The document discusses compensation trends and best practices in the current economy. It provides an overview of projected employee turnover as the economy improves and reviews compensation strategies companies can use, including both offensive and defensive approaches. Specific strategies discussed include top grading, aggressively paying for performance through a merit matrix, using total rewards statements, and potentially re-pricing stock options. The document also reviews concepts from compensation economics, such as the relationship between supply and demand of labor.
1. 7/11/2011
Trends in Compensation
and Best Practices in
the Current Economy
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Introduction
• Edward R. Rataj
R
• Managing Director, Compensation Consulting
• Certified Compensation Professional (CCP)
• Frequently quoted in national news publications such as
the Wall Street Journal and Smartmoney.com
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“HR matters enormously in
the good times. It defines
you in the bad."
- Jack Welch
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Overview
• Explore turnover in the rebounding economy
• Examine compensation economics 101
• Offensive and defensive strategies
• Review steps for designing a market-based
compensation system
• Recognition and sustaining high performance through a
merit matrix
• Answer your questions
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Unemployment in Improving Economy
• Common perception supported by monthly reports from
perception,
the U.S. Bureau of Labor Statistics:
• 10% unemployment
• In reality, a strong negative correlation exists between
unemployment percentage and education:
Bachelor s
Bachelor’s degree or above 4.8%
4 8%
Some college or an associate’s degree 8.1%
High school graduate 9.8%
Less than high school diploma 15.3%
Bureau of Labor Statistics Table A4: Employment status of the civilian population 25 years and over by educational 6
attainment
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Projected Turnover as Economy Improves
• According to a recent WorldatWork survey, more than
survey
half of employees intend to leave their current job as the
economy improves.
• The survey asked: Do you plan to pursue new job
opportunities as the economy improves?
– 60% — Yes, I intend to leave
– 21% — Maybe,
Maybe so I’m networking
Im
– 6% — Not likely, but I’ve updated my resume
– 13% — No, I intend to stay.
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www.worldatwork.org/waw/adimComment?id=35633
Compensation Economics 101
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Compensation Economics
• Why is a burger flipper no long an entry level job?
• Why does minimum wage negatively impact the
employees whom it is designed to protect?
• Why are banking executives leaving the industry?
• If options are significantly under water and the board
refuses to re-price, what is the potential outcome?
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Supply of Labor
Supply
of Labor
C
P3
Cost of Labor
B
P2
C
A
P1
Q1 Q2 Q3
Quantity of Labor 10
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Demand for Labor
Demand
for Labor
A
P3
Cost of Labor
P2 B
C
P1 C
Q1 Q2 Q3
Quantity of Labor 11
Supply and Demand of Labor – Market Equilibrium
Demand Supply
for Labor of Labor
Market Equilibrium
Supply = Demand
Cost of Labor
P*
t
Q*
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Quantity of Labor
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Effect of Minimum Wage
Demand Supply
for Labor Excess Supply of Labor
of Labor
P3
Price Floor
Cost of Labor
C
Q1 Q3
Quantity of Labor
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Effect of an Executive Compensation Cap
Demand Supply
for Labor of Labor
Cost of Labor
C
Price Ceilng
P1
Unsatisfied Demand
for Labor
Q1 Q3
Quantity of Labor
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The Rebounding Economy
Supply
Demand1
Cost of Labor
P2
Q2
Quantity of Labor
As the economy rebounds, the demand for all employees will increase. Accordingly, differentiation in
Because high performers can drive an organization through the down economy and
Additionally, due to unemployment, the supply of average‐performing employees is up.
Because of the poor economy, the demand for average‐performing employees is down. 15
position it well for a rebound, there is an increased demand for high‐performing employees.
compensation based on performance will become more important.
Compensation Strategies in the Rebounding
Economy
• Offensive Strategies:
– Top Grading
• Poach top performers at competitors who would help drive your
organization forward.
• This is especially true for sales staff.
• Pay the “winners like winners and losers like losers.”
– Aggressively pay for performance via a merit matrix (further
discussion in the following slides)
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Compensation Strategies in the Rebounding
Economy
• Defensive Strategies:
– Total Rewards Statements
– Communication regarding other positive aspects of being
employed by your organization
– Consider changing targets for sales staff to ensure that they are
reasonable given the current downturn
– Re-price Options – otherwise executives will
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Compensation Strategies in the Rebounding
Economy
• Merit Matrix is a blended strategy:
– Offensive component of performance management = Helps attract
key talent from outside the organization
– Defensive component of performance management = Helps
motivate and retain high performers within the organization
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Designing a Market-Based Compensation System
• Plan and collect data
• Ensure job documentation accuracy
• Complete market analysis
• Design pay structures
• Model implementation costs
• Assess internal equity
q y
• Create procedure manual
• Report results
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Purpose of a Compensation System
• Implement compensation philosophy
• Ensure efficient allocation of resources
• Provide rational basis for pay decisions
• Assist supervisors in evaluating and rewarding
performance
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Job Documentation
Job Documentation
Market Matches
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Market Pricing Methodology
• What is market pricing?
• Valuation of pay for jobs in the external labor markets
• Key considerations when determining labor markets:
– Location
• Local
• Region
• Nation
at o
– Industry
• Industry specific
• Broad spectrum of employers
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Market Pricing Methodology
• Reliable Data
– Published survey data
• Major consulting and surveying firms
• Statistically validated
• Standard deviation analysis of data
• Unreliable data examples:
– Self-reported data
– DOL
– Data from one or two competitors
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Designing Salary Structures
Range Spread
midpoint
Midpoint Differential 24
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Assessing Current State of Compensation Program
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Compensation Strategies in the Rebounding
Economy
• Merit Matrix Approach:
– Affects pay increases, not pay structure
– Rewards performance
– Focuses dollars on employees that are most likely to leave
because of pay
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Compensation Strategies in the Rebounding
Economy – Merit Matrix
• Employee 1 ( 1 ) and Employee 2 ( 2 ) are both accountants
with exactly the same tenure, experience, education and pay.
Only performance differentiates them. To whom would you
provide a higher pay increase, low-performing Employee 1 or
high-performing Employee 2?
High
2
H
1
Low
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Compensation Strategies in the Rebounding
Economy – Merit Matrix
• In this example all other factors are equal except current base
example,
salary. To whom would you provide a higher pay increase,
high-paid Employee 1 or low-paid Employee 2?
COMPENSATION
Low High
2 1
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Compensation Strategies in the Rebounding
Economy – Merit Matrix
• Finally all other factors being equal to whom would you
Finally, equal,
provide a higher pay increase, high-paid/low-performing
Employee 1 or low-paid/high-performing Employee 2?
Low COMPENSATION High
High
2
Low
1
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Compensation Strategies in the Rebounding
Economy – Merit Matrix
Typical
Matrix
Quartile in Range
Performance 1 2 3 4
Exceptional 3.5% 3.5% 3.0% 3.0%
Exceeds Expectation 3.0% 3.0% 3.0% 3.0%
Effective 2.5% 2.5% 2.5% 2.0%
Development Needed 2.5% 2.5% 2.0% 2.0%
Critical Need for Improvement 2.5% 2.0% 2.0% 2.0%
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Compensation Strategies in the Rebounding
Economy – Merit Matrix
Best Practice
Matrix
Quartile in Range
Performance 1 2 3 4
Exceptional 6.5% 5.5% 5.0% 4.0%
Exceeds Expectation 6.0% 5.0% 4.0% 3.0%
Effective 5.0% 4.0% 3.0% 2.0%
Development Needed 2.0% 1.0% 0.0% 0.0%
Critical Need for Improvement 0.0% 0.0% 0.0% 0.0%
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Compensation Strategies in the Rebounding
Economy – Merit Matrix
Ultra-Aggressive
Matrix
Quartile in Range
Performance 1 2 3 4
Exceptional 13.0% 11.0% 5.0% 3.0%
Exceeds Expectation 11.0% 6.0% 3.0% 1.0%
Effective 4.0% 0.0% 0.0% 0.0%
Development Needed 0.0% 0.0% 0.0% 0.0%
Critical Need for Improvement 0.0% 0.0% 0.0% 0.0%
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Typical
Results Matrix
Quartile in Range
Performance 1 2 3 4
Exceptional 8.0% 7.0% 6.0% 5.0%
Exceeds Expectation 6.0% 5.0% 4.0% 2.5%
Effective 4.5%
4 5% 3.5%
3 5% 3.0%
3 0% 2.0%
2 0%
Development Needed 2.0% 0.0% 0.0% 0.0%
Critical Need for Improvement 0.0% 0.0% 0.0% 0.0%
Cost Summary
Payroll: $30,400,917 Budget $: $1,064,032
Merit Increases: $1,071,120.86 Budget as % of Payroll: 3.5%
Model fits
Percent Increase: 3.5%
within budget
Cost Detail
Quartile in Range
Performance First Second Third Fourth
Exceptional $83,979 $184,222 $88,669 $15,200
Exceeds Expectations $109,175 $158,310 $58,617 $0
Meets E
M t Expectations
t ti $108,116
$108 116 $191,830
$191 830 $36,698
$36 698 $3,650
$3 650
Development Needed $32,654 $0 $0 $0
Critical Need for Improvement $0 $0 $0 $0
Total Cost: $1,071,121
Employee Count Detail
Quartile in Range
Performance 1 2 3 4
Exceptional 24 36 16 4
Exceeds Expectations 36 60 20 0
Effective 52 96 16 4
Development Needed 36 40 20 4
Critical Need for Improvement 24 32 12 33 4
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Total Employees: 536
Results Company XYZ
Cost by Quartile
$600,000
$500,000
Critical Need
for
Improvement
$400,000
Meets
Merit Increase Cost
Expectations
$300,000
Exceeds
pectat o s
Expectations
M
$200,000
Exceptional
$100,000
$0
1 2 3 4
Quartile in Range 34
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Results Company XYZ
Costs by Performance Level
$400,000
$350,000
$300,000 Fourth
$250,000
Third
Cost
$200,000
$150,000
Second
$100,000
$50,000 First
$0
Exceptional Exceeds Expectations Meets Expectations Development Needed Critical Need for
Improvement 35
Performance
Employee Analysis
Salary Grade Perf- Merit New Merit
Last Name Name Job Title Min Max Salary Quartile ormance Percent Salary Increase
Brown Stan HR Generalist $47,042 $72,915 $46,000 1 4 6.0% $47,042 $2,822.52
Phillips Kevin IT Analyst $53,058 $84,892 $64,550 2 4 5.0% $64,550 $3,227.50
Pence Skyler Construction Manager $47,042 $72,915 $76,000 4 5 5.0% $76,000 $3,800.00
Pratt Jason Controller $70,169 $112,270 $103,299 4 2 0.0% $103,299 $0.00
Beals Susan Maintenance Manger $47,042 $72,915 $59,000 2 3 3.5% $59,000 $2,065.00
Duncan Elizabeth President $153,058 $229,587 $200,000 3 5 6.0% $200,000 $12,000.00
Adjustment due to
employee being Lump sum increase
below salary range due to employee
being at top of salary
range
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Compensation Strategies in the Rebounding
Economy– Merit Matrix
• Cost neutral
• Rewards performance
• “Targeted” turnover
• Fair and efficient method for administering pay
• Accelerates employees to market competitive pay levels
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Compensation Strategies in the Rebounding
Economy– Merit Matrix
• Common Pitfalls
– Structures out of alignment with market
• Garbage in, garbage out
• May improperly allocate limited salary increase dollars based upon the
current competitiveness of pay
– Performance scores not calibrated
• Supervisors can learn to game the system
• Cheating is rewarded
• Top performers may not be properly rewarded
– Matrix results outside of budget
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Additional Considerations
• Nonprofit compensation
• Executive compensation in closely held businesses
• Fair pay based on race and gender
• Online performance management
• Sales compensation
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CBIZ CompCasts
How to Set Pay Ranges that are Fair and Effective
CompCasts Nonprofit Quick Guide to Navigating Intermediate Sanctions
Creating and Using a Salary Increase Matrix
Fair Pay: Maintaining Equality in Today’s Litigious Society
In development at:
www.cbiz.com/hr/compcasts
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Questions?
Ed Rataj, CCP
Rataj
Managing Director – Compensation Consulting
CBIZ Human Capital Services
(314) 692-5884
erataj@cbiz.com
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