HR Doesn't Like Doing Compensation: It's a Big Deal!

Editor's Note: Today's post comes to us courtesy of guest contributor Jacque Vilet.

In a recent Cafe post, Ann Bares presents survey results compiled by Sharlyn Lauby, who blogs as HR Bartender.  The survey results show that:

• HR spends a lot time on compensation today and doesn’t like it.
• HR  would prefer to spend their time on any other HR area than compensation.

Ann raises the question of what this tells us about HR and whether it’s an issue we should be concerned about.

My opinion is “yes”; we should be concerned.  And I will respond to the issue of compensation specifically as well as what this bodes for HR’s future:

1) Why is the compensation role important?
2) What will become of HR in the future if it doesn’t learn to apply some of the same skills to their new HR role in the “new normal”?

Number 1 --- Why is the compensation role important?

HR has traditionally focused on soft skills and transactional activities --- employee relations, training and development, and recruiting.  Even compensation was conducted in a transactional manner through survey participation.  It  focused on keeping employee pay in line with competitors.   

Today compensation is viewed differently by top management.  Now it even has the attention of  the Board of Directors.   HR is having to respond to this interest in ways they have never had to before.

Let’s look at some ways the compensation role has changed:

1) Labor cost is one of the largest, if not the largest, company expense.   Labor costs range from 35% of revenues in manufacturing companies to about 70% in professional services companies.     This is not “chump” change.    In the past, companies would agonize over a decision to spend $100,000 for a computer system and ignore labor cost.   The only person remotely interested was the CFO who monitored labor cost as a percent of revenues --- or whatever metric the company used to limit labor cost.

Result:  HR needs to understand how labor cost is spent, if it is spent wisely, are there other more creative ways to spend the same amount of money and how to model different ways it could be changed to meet various business situations.

2) Compensation has received a lot of attention in the past few years due to the layoffs associated with the economic downturn.   We now are beginning to read about the resurgence of “flexible compensation” and the possibility that companies may keep base salaries flat and use variable comp as the way to compensate employees.   Competitive practices are becoming less important.  Demographics are playing a role with four distinct age groups in the workplace, each with differing wants/needs. 
 
Result:  HR needs to create and offer an array of compensation options to employees using the same amount of money to satisfy the wants/needs of these different demographic groups.  If competitive practices are no longer so important, HR needs to better understand the business and build compensation packages for different groups to reflect their value to the business strategy.   In other words, one size doesn’t fit all employee groups.

3) The Board of Directors is more involved in executive compensation now due to the Dodd-Frank Act.  They are expecting HR to provide competitive information on executive compensation.

Result:  HR must be able to analyze not only what the competition pays but also some options on how best to reward the CEO using different components of salary and short/long-term incentives.

Number 2:  What will become of HR in the future if it doesn’t learn to use some of the same skills that are required in the compensation role in their role in the “new normal”?:

It doesn’t really matter what HR wants/doesn’t want to do.   The reality is that the world has changed and HR has not. 

Let’s look at some alarming data from some experts on how HR in general measures up to the new standards that are being imposed on them. 

Studies from McKinsey & Co. and Hewitt suggest that many managers believe HR still lacks the capability to develop strategies aligned with business objectives.    These studies polled CEOs and found that 58 percent of them said HR lacks business acumen.

The need for business acumen is viewed as one of the top HR skills needed today.   And business acumen is most clearly linked to the kind of skills used in the compensation role.  Among other things, HR needs to design compensation  programs that are going to incent employees in enabling the company to meet its business strategy.  

HR needs to be able to solve compensation problems like this one:

“Health care costs are up. I don't have as much money to spend on this plan.   I need to take money from some other plan.  But which one?   How do I put it all together?  And, by the way, I'm in 137 countries with demographic groups ranging in age from 19 to 73. How do I work that all out?”

Solving a problem like this requires some good strategic and analytical thinking. . . . and some number-crunching.

This is just one example.   Cost analysis, modeling and analytics that link directly to the bottom line are becoming an important HR function.   And those skills link back to some of the same ones used in the compensation role.

Business requires it.  The future of HR depends on it. 

Jacque Vilet, President of Vilet International has over 20 years’ experience in International Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology.    She has worked with both local nationals and expatriates and has been an expat twice during her career.    Jacque holds the CCP, GPHR and SWP (Human Capital Institute).  She is a member of WorldatWork,  Society of Human Resources Management and the Human Capital Institute.   She is co-chair of the Global HR professional emphasis group for the Dallas chapter of SHRM.  She is a regular contributor to HCI, HR.com and IHR Forum.

Image courtesy of www.publicradio.org/columns/marketplace/money-blog/2011/03

Comments

[keepdol]

I think Compensation is necessary, the sacrifice must given the price.

Thanks for your info

- keepdol -
keepdol.blogspot.com

[John Nichols]

Jacque is spot on to highlight the need for skilled compensation professionals.

For a number of years it has been too easy to deliver reasonable % pay increases but now for most companies the squeeze is on and you have to act smart with limited resources.

There are notable exceptions but I am afraid too many individuals skip through HR on their career path treating it as a necessary evil but not staying long enough to experience the consequences of some of their decisions.

Bit of a moan but perhaps I'm preasching to the converted.