Can Variable Pay and Non-Financial Rewards Replace Annual Increases?

Friday, July 26, 2013

 

2013 is shaping up to be yet another year in which merit budgets and compensation increases are modest at best.  The surveys from WorkatWork, the Hay Group, Milliman and a score of others point to about a 3% target for most increases.  At the same time, the economy is slowly improving, organizational hiring is up moderately, and employees are beginning to think about alternative employment opportunities.  With an emphasis on holding fixed labor costs down, employers are trying to balance employment costs with the need to retain their best talent and hire a limited number of talented employees.  To accomplish this, organizations are relying more on both variable pay and non-financial rewards to keep their workers motivated.  But can theses efforts replace the standard model of annual increases?

 

Variable pay can take many forms, from short and long term bonuses and incentive plans to spot awards for exceptional performance to sales commissions, and even employee stock and ownership plans.  Variable pay plans may be based on individual employee or group performance, e.g., a department, a plant or an entire company.  For Variable pay to be effective, it must never permanently add to an employee’s base pay, benefits are generally not based on a definition of compensation which includes variable pay, and employees clearly understand that variable pay must be re-earned.  This definition means that a portion of an employee’s compensation is “at risk” of not being earned or being less than it was during some former period.  This risk factor contributes to the employee’s motivation to strive to re-earn a similar amount and even more than they did previously.

 

As with variable pay, employers are engaging in the use of non-financial rewards as a means to motivate employees while keeping compensation costs down.  And just as with variable pay, non-financial rewards can take on a multitude of forms such as training, trips, recognition awards, gift cards, promotions, special assignments, letters of commendation, merchandise and even bragging rights.  Organizations often overlook the most common form of non-financial reward, simply acknowledging the employee’s contribution and efforts with a “Thank You”!

 

It is known and understood that any reward system which occurs on a regular and predicable cycle will sustain behavior, but only at a fixed level.  However, rewards which take place on a variable basis tend to increase behavior to its maximum level.  Therefore, a compensation system with a portion of its pay based on a variable reward design will tend to increase performance.  At one end of this method is a function whose compensation is 100% commission and at the other extreme is a job paid 100% by fixed wages.  For most variable pay designs, the desire is to have a reward system designed between these two extremes.

 

Variable pay and non-financial rewards will see even greater use in the future, even in jobs which traditional have been compensated on a 100% fixed based salary.  However, it is unlikely that annual pay adjustments will completely disappear from the compensation manager’s tool box.  There will always be a need in some situations with selected jobs to annually review and adjust base pay due to organizational demands, labor market pressures or the contributions of individual employees.

More Jobs are Requiring More Education

Friday, July 12, 2013

 

Tell me something that I did not already know.

 

In a June 2013 report co-authored by Anthony P. Carnevale, Nicole Smith, and JeffStrohl, “Recovery: Job Growth and Education Requirements through 2020”, the Georgetown Center on Education and the Workforce authors point to a somewhat bleak picture of the supply of job candidates vs. the skills demanded by the workplace.  The study estimate that by 2020, on a national level, 65% of jobs will require some level of post-high school education.  And if that was not already a slap in the face, 66% to 76% of jobs in the top half (28) of the states will require education beyond high school.  With the exception of New Hampshire, Utah, and Wisconsin, every state and the District of Columbia are projected to be unable to meet the educational job-market demands by 2020.  So what is the message for many business organizations?

 

Most business leaders already know that many high school, community, and college graduates possess a significant gap of varying degrees for both soft and hard skills.  While vocational and trade schools may be training workers for trades, most traditional colleges do not see that it is their role is to produce job ready employees for an specific industry or employer.

 

What’s an employer to do in the search for top talent?  Karen Klein, writing for Bloomberg Businessweek on May 17, 2013 in her article titled, “How to Recruit the Best of the Class of 2013”, describes seven issues that small businesses should address.

 

1.     Sell your size: smaller organizations often expose employees to a wide range business area, link them to organizational leaders, and open doors to mentoring by owners and directors.

2.     Promote culture: current graduates want meaningful employment and associations, an employer’s culture and passion will be important to that top grad.

3.     Find grads before they graduate: start early with college alumni networks, college career centers, get involved in mentoring and internship programs.

4.     Pay them well:  ensure compensation is competitive and have a good employee-review process.  Leverage the motivating power of technology, such as providing the latest mobile device.

5.     Use social networks: highlight fast-track career opportunities in social media. Use social media to help screen applicants.

6.     Make your company look good: make your organizational brand stand out.  Again, social media can be a platform to reach that new top grad.

7.     Be realistic:  there are no guarantees, as with any new employee.  Top grads do not always make for a top performer.

 

As the economy continues its slow and protracted recovery, employers can be extremely selective in their new employee hiring processes, especially for recent college graduates.  It is important that organizations focus their recruiting efforts on those candidates who possess the right combination of soft and hard skills.  This is uniquely true of small to midsize employers who often make a limited number of technical and four year college hires.

Performance-Based Pay and Employee Engagement

Friday, July 05, 2013

A recent study (Kelly Global Workforce Index) by Kelly Services, a workforce and staffing solutions company, indicated that employees prefer compensation based on job performance. The study reported that for those employees not on a pay-for-performance system, 40% of respondents indicated they “would be more productive if they had their earnings linked to performance/productivity outcomes”. Steve Armstrong, Sr VP/GM for Kelly’s U.S. Operations was quoted as saying, “the trend reflects widespread recognition that organizations and individuals are most productive when their interests, including incentive-based pay, are aligned”.

Employee pay-for-performance systems are most effective when employees’ interests align with the organization’s business goals and objectives. In an April 26, 2013 report on Gallup's Employee Engagement Index, Daniela Yu, Jim Harter, and Sangeeta Agrawal found that U.S. managers had the highest (36% vs. 26% in 2009) level of employee engagement. The lowest level of engagement was attributed to “Manufacturing or production workers” at 24%. Equally, significant, the report clearly shows an increase in engagement for all worker classifications between 2009 and 2012. While at 36%, even the highest engagement level is well below an acceptable level, nevertheless, a 10-percentage point improvement over 2009 is certainly significant. The authors attributed this increase in manager engagement, in part, due to an increase in their organization’s new hire activities and thus an “improved view of the hiring situation at work”. By extension, a worker’s increase in engagement correlates with an improvement in their organization’s “hiring situation”, i.e., workers feel more secure about their future prospects.

Towers Watson, a professional services company, reports that organizations often struggle to show a relationship between performance-based compensation programs and employee engagement. In a 2013 white paper titled, “Using Targeted Incentives to Drive Sustainable Engagement”, Towers suggests the linkage between reward and engagement is related to; “… behaviors that organizations can promote via incentive plans [which] are limited only by their ability to observe, measure and communicate …” This clearly relates to the axiom, “If you can’t measure it, you can’t manage it.” Towers goes on to define engagement as, “… discretionary effort in order to achieve work-related goals.”

While it may be apparent, it bears restating, employee engagement behavior resides at the upper bounds of employee performance levels. In other words, employees must stretch their performance to achieve engagement. Merely reporting for work will not achieve employee engagement. Kathy Orr, Principal, Orr & Associates, has described this process as “rasing the bar” of employee performance expectations and hence employee engagement. Employees may not want to hear it, but the performance and engagement levels they delivered last year, may not be acceptable this year. For performance-base pay to be effective at engaging employees, organizational leaders must design reward and recognition systems, which drive the work behaviors of more than 36% to 24% of workers.

How Much Should You Pay Top Performers?

Friday, June 28, 2013

Classical compensation and salary administration methodologies deal with jobs evaluated based on their required knowledge, skills, abilities, and level of responsibilities often using point factor analysis techniques, i.e., the Hay method. Salary structures and ranges develop around survey data for similar organizations. A typical salary range is from 20% below to 20% above the mid-point for a given cluster of jobs. Therefore, a range with a mid-point of $25 per hour would have a minimum or $20 and a maximum of $30, or a spread of 50% from top to bottom. The range’s maximum is the rate for top performers. However, at some point we realized this approach did not address the truly outstanding performer. Salary ranges have now morphed into “broad bands” with range spreads of up to 100% or more.

So again, I ask, how much should we pay top performers? According to WorldatWork’s 39th annual salary budget survey for 2012-2013, the 2013 average expected percent increase is 2.7%. Kerry Chou, a senior practice leader with WorldatWork, has suggested truly top performers be compensated up to 200% of the “meets” performer. How does an employer with a limited budget pay 200% the going rate, even for their top performers?

Good compensation practices generally include a mix of reward and non-cash recognition opportunities available for ALL performance levels. These opportunities include base pay, incentive/variable pay, equity shares, benefits, as well as non-cash recognition such as additional time off, advancement opportunities, special assignments, project leadership roles, and training/education. This approach permits organizations to develop middle performers into top performers and sustain top talent.

In a July 2012 Oracle whitepaper, compensation for top performers was characterized as “Talent Insurance”. The white paper goes on to identify a top performer as:

• Is a key contributor

• Demonstrates high performance

• Is capable of a lateral move

• May be qualified for a broader role within the same profession

• Has reached the potential to move upward in a management capacity

As an example, consider Ted who started as an entry-level design engineer, who later moved into sales and then into marketing, and is now working in finance after completing his MBA. While in design he routinely had lead roles on many projects, in sales, he was 150% to 200% above standard, in marketing, he revolutionized how the organization roles out new products through the use of social media, and now in finance he is reducing write-offs by 50% by pre-qualifying clients.

Does the organization have a plan for Ted? If so, Ted’s depth and scope of talents can be directed and any number of problem areas within the organization and even acquisitions. If there is no plan to compensate, reward, and recognize top performers like Ted, they will begin to look outside the organization and will eventually move on to your competitor. Or, worse yet, they will become your competitor!

Keeping Workers at the Farm

Friday, June 21, 2013

Compared to most employers, turnover in the retail industry, which is heavily dependent on part-time workers, is relatively high. In May 2012, the Hay Group reported a turnover rate of 67% among part-time employees, an increase of 33% above 2011. Sourcing, recruiting, training, and retaining part-time employees is time consuming, expensive, and distracts from the three key objectives in retail - sales, sales, and repeat sales. As the economy slowly improves, how do retail employers retain part-time workers?

As Lauren Weber reported in the Wall Street Journal on June 10, 2013, one retail employer is trying a different approach. The Cumberland Gulf Group, which owns and operates Cumberland Farms convenience stores and the Gulf Oil brand, plans to re-classify some 1,500 employees as full-time. This will allow those employees to become eligible for the Cumberland’s health care plan. In addition, Cumberland is re-classifying workers based on 30 hours per week rather that the previously required 40. Thirty hours is the floor for full-time employees under PPACA as of 2014.

While some retail employers are thinking and then rethinking a reduction in workers hours to avoid health care mandates, The Cumberland Gulf Group’s actions appear to be unique. In October 2012, Darden Restaurants, which owns the Red Lobster, Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House stopped offering employees work schedules with more than 28 hours, as reported by Newsmax. Then on December 5, 2012, Candice Choi reported in the HuffPost Business that Darden had a somewhat change of heart. Darden will not reduce the hours of current full-time employees but may rely more on part-time employees in the future.

Ari Haseotes, President/COO of Cumberland Farms’, indicated that Cumberland planed to make “employee satisfaction and retention a corporate priority”. Haseotes went on to link tenured employees with both the speed and quality of customer service. “Our people know how to speed a customer through checkout quickly, how to use our ovens to make a pizza or sandwich right.”

Highly competitive businesses must find ways to attract, retain, and motivate ALL workers, especially part-time employees. As with hiring any employee, there must be a fit between the expectations of both parties, if the relationship is successful. Since many part-time jobs are and will always be, part-time, ensuring part-time employees understand that premise is essential for employee engagement and motivation. It should be clear to part-time employees that schedules may vary from week to week, even day to day and their availability may be on an on-demand, just-in-time need.  This allows both to enter the relationship with full knowledge of each others expectations.

As the old adage states, “Honesty is the best policy”.

2014 - Worker Misclassification More Important Than Ever

Friday, June 14, 2013

Worker misclassification, the classification of a worker as an independent contractor rather than as a common law employee has numerous advantages for both the contracting entity as well as the contractor. For the contracting entity, there is usually no payment of various federal, state, and local employment related taxes. Generally, there is no requirement to meet the Fair Labor Standards Act (FLSA), Employee Retirement Income Security Act (ERISA) or a host of other laws and reporting requirements. The independent contractor often has the ability to choose which jobs are accepted and when, where, and how the work is done. Failure to comply with FLSA and ERISA has the potential to carry significant penalties.

Beginning in 2014, worker misclassification exposes some employers to additional risks under the Patient Protection and Affordable Care Act (PPACA). In general, most employers with 50 or more full-time and full-time equivalent employees (FTE) who average 30+ hrs/wk are required to offer those employees affordable health care, which meets certain essential standards of medical care. The issue of worker misclassification comes into play when the employer counts those workers to determine if they meet the 50 employee (full-time equivalent) threshold of a “large” employer. If the employer has incorrectly classified those workers as independent contractors and it is later determined those workers were common law employees, the employee might face penalties under PPACA but also FLSA, ERISA and possibly other federal, state or even local laws.

Under PPACA, counting employees is not as simple as counting just the number of heads at some point in time. IRS’ own frequently asked questions and answers point to some of the possible misunderstandings. The 50-employee threshold may be met with 100 employees working 15 hours per week, how so, 100 ees times 15 hrs/wk equals 150 hrs/wk divided by 30 hrs/wk equals 50 full-time equivalent employees. Any combination of full-time and part-time employees could render the employer a “large” employer and thus subject to the Employer Shared Responsibility mandate.

By misclassifying a full-time or part-time worker as an independent contractor, later deemed a common law employee, the employer may have to recount the workforce to determine if they in fact met the 50 FTE threshold of the Employer Shared Responsibility mandate. Knowing how the regulatory agencies have “fixed” similar situations in retirement plans, the employer might be obligated to correct the situation by making the affected employees whole. Needless to say, the possibility of such a corrective action could be expensive, time consuming, distractive, and harmful to the employer’s public image. Talented employees have the option to work for several employers; those same employees may exit and/or shy away from any employer with a reputation of worker misclassification.

Management, financial, labor, and legal issues dealing with any governmental interaction requires knowledgeable and professional level assistance and guidance. Employers should consult with the appropriate level of professional counsel prior to undertaking changes to their worker classification processes and procedures or employee benefits plans.

Retirement Postponed, Retirement Reinvented!

Friday, June 07, 2013

It is no secret; many employees approaching retirement are postponing their withdrawal from the workplace for several reasons. Economics is certainly one reason, confusion over the availability of health care is another, and even coordination of retirement with a spouse may be a factor? For employers, hard pressed to find highly skilled, talented, and knowledgeable workers, being able to retain some workers past their normal retirement age can be a competitive advantage.

In a recent article in the Spring 2013 issue of the ISR Sampler from the University of Michigan’s Institute for Social Research, Susan Rosegrant describes what the new retirement may look like for Baby Boomers. Titled, “The New Retirement: No Retirement?” Rosegrant depicts the world of retirement populated by reluctant participants, delaying and deferring retirement. Rosegrant cites retired college professors returning to work without pay who continue to contribute.

Chris Farrell, a contributing editor for Bloomberg Businessweek, recently noted, “The footprints of an aging America are everywhere”, in his August 07, 2012 article, “It's Time to See Older Workers as an Asset”. Farrell points out that unlike the US, Europe is just now beginning to pass age discrimination laws and is struggling to keep older workers on the job. In effect, Europe is missing out on the talent war by failing to tap into some of its most valuable resources.

Philip Moeller, writing for U.S. News & World Report points out that, “… prospective labor-force shortages mean many employers simply cannot afford to let older workers retire or walk out the door.”  So if there is a labor shortage, why aren’t employers aggressively recruiting older workers? Well, apparently some are according to Donna Fuscaldo, writing for FOXBusiness. Organizations are seeking older workers for their “gravitas that … younger counterparts may lack”. Employers are opting to take advantage of the older worker’s managerial and project experience in mentoring and other roles.

When Trevor Stansbury, the president of Supply Dynamics', a Loveland, Ohio based professional services company specializing in OEM “Supply CHANGE Management”, needed engineers to support his organization, he found that new college graduates simply lacked the experience he needed. Instead, he turned to retired engineers from the transportation industries. Even though working part time, Stansbury found that these engineers understood the concerns of Supply Dynamics' customers, at times better that the customers themselves. Stansbury values his retired engineers for what they possess, "They bring a wealth of knowledge."

What Stansbury did not speak to, was the inter-generation dissemination of that “knowledge” among the several generations of workers at Supply Dynamics. As organizations continue to struggle with domestic and global competitive forces, decade’s worth of business knowledge is often lost as skilled workers exit employment. While many underlying manufacturing, communications, and transportation processes have changed in the last several decades, much of the basic inputs into the supporting infrastructures have not. It is the passage of information from one generation another, which has brought our economy from an analog to the digital realm. That journey’s foundation is knowledge.