenced (some might say entirely influenced) by supply and demand.  As the knowledge economy expands, and - particularly - as our population ages, there will be more demand for the kinds of jobs traditionally held by women.  And we will likely find that the supply of labor is a finite one.  Just look at what has happened with the field of nursing.  As demand has outstripped supply, not only have wages risen but - interestingly - the perception of the profession as a "female" one is shifting.  I know several talented, college age young men who have chosen to pursue nursing as a major and a career.  The influx of men into the field will also positively impact pay levels - this is a fact of life.

Is this a long-awaited solution to the gender pay gap?  Not entirely, unfortunately, for that is a complex, multi-faceted phenomenon.  But I would submit that there is a quiet pink pay revolution underfoot that does promise some relief. 

HR's Quest for a Seat at the Table and HR Compensation

Yes, there is a relationship here.

That is what crossed my mind when a copy of the white paper The Role of HR in the Age of Talent (based on research by Vurv and Human Capital Institute) found its way to me.

This is a report that every one of us in the profession should read.  The news is not necessarily good.  It tells us that while talent management has become a top level concern for organizational leaders and boards, the HR profession has not yet made the necessary strides - in business acumen, prestige and influence - to earn the right to own this concern.  In the words of the study: "... its almost as if corporate leaders have made a collective, unconscious decision that talent management is too important to be left to HR."

Other key findings from the study:

• Across multiple measures of business proficiency and knowledge, there is an alarming lack of expertise among senior HR leadership.
• Despite the impact and importance of globalization, HR is on the sidelines. It is regularly involved and consulted on global strategy less than one-third of the time, even where it directly effects the workforce.
• Respondents’ top current challenges are attracting and engaging talent, succession planning, and leadership identification & development. Over the next three years, respondents expect specific skills shortages, finding leaders and successors, and retaining & engaging top talent to be their main challenges.

The connection to pay?  I believe there is a real one.  I think our profession's inability to demonstrate a deep understanding of business and garner leadership respect is depressing HR compensation.  I see this play out in my work, at the micro level, way too frequently.  Often it takes the form of subtle resistance to, or questioning of, market rates for HR talent (Does it make sense for us to pay this much?  After all, our HR function is primarily an administrative one ...).  And it is a well-known fact to many in the field that top HR executives - typically - don't command the same pay levels as most of their executive "peers".  This lower market rate represents, among other things, the market's consensus on our value - which is an unfortunate obstacle to equitable treatment for the HR leaders (and I know several) who are engaged and appreciated at a strategic level.

If a transformation of the HR profession is what's needed, we'd best get ourselves into the driver's seat and make it happen.  Our compensation is at stake.

Update:  Check out what other bloggers have to say about the Vurv/HCI report - Kris at the HR Capitalist and Deb at 3 Hours and a Lunch.

Rising Gas Prices and Employee Total Rewards

Seven bucks for a gallon of gasoline?  Sources tell us that this could be in our future, perhaps sooner than we think.  And the pain could be felt far beyond the pumps, impacting our ability to effectively attract, retain and reward employees.

Ryan Johnson's WorldatWork Blog highlights a great article by WorldatWork editor Bob King, which discusses the implications of the cost of gas for employment relationships.  He focuses particular attention on the total rewards implications, with expert advice on how to address the increasingly high costs of commuting as part of the overall employee value proposition.

From the article, Jennifer M. Verive, Ph.D., CEO of White Rabbit Virtual Inc., describes the concern:

Our employee surveys find that the cost of the commute is beating out ‘time spent in the commute’ as employees' number one commute concern.  Getting a job closer to home is no longer about time convenience; it's a $60 fill-up that takes money away from other personal and family needs. The first time we saw this was when gas was about $2.25/gallon a couple of years ago. The trend has increased along with gas prices and is especially strong among lower-paid employees, such as customer support representatives. Currently, a growing number of employers are worried about this, as they know employees are factoring it into their cost of living and net wages. In regions with high home prices where commutes are longer, attracting new employees is now even more difficult.

Experts warn (and I would second this warning) of the pitfalls associated with simply increasing base pay (in the form of a "cost of living" increase) to address these rising costs.  What happens if gas prices continue to increase indefinitely, and you've set a precedent for covering the cost?  And why increase pay to address fuel costs but not rising healthcare expenses?  Again, potentially dangerous and slippery territory to step into.

Alternatively, the article offers companies other options to help alleviate the burden on their employees, including:

• Transit subsidies
• Car pooling/van pooling (along with a contest and/or incentives)
• Flexible scheduling options such as a compressed work weeks or alternating start times
• Teleworking, where feasible, once or twice a week

The article also steps beyond rewards to examine the impact that this trend will have on organizations' overall ability to attract and retain workers.

Check out the article for more information and details.  This is an issue that will be calling for increased consideration by HR professionals.  Special thanks to Ryan and Bob for bringing it to our attention in such an informative and well-researched way.

Image:  Andrea Church 

Geographic Differences: Focus on Pay - not Cost of Living - Levels

Any organization with more than one location faces this question:  Do we pay differently in different places?

Responding to this question requires market research on actual practices in order to determine whether, and to what extent, differentials truly exist.  I would caution you, though, to be careful about the data you choose to assess geographic differences.  I find that employees and managers nearly always broach this topic from the standpoing of differences in cost of living (the cost of good utilized by a typical consumer in a particular geographic market, including items such as housing, groceries, transportation, etc.).  I would advise you, however, to focus on another standard in examining differentials, and that is cost of labor (what a particular geographic market offers as average employee compensation).  (See earlier post on this topic for more on the distinction between cost of labor and cost of living.)

This isn't just semantics; there can be a substantial difference between cost of living and cost of labor in a particular location.  As examples, consider the following scenarios using data from Economic Research Institutes Geographic Assessor (my tool of choice).  (Note that these statistics are specific to salaries at the $30,000 level.)

For Boston, Massachusetts, salaries (cost of labor) are 115% of the U.S. average, while cost of living is 156% of the U.S. average.

For San Francisco, California, salaries (cost of labor) are 122% of the U.S. average, while cost of living is 222% of the U.S. average.

For Manhattan, New York, salaries (cost of labor) are 118% of the U.S. average, while cost of living is 235% of the U.S. average.

You get the picture.  Your mission here is to be clear on what your organization is willing to address and pay for in its compensation program.

Employees Looking Despite (Because of?) Slowing Economy... and Pay Named as Top Reason

The slowing economy may not protect employers from turnover ... if employees have anything to say about it.  More than half of the over 7,000 employees surveyed by Salary.com as part of its 2007/2008 Employee Job Satisfaction and Retention Survey say that they plan to look for a new job in the next three months.

As shown in the details below, inadequate compensation is the top reason employees give for considering leaving their current position:

Top Five Reasons for Leaving a Job (as reported by Employees):

1. Inadequate compensation (27%)
2. Lack of career advancement (19%)
3. Insufficient recognition (17%)
4. Boredom (11%)
5. No professional development (11%)

The survey includes a number of other interesting findings from employers as well as employees surveyed, including the number of employers who make counter-offers (35% say they never do), the average cost of replacing an employee across a number of industries (biotechnology is highest at $46,250) and the most popular benefit - outside of compensation - that would entice an employee to stay (it's professional development).

I have some thoughts on how to frame these findings, particularly with respect to inadequate compensation being the top reason for leaving.  These employees may indeed be underpaid.  But I have found, across all the organizations that have ever hired me to examine their compensation program because employees are complaining about compensation, as often as not, that the problem is not so much their pay program or the level at which employees are being compensated.  The problem is that they have done such a crummy job of explaining the purpose and objectives of the compensation program, and how it works. 

Conclusion?  If your employees are griping about compensation, don't assume they won't start looking and eventually leave just because the economy is slower.   And keep in mind that employee satisfaction with pay is not only about how much you pay them, but also your efforts at communication, transparency and promoting involvement with respect to your compensation program.

Momentum Continues to Build for Performance-Based Pay, Even as We Struggle to Measure Performance

Evidence of continued momentum toward performance-based pay streams in, from places expected and not-so-much so.

The #1 expected change in compensation plans cited by the 413 U.S. HR professionals surveyed by Deloitte Consulting for its recently released 14th annual Top Five Total Reward Priorities study was: "Increased emphasis on performance-based pay."

And from our nation's capital, we hear news of a 5-year pay pilot at the National Nuclear Security Administration, whereby the agency will depart from the traditional 15-grade government general schedule and move to a performance-based pay system which appears to feature broad bands (aargh).  It is hoped that the new pay approach will better enable the agency to compete for technical talent in a tight job market and motivate and reward those employees who perform well.

This is all good, I think.  I am a fan of paying for performance, if for no other reason than none of the alternatives strike me as good ones.  But I smile (or is it a grimace) at the irony that I see at play here.  As we drive ever more steadily - in all sectors of work, it appears - toward tying employee pay to their performance, we also increasingly wring our hands over our collective inability to do performance management very well.  As evidence of the latter circumstance, I offer up the results of the recent State of Performance Management Study conducted by WorldatWork and Sibson Consulting where only 5% of participating HR professionals gave their performance management programs a grade of "A".  There are also many who cry for the abolishment of performance appraisal - and their arguments have force and merit.

And so we find ourself with a bit of a dilemma.  Something I continue to reflect on, anyway.  Look for more thoughts on the issue here.