Keeping Comp on Track: Some Practical Tips

By Nancy M. Davis and Stephen Miller Jun 25, 2008
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CHICAGO—It’s the economy, said Sharon K. Koss, SPHR, consultant and author of Solving the Compensation Puzzle (SHRM, 2007), during her June 21, 2008 workshop on “Compensation Basics,” held here.

“We have changes in the economy … that are going to affect compensation,” she predicted, blaming the downturn for growing the number of U.S. workers—70 percent, she claims—who are living paycheck to paycheck as a result of credit and housing crises as well as rising gas prices.

“We have this perfect storm of people with real significant financial issues and a severe shortage of skills,” she said. How, she asked, can U.S. employers face hiring shortages when unemployment is rising? “A lot of people don’t have the right skills. Some people are the wrong people. We have a mismatch.” The jobs in shortest supply include nurses, pharmacy technicians and pharmacists, and engineers.

Leaders of many companies have “no clue” how vulnerable they become by constantly losing workers, she warned, citing SHRM research and noting that:

  • 75 percent of workers say they are open to considering new jobs.
  • 35 percent say they are actively seeking new jobs.

Low merit increases have positioned compensation in many companies below the market.

Many employees now figure that changing jobs represents the best way to increase their pay.

“Don’t take anyone for granted,” she insisted. Too many companies embrace a “Don’t you like it here? Get another job” mentality.

Plan Whole Packages

Total compensation requires balancing direct compensation, such as base pay and incentives, and indirect compensation, including benefits and the work environment. Nevertheless “base pay is the ticket to the ball game,” Koss predicted. “If people aren’t happy with base pay, they won’t be happy. [Members of the] new generations are even more focused on money. So, you better have a compensation philosophy.

“You need to know where you’re going to be and how you’re going to get there. A compensation philosophy requires in-depth analyses of current practices and results, and the strategic role compensation should play in your company.” Koss recommends plans where the midpoint of the salary range meets the market.

Compensation equity inside a company—fairness between what employees bring to a company and how they are rewarded—has become more important than external equity, she reflected. Furthermore, in the current economy, “How much people make will be a topic talked about.” Most employers ignore internal equity issues when setting compensation policy, she said.

Inflation Pressure

Whereas the average salary range adjustment recommended for 2008 was 2.8 percent, according to studies by Mercer, Hewitt and WorldatWork, that figure will be higher this year because of inflation, she warned.

What is the merit increase salary pool for 2008? According to Mercer, WorldAtWork and Milliman USA, it was 4.0 percent, Koss said. She recommends HR professionals strive to get a 4.5 percent merit budget set aside for 2009. To gain support for such plans from senior leaders, HR professionals need to back their proposals with solid data, she insisted.

Highs and Lows

All employees aren’t above average, a fact that both basic and variable pay schemes must take into account, advised Koss, in the second part of her workshop on Sunday morning, “Basic and Variable Pay: A Practical Overview”

“The difference between high performers’ annual merit increase and low performers’ merit increase should be at least 3 percent to be motivating,” she noted, citing psychological studies. “If an average performer receives a 3 percent raise, your all-stars should get at least 6 percent.”

On a standard 5-point scale, “some have to get ‘0’ to fund your stars,” Koss said. “That’s OK!” When managers fret that if they give out low ratings with no increase, then those employees will quit, she advised, “Offer to drive them to the bus stop.”

Don’t Drink the COLA

And don’t get Koss started on automatic cost-of-living adjustments (COLA) outside the union environment. “Take that money and put it into your merit increase fund,” she advised. Once offered, cost-of-living increases will be viewed as an entitlement, “so getting rid of them will be a communications challenge,” Koss admits, but one worth tackling.

Another tip: Jettison anniversary-date merit-increase reviews in favor of doing performance appraisals for everyone at one time. One problem with using anniversary dates is that “you’re constantly tracking which managers are ‘late’ and prodding them to turn their appraisals in.” Or not tracking and prodding, which is even worse.

Reviewing everyone together allows managers to look at the whole bell curve of employee performance at one time, and it avoids the temptation to make everyone at least “average.” Also, it circumvents problems that crop up, for example, when comparing Fred’s performance in February against Jane’s performance in June—when deteriorating economic considerations might unfairly weigh on Jane’s rating. “It’s just fairer to rate everyone at the same time” under the same market conditions, she said.

The ‘Variable’ Shift

Along with market-base pay structures and performance-based merit pay increases, employers across all industries are increasingly shifting more of their compensation package toward incentive-based variable pay, Koss said, which includes bonuses and incentive awards. Unlike base pay, “it doesn’t become a permanent part of an employee’s paycheck.” Like respect, it must be earned.

One advantage of variable pay is that it speaks to younger workers’ desire for individual recognition and addresses the so-called “what’s in it for me” (WIIFM) issue.

Steps for successful plans, Koss said, include achieving top management support, meshing organizational and individual goals, and communicating clearly why the shift is being made (again, WIIFM) and the criteria for earning bonuses and other incentive pay.

And how do you measure the link between employee behavior and payout? Start with a pilot group, Koss recommended. Run financial modeling to provide a sense of what payouts will cost. And have a written plan that spells out variable pay criteria.

“Educate your managers,” Koss emphasized, making sure that they’re onboard and comfortable with new variable pay approaches.

“Good variable pay plans can pay for themselves in decreased cost and increased revenue,” Koss said. In other words, incentives work.

Nancy M. Davis is editor of HR Magazine, and Stephen Miller is an online editor/manager for SHRM.

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