Your Compensation Questions, Answered

As organizations emerge from the recession, they confront the challenge of how best to reward and retain their current employees—and attract the new hires they’ll need in the future. The pre-recession pay and reward models may no longer be working in many organizations. Decisions made during the recession to freeze or cut pay may need to be revisited. And companies will soon have to balance salary demands made by top candidates against the compensation packages of their recession “survivors.” In her 60-minute webcast (archived and available for viewing through February 18, 2011), compensation expert and Compensation Force blogger Ann Bares talked about:

• Re-examining reward strategies in light of new business realities.

• The importance of identifying the distinct roles that base salary, variable pay, recognition and other reward elements play in meeting your overall reward goals.

• Ensuring that compensation practices remain competitive as the labor market turns around.

Here are some key audience questions that Ann Bares agreed to answer after time ran out during the live event:

Q: I agree about the importance of getting leadership involved in the conversation of looking at the compensation program from a different perspective. The question is: How?

Ann Bares: This is a great and important question, as any effort to change the compensation program without leadership support is unlikely to go far. Three thoughts here:

1. Business context. The whole question of positioning your compensation program for success in 2010 and beyond must be framed in the larger context of what your organization must do to succeed. Our challenge, as compensation professionals or HR professionals charged with compensation management, is to not only understand the situation and needs of the employees, but also to understand the needs of the business going forward. What are the biggest challenges the organization faces in the near future? Over the next two to three years? What is necessary to succeed in the face of those challenges? Any conversation about compensation program changes must be within the context of the larger business challenges, the threats as well as the opportunities.

2. Compensation as a (or the) major business expense. For most organizations today, employee compensation expenses are one of the biggest costs of doing business. Are your compensation practices and structure delivering the best return on that investment? Your job is to help leadership see the connection between compensation investment and organizational success by positioning your points in the language of profits and returns.

3. The recession-generated opportunity. Crisis is a game changer. Although the economic downturn wreaked havoc on our pay and benefit programs, it also provides us with the chance to hit the reset button. It can provide us the chance to make new deals and to push forward reward principles and ideas. Help your leadership see that they can use this momentum to make changes or improvements to any programs or practices which are no longer seen as working well.

Q: I like the idea of considering mission-critical talent in regards to salary decisions. However, I am concerned about perceptions of inequality internally.

Bares: The labor market is going to keep doing what the labor market does best: sort through talent supply and demand, and drive up the price of those skills most critical to the most organizations. This is a reality that we who manage pay programs cannot afford to ignore. We must figure out how best to respond to this from the standpoint of our organizations’ talent needs, but it would behoove us to do so in a forward-thinking manner that also considers the needs of our employees.

I think we owe our employees an education in how the talent marketplace works, and the impact it has on compensation programs and practices. Employees need this information and understanding to make the best possible decisions about their own careers and livelihoods. I think it would be even smarter to provide regular information to employees about the organization’s critical skill needs and create resources and opportunities for those who are motivated to retool and position themselves for greater earning potential. That would be a win-win, to my mind.

Q: On the salary increase budget slide, are the percents shown based on all organizations, including those not giving any increase, or are the percents shown based only on those giving increases? Is it important to know both sets of data? Why?

Bares: The base salary increase percents shown in this presentation are reflective of all organizations, so they include the “zeros” (those organizations not giving any increase). To provide a bit of perspective, the slide in question, titled “Historically Low Salary Increase Budgets,” lists 2.5 percent as the most recently updated 2010 projected average salary for all organizations. If we were to remove the approximately 17 percent of organizations that aren’t planning increases in 2010, that figure would go up to 3 percent.

It’s a good question, because both of these numbers tell you something important about what’s happening in the labor market. The “all organizations” data (including the “zeros”) give you a snapshot of the market in its entirety, the speed at which salaries are expected to move on average across all employers. The “without zeros” data tell you what is happening at those employers that are financially strong enough to commit to salary increases and that will be in the best position to compete for your employees. How much relative weight you give to either number should reflect your own particular situation including business outlook, industry trends, turnover, staffing needs and skill shortages.

Q: If we start tying employee compensation more closely to company performance, how can we make sure that the line of sight is short enough?

Bares: Another great question. Line of sight, for anyone unfamiliar with the term, is a favorite phrase of compensation professionals and a key concept in designing variable-pay plans. I believe the expression has its origins in the military, where it means “distance to target” or something along those lines. When we use the phrase in relation to employee motivation and rewards, it is defined as an employee’s perceived ability to affect a particular performance measure.

Why does this matter? Because the whole point of most incentive plans is to focus employee attention and effort on making some type of improvement happen—such as more revenue, greater profit or more satisfied customers. If you choose a measure of improvement and base your incentive awards on it, but the typical employee doesn’t believe that there is anything she can do to influence that measure, what outcome can you expect? Here’s my view: You can expect a lot of people sitting around hoping for their incentive ship to come in.

More often than not, line of sight is a matter of education and information sharing. That’s why it will be important that any move to shift the employee pay mix be accompanied by a move to more education and information sharing. Employees whose pay is increasingly tied to the success or failure of projects, business units and even entire organizations will demand the information and help they need to track and understand that performance.

Q: Do you think that base salary or variable pay is in the better position to incent either organizational or individual outcomes?

Bares: An employee’s base salary is the price an organization pays in order to “purchase” that individual’s unique set of talents, skills, abilities and experience. Traditionally, we have provided increases to base salary both to reflect the fact that the price of that skill set is increasing in the market for talent , and to reward the individual for his/her performance. As we’ve discovered, it is very difficult to accomplish much “rewarding” with the small salary increase budgets of recent years. So, it has been tough enough to use base salaries to reward individual performance; it would be an extreme challenge to also use base salaries to reward organizational performance in a very meaningful way.

Because variable pay can be designed in so many ways and because it must (by definition) be re-earned every performance period, it is a much more flexible compensation element. It can be used to reinforce individual, project, group or even company performance. But variable pay works best when it is focused on a few key outcomes, rather than spread thin across too many. So here, too, we want to be deliberate and strategic in how we use variable pay.

This takes us back to the webcast’s idea of considering and using all the elements of total rewards, rather than just base salaries and variable pay, to drive the things necessary for business success. It means thinking through the most important outcomes our reward package must deliver on, and determining how best to use each and every total reward element to help get us there.

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