Lead or Lag Your Competitor’s Compensation Plans?

Friday, August, 31 2012

It is a fundamental question for every compensation practitioner, should the organization lead or lag competitors’ compensation plans? And if it is decided to lead or lag, by how much should the organization lead or lag the market? It may seem like a simple question and the simple answer is that an organization should merely match competitors rather than either alternative of leading or lagging. Unfortunately, it is not so simple. There is much riding on any one of the choices and all alternatives can have a dramatic influence on an organization’s viability as a business.

Businesses must decide what they are willing to pay for the goods and services required for them to operate and produce the goods or services they market to their customers, which includes labor. Few businesses are in a financial position to pay whatever is demanded of them without some serious thought being given to what effect those expenditures will have on their ability to remain a viable entity.

Organizations which require highly trained staff with hard to find skills and with a need to retain that talent for very long periods may find that they have to pay a wage that leads the market by 6 to 9 months and lag the market for the balance of the year in order to attract and retain the skilled workers needed. Another organization which requires no specific or special skills and willing to accept higher than average rates of turnover might be able to manage its talent even though its wages lag the market for the entire year. It would not be unusual for an organization to lead the market for their key jobs while lagging the market for those jobs where the demand is less critical.

While cash compensation is only one part of most organizations’ total compensation structure (even for those organizations who do not realize it), it is highly visible to workers and competitors. Although organizations generally do not publish their wage rates, most competitors have an idea of what rates each are paying and with whom they compete for labor and other resources.

Even after an organization has developed its compensation structure in terms of lead-lag and the market place, the marketplace has an uncanny habit of changing over time. Skills which were in high demand a few years ago are now out of favor and they have been replaced with skills which did not even exist 3-5 years ago. Thus, it becomes necessary to periodically revisit the lead-lag discussion. For many organizations this means an annual or a biannual review of job pricing, pay structure, market place movement, changes in labor competitors, and the overall mix of direct cash and benefits which makes up the organization’s total compensation structure.

Since the wage and labor markets are highly dynamic, wide swings in wage rates can occur from one year to another. Organizational change such as acquisitions, divestitures, new business lines, and products can create and/or eliminate the demand for labor skills very quickly. These changes dictate that an organization make necessary updates to its compensation structures in order to meet any new demands on the organization’s workforce resources.

Will Employers Continue to Offer Health Care Benefits After 2014?

Friday, August, 24 2012

Beginning in 2014, employers will either “Pay or Play” in the area of employer sponsored health care benefits for employees. Under the 2010 Patient Protection and Affordable Care Act (PPACA), employers with 50 or more employees must provide health care benefits or pay a penalty. The penalty for not providing health care, i.e., the “free rider” penalty is $2,000 per full time employee after the first 30 employees. However, if the employer elects to offer health care benefits and just one of their employees acquire federally subsidized health care benefits; the employer is still subject to a potential penalty of $2,000. Based on a Towers Watson 2011 survey, total employer and employee health care cost for employee only coverage of $8,425 is expected to increase to over $10,000 by 2014. So the question posed is, will employers Pay or Play?

That is the question that Christopher Justice of Truven Health Analytics, formerly Thomson Reuters, attempted to answer in a July 2012 white paper titled ”Modeling The Impact Of “Pay Or Play” Strategies On Employer Health Costs”.

With data from 33 large employers totaling some 933,000 employees Truven modeled four scenarios for the 2014-2020 time frames:

1. Eliminate Group Health, Make Employees “Whole”

2. Eliminate Group Health, Cost-Neutral Impact for Employers

3. Eliminate Group Health, Provide Subsidy to Achieve 20 Percent Savings

4. Eliminate Group Health, No Employee Subsidy to Purchase Exchange Healthcare

To summarize Truven’s findings:

1. No immediate or long-term cost advantage for employers to eliminate group health benefits.

2. Employers will spend more to “make employees whole” shifting to an Exchange rather than to maintain existing group health plans.

3. Employers, who choose to eliminate group health, will have a significant impact on total employee compensation.

In closing, Truven concluded”

“Not only is eliminating group health coverage not cost efficient, it may potentially have a large impact on an employer’s competitive market position for retaining and recruiting talent.”

While Truven’s research looked at large employers, averaging 30,000 employees, small and mid-size employers may be at greater risk of talent management issues than their larger brethren. With fewer resources to make up for the lack of health care in a post-2014 world, small and mid-sized organizations often cannot afford to lose their top designer, engineer, sales staff, technician or money maker. That means spending much more on cash compensation to overcome the attraction of a larger competitor’s health care plan, paid time off, 401(k), and numerous advancement opportunities.

Ultimately, it is a business management decision to eliminate or keep employee health care or any other employee benefit program. Although it may appear to be a clear-cut decision, that decision could have a long reaching impact on the continuing viability of an organization.

2013 Salary Increases Expected to be in Line with Prior Years

Friday, August, 17 2012

According to the latest Hay Group research into projected 2013 salary increases, median increases of 3% will be consistent with the prior two years experience. This is in line with an AonHewitt study projecting 2013 increases also at 3%. Paradoxically, the AonHewitt survey found that employers are planning to spend upwards of 12% for “variable” pay for Salaried Exempt and 6% for Salaried Non-Exempt, 2 to 4 times what is spent on base pay increases. Employers have increasingly redirected monies from base pay adjustments to focus those dollars on their high performers and top producers. Additionally, variable pay allows employers to target specific projects or assignments and better direct the performance of individuals without increasing the underlying base pay structure.

Although not a new concept, variable pay is being used by organizations to attract, retain, and motivate top talent in an era of 2%-3% salary increase budgets. A simple example is the project manager who completes the project on-time, under budget, and to specification. The project manager is paid a flat fixed (lump-sum) dollar amount in recognition of the achievement. Under a traditional pay system, the project manager might have gotten a percentage increase at their next scheduled review in 6-9 months or a year which built on top of their existing base salary. Over time, these repeated percentage increases over the employee’s career compound until the organization is paying 50%, 75% or even 100% above market price for a project manager.

The value of variable pay, aka “pay for performance”, is the fact that it does not inflate calculations in salary based benefits such as life insurance, paid time off, STD/LTD replacement pay, pension and savings plans. Since traditional pay add-ons to base salary compound over time, so would those add-ons compound anything tied to base pay. In fact, the employer would be paying multiple times for the same performance. While our project manager did a great job on the last project, that same employee is now performing poorly on the current project. Thus the organization could find itself paying for top performance based on prior efforts but receiving only lack luster results on the current assignment if compensation were based on a traditional pay system. Properly designed, a variable pay approach clearly defines what performance level has to be achieved and what the reward is if it does.

Variable pay is one many forms of incentive pay and may be found alongside other pay practices within the same organizational unit. At one time, the former Florida Steel Corporation, now Gerdau S.A. had a variable pay plan which rewarded ALL workers for returning the mill to production status as soon as possible during its annual maintenance shutdowns. This included office workers who would do whatever was required to support the maintenance work and getting the mill back into production. As part of the plan, management clearly communicated to all employees the need to have the mill on shutdown for the minimum amount of time.

Variable pay can work in any organizational setting and with any occupational role; from the shop room to the boardroom, variable pay has the ability to focus and drive employees to the organization’s desired outcomes. The key, as with any compensation system, is its design, transparency, and administration.

Sales’ Compensation in the Spotlight

Friday, August, 10 2012

True or false, every organization wants more sales. Answer, it depends on which products are being sold, in what quantities, to which customers, under what terms, and lastly, what is the sales’ compensation structure for the sales. Sales of un-profitable products or those with low margins, sales in the wrong quantities, sales to customers with poor collection or credit histories under unreasonable terms, and sales compensated for under an excessively generous commission scheme, may not be desirable. What should an organization consider when designing or redesigning a sales’ compensation system?

1. How does the sales’ compensation system fit into the overall goals of the organization, the product line, and business strategy?

• Consider that a sales’ compensation system which promotes expansion to new customers and territories too soon or which cannot be supported with product production, may not be in alignment with the current strategy of the organization.

2. What is the financial return on sales for each product line? 

• The expected financial performance of a sales’ compensation plan should be modeled across all possible configurations to identify any possible situations where it would produce a negative or marginal return.

3. Does the sales’ compensation system build and support the desired culture and behavior the organization wants from its sales force?

• A “go slow” organization may not want a sales’ compensation plan which attracts, motivates, and drives a high performing “go getter”, “no-holds-barred” sales force.

4. Is it simple to explain and easy to administer?

• A sales’ compensation system that requires more than a single written page to explain is too complicated and may be very complicated to administer and will incite mistrust from the sales team.

5. Does the compensation paid correlate with performance or does it overly reward low performers while punishing top performers?

• Most organizations anecdotally already know who the top and bottom performers are. This knowledge should correlate very well with existing or proposed sales’ compensation plan payouts.

6. Have sales goals been set to fairly reflect the market and sales’ staff capabilities as well as the organization’s ability to produce and deliver product?

• Target goals set too low or set too high can have unexpected sales results. The inability of the organization to produce and deliver product on time and in the quantity and quality required can cost the organization sales and sales staff.

7. Is a sales compensation system the most optimum means to direct the motivation of the organization’s sales force?

• Depending on the organization, its products and where it and its products are within the business and product cycles, commissioned sales’ compensation may or may not be the best choice to reward sales performance.

Financial performance, market position, and reputation often hinge on the ability of an organization’s sales force to deliver product to current customers while incubating potential clients. The catalyst to driving and motivation sales behavior is often the design of the organization’s sales compensation system.

Are State Managed Retirement Plans an Option for Individuals and Small Businesses

Friday, August, 03 2012

After several years of under-performing investments, many employer sponsored retirement plans as well as individual retirement savings accounts, have lost value or are returning meager gains. This has necessitated increased contributions into those plans in order to maintain solvency for employers and to meet retirement targets for individuals. Increased contributions in these continuing difficult times is challenging for both small businesses and individuals.

A Wisconsin legislator, Sen. Dave Hansen, D-Green Bay, has offered a solution; a state managed retirement plan for “non-government workers like small business owners and farmers to buy into”. Senator Hansen raised this idea after the Pew Center on the States named Wisconsin's pension system the most solvent in the country. Hansen’s model would allow the state to offer individuals and small businesses participation in a state managed retirement plan built on the archetype of Wisconsin's pension system, which reportedly has had an average annual return of over 10% for the 29 years. This arrangement, while far from being a reality, would seem to place the State of Wisconsin in direct competition with private financial instructions.

Small businesses and individuals struggle with retirement savings plans. While federally tax favored retirements plans are available to small businesses, they can be relatively complicated. Simplified Employee Pension Plan (SEP) provide a basic method for small businesses to make contributions to a retirement plan for the business owner and their employees. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA’s plan provides owners and employees with a less complicated way to contribute toward retirement plans. However, it is designed for employers with 100 or fewer employees, who currently do not have another retirement plan.

Options for individuals are somewhat limited, traditional Individual Retirement Accounts, (IRA’s), allow pre-tax contributions but are limited to $5,000 for taxpayers under age 50 and taxpayers cannot be an active employee-participant in an employer sponsored retirement plan. An after-tax version of the traditional IRA, the Roth IRA, is also available.

State managed retirement plans such as that conceived by Senator Hansen places such arrangements in direct competition with private financial plan managers and would expose states to additional risk. In addition, such plans could come under strong political pressure if investment returns were less than desirable or even negative. While Wisconsin's pension system may have enjoyed over two decades of respectable growth, a parallel but private system might not fare as well. Furthermore, if Wisconsin's pension system was easily duplicated, why have not other public and private retirement plans done so?