This presentation discusses key compensation strategies to maintain morale and retain talent. This includes *The turnover in the rebounding economy & steps for designing a market-based compensation system *Recognition and sustaining high performance through a merit matrix *Compensation in closely held businesses For more information, visit http://www.cbiz.com.

1. Creative Compensation Strategies to Maintain
Morale and Retain Talent
Presented by
Edward Rataj, CCP
Managing Director, CBIZ Human Capital Services

2. Strategic Edge Series
• Seven Core Principles to Maximize the Value of Your Business
During Its Life and Upon its Sale – May 18th
• Creative Compensation Strategies to Maintain Morale and Retain
Talent – June 22nd
• Don’t Be Held Captive: Go Captive to Manage Your Risk and
Expenses – July 20th
• Federal Incentives That Can Show You the Money – August 17th
• Protecting Your Legacy with Succession Planning – September 21st
• State Tax Nexus: No Physical Presence Required – October 26th
All these webinars are from 2:00 – 3:00 ET. Here is the link for
registration for any of these webinars - www.cbiz.com/strategicedge
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3. Agenda
• Explore turnover in the rebounding economy
• Review steps for designing a market-based
compensation system
• Recognition and sustaining high performance through a
merit matrix
• Discuss compensation in closely held businesses
• Answer your questions
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4. Unemployment in Improving Economy
• Common perception, supported by monthly reports from
the U.S. Bureau of Labor Statistics:
• 10% unemployment
• In reality, a strong negative correlation exists between
unemployment percentage and education:
Bachelor’s degree or above 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 4
attainment

5. Projected Turnover as Economy Improves
• According to a recent WorldatWork survey, more than
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, so I’m networking
– 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

6. Compensation System Design
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7. 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
• Create procedure manual
• Report results
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8. 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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9. Job Documentation
Job Documentation
Market Matches
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10. 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
– Industry
• Industry specific
• Broad spectrum of employers
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11. 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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12. Designing Salary Structures
Range Spread
midpoint
Midpoint Differential 12

13. Assessing Current State of Compensation Program
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14. Merit Matrix Approach
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15. Compensation Strategy – 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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16. Merit Matrix - Concept
• 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
Low
1
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17. Merit Matrix - Concept
• In this example, all other factors are equal except current base
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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18. Merit Matrix - Concept
• Finally, all other factors being equal, to whom would you
provide a higher pay increase, high-paid/low-performing
Employee 1 or low-paid/high-performing Employee 2?
COMPENSATION
Low High
High
2
Low
1
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19. Merit Matrix - Example
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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20. Merit Matrix - Example
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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21. Merit Matrix - Example
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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22. 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% 3.5% 3.0% 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 Expectations $108,116 $191,830 $36,698 $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 4
Total Employees: 536
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23. Merit Matrix - Results
Company XYZ
Cost by Quartile
$600,000
$500,000
Critical Need
for
Improvement
$400,000
Meets
Merit Increase Cost
Expectations
$300,000
Exceeds
Expectations
$200,000
Exceptional
$100,000
$0
1 2 3 4 23
Quartile in Range

24. Merit Matrix - 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 24
Performance

25. Merit Matrix - Employee Analysis
First 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 below Lump sum increase
salary range due to employee being
at top of salary range
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26. 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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27. 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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28. Assessing “Reasonable”
Executive Compensation in
Closely Held Businesses
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29. Reasonable Compensation in Closely Held
Businesses
• The determination of reasonable compensation is
particularly important when:
– Arm’s length transactions are less likely,
– Large amounts of compensation are provided to a visible
position and
– The boundaries between owners and employees are blurred.
• Examples include divorce cases, S and C corporations
and executive holdings of a significant number of
company shares.
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30. Reasonable Compensation Overview
• There is no single recognized definition of reasonable
compensation.
• This is one of the key reasons that compensation
frequently comes under scrutiny – without a clear
approach to establishing what is reasonable, subjectivity
bears heavy influence.
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31. Reasonable Compensation Overview
• According to the IRS, there are two key elements of
determining reasonable compensation:
1. Intent
Is the payment in exchange for services provided?
2. Amount
Is the payment reasonable given the services rendered?
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32. Reasonable Compensation – Intent
• Compensation is reasonable only if the amount
provided was both intended to be and treated as
compensation at the time of payment.
• Intent is typically questioned when there is an
appearance of ―disguised dividends.‖
• Considerations used in measuring intent include:1
1. The salary history of the employee
2. The dividend history of the corporation
3. The formality and timing of corporate action
4. The degree to which salary negotiations were conducted at
arm’s length.
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1 Moran, 290-4th T.M., Reasonable Compensation.

33. Reasonable Compensation – Amount
• ―It is, in general, just to assume that reasonable and true
compensation is only such amount as would ordinarily be paid for
like services by like enterprises under like circumstances.‖ Regs.
1.162-7(b)(3)
• The Internal Revenue Manual identifies several factors that IRS
personnel should consider in determining the reasonableness of
compensation, including:1
– The nature of the employee’s duties
– The employee’s background and experience
– The size of the business
– The employee’s contribution to the success of the business
– The amount paid by similar size business in the same area to equally
qualified employees for similar services
1Moran, 290-4th T.M., Reasonable Compensation. This is not an exhaustive list, but rather a listing of factors recognized as 33
principal considerations.

34. Effect of Performance on Reasonable
Compensation
• Measuring Performance
– The courts have recognized significant profitability as
rationalization of seemingly high executive compensation. This
is particularly true for personal service organizations.
– Other financial ratios that may be considered as indicators of
corporate success include revenue growth, return on
shareholders’ equity, return on assets, return on sales, earnings
per share and return on capital.1
1 This list is not necessarily comprehensive. Rather, it is a representative list of financial performance metrics cited 34
by the courts as factors that may suggest superior performance.

35. Additional Considerations
• Nonprofit compensation
• Fair pay based on race and gender
• Online performance management
• Sales compensation
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36. Summary/Key Takeaways
• Market-based compensation system
• Merit matrix
• Compensation in closely held businesses

37. 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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38. QUESTIONS?
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39. CBIZ Human Capital Services Contact
Edward Rataj
Managing Director
 314.692.5884  erataj@cbiz.com

40. Thank You