Compensation Cafe

Let's Stop Shooting Ourselves in the Foot, Compliance-Wise

Wage and hour litigation is on the rise, as my fellow blogger Becky Regan confirmed in her post yesterday.

As compensation and HR professionals charged with FLSA compliance, we face a host of challenges in ensuring that our organizations' jobs are properly classified.  Not the least of these is pushback from managers and employees who see an exempt designation as an acknowledgment of professionalism and status, or (somewhat ironically) a way to get more money.

So, why do we insist on making our lives harder than they have to be by...

• Making exempt status a criteria for incentive plan eligibility, or for a higher award tier within the incentive plan?
• Creating an artificial salary ceiling for nonexempt employees by reserving certain salary grade levels (grades 12 and up, for example) for exempt positions only?
• Making exempt status the criteria for moving from a cubicle to an office?
• Providing a higher level of benefits (such as more vacation, more PTO days or a larger life insurance benefit) to exempt employees?

Come on, people!

You can't expect your managers and employees to buy the argument that FLSA status is solely about compliance with overtime laws when your HR policies showcase it as the hurdle to be crossed for better perks, benefits and pay.

So here's a call to stop shooting ourselves in the foot and throwing boulders into our own paths.  Make FLSA compliance more straightforward and less baggage-ridden.  If you must limit the eligibility for different reward plans and opportunities, please find some genuinely business-related criteria to use instead.

Thanks for listening.

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.   She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time.  Follow her on Twitter at @annbares.

Image: Creative Commons Photo "Stop" by Brainware3000

5 Tips For Avoiding Wage & Hour Lawsuits

Here at the Cafe, we've been talking a lot about compensation communication lately.  And recent  broadcasts from multiple sources including Kiplinger and the national employment law firm of Seyfarth Shaw are advising clients and workplace managers of the huge uptick in wage and hour class action lawsuits.  This dramatic increase in the sheer number and settlement size of these class action suits provides further support to train managers in wage & hour issues.

Both sources contend that wage & hour lawsuits are exponentially outpacing all other types of workplace class action lawsuits.  Collective actions filed in federal court outnumbered all other types of private class action suits, and hit the following states the hardest last year: California, Florida, Illinois, New Jersey, New York, Massachusetts, Minnesota, Pennsylvania, and Washington.  This trend is expected to continue into 2010.

Seyfarth Shaw summarizes their findings in their Sixth Annual Workplace Class Action Litigation Report by saying, "Increasing sophisticated class action and collective action litigation, combined with aggressive government enforcement, means that employers are apt to face more claims and bigger exposures in 2010."

The cost of losing these complaints and lawsuits for employers is huge.  Seyforth Shaw reported that the dollar valuation of the "top 10" private settlements in 2009 totaled $363.8 million, up from $252.70 million in 2008.

At Ohio Employer's Law Blog, attorney John Hyman wrote a 12/09 blog that highlighted a $1 BiIllion class action lawsuit (as he says, "yes that's 9 zero's!") filed against AT & T for their alleged misclassification of their first line managers as being "exempt."  Unfortunately, it only takes one disgruntled employee to instigate a wage & hours complaint that has the potential to become a major class action suit against an employer.

Here are 5 tips you can implement in your organization to avoid wage and hour complaints and lawsuits:

1).  Conduct a wage & hour audit.  Now is the time to become proactive, to be certain that your organization's jobs are properly classified as being either "exempt" or "non-exempt" under the FLSA and DOL's regulations.  If you don't have the time to conduct the audit yourself, hire an experienced HR consultant or attorney to perform this analysis.

2).  Identify & focus on known "problem jobs" including jobs under the administrative exemption, IT jobs, outside/inside sales jobs, and first line supervision jobs.  The FLSA evaluation tends to become difficult when evaluating the "threshold jobs" that are just on the border of transitioning from being "non-exempt" to "exempt."  States who have more restrictive wage & hour regulations regarding specified jobs groups can also be problematic.

3). When in doubt, hire an expert to make the determination as to the proper classification status.  Run the  most difficult "problem jobs" by your labor attorney to make a final determination.  Or....decide to manage this conservatively and classify "problem jobs" as being non-exempt to avoid any future problems. Of course, many employers don't want to do this because of the overtime pay costs.

4).  Bring your managers into the decision making process.  Get additional information from them about the job's responsibilities and duties as necessary, and use the time to educate them about why the job has to be classified one way or the other.  You'll have greater "buy-in" from them once the final decision's been made because they were a part of the process.

5).  Train your managers.  Clarify and correct common managerial beliefs such as discretionary classification of jobs based upon their whim, the differences between "salaried" and "exempt," and key elements of your compensation practices.  Knowledgeable managers won't allow unauthorized overtime practices, missed lunch or regular breaks from their employees.

Experts believe that approximately 70% of businesses are out of compliance with wage and hour laws.  Through implementing these five recommended practices, you could potentially save your organization thousands and maybe even millions of dollars in avoided complaints or lawsuits.  If you suspect that your company has wage & hour issues, don't wait for one of the 250 newly hired DOL agents to show up on your doorstep before you address them!

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

Flickr photo courtesy ofcrystaljingsr

The Seven Step Compensation Diet: Step #1 - The Mirror

It is an easy thing to lead an organization when the good times are rolling.  During a recession - when challenges assail you from every direction - not so much.  To succeed, to lead under these circumstances will require more than possessing a particular series of technical and behavioral skill sets.  You must command the ability to apply them as well.  Effective cost cutting has become a business priority, as well as the imperative to continuously create more efficiency in company operations.  You need to trim down as well as trim back, but in a managed fashion that will strengthen your organization for the future.

When it comes to Human Resources and the management of your payroll dollars, you need to cut the fat and tone the muscles; you need to go on a diet.

In your personal life the decision to begin a weight loss / trim down regimen typically means that you have recognized a problem with your current life style. You have then committed to 1) stop certain negative-reinforcing actions (eating the wrong foods) and 2) instill a sense of discipline to follow new positive-oriented behaviors (portion control and exercise) that would lead you to a healthier tomorrow.  In a similar vein companies facing a legacy of wasteful spending and misused employee rewards require the same discipline to curtail ruinous business practices and embrace the need for new thinking.

In order to rectify costly and damaging practices that have built up and ingrained themselves over time HR Management will need to change the manner in which they reward employees.  They should also exercise more prudent behavior - as if the funds came from their own pocket, versus a bottomless well or the company's money tree.

So how do you do this?  Where do you start?  I suggest that if you follow the Seven Step Compensation Diet you will develop a more effective and efficient HR organization, one that maximizes employee reward dollars while keeping a close eye on the company's business objectives.

Today begins a series of Compensation Cafe posts that will describe each of the seven steps your organization should take to turn your pay practices around.

Step #1: Look Yourself in the Mirror

People begin a diet because they need to.  The damning evidence stares back at them in the morning mirror, forcing an acknowledgment that something must be done.

Management and HR professionals face a similar wake-up call as employee-related problems raise their troublesome heads to demand attention; payroll costs grown out of control, an increasing turnover of key talent, lower productivity or perhaps evidence of worsening employee morale.  Something is damaged or broken within the organization, economic and human factor pain is being felt and the need to address the issues has become critical.

Sad to say though, that it's usually a crisis springing up out of nowhere - not timely self-appraisal - that forces action to replace historic lethargy.  Advance warning for the unwary is a luxury that cannot be counted upon.

The likely sources of this pressing concern are systemic practices rooted in outdated or ill-monitored policies that have out-lived whatever usefulness they might have once claimed.  So ask yourself:

• Do you have an HR / Compensation policy manual?

• When was it last updated?

• Do employees / managers read it / use it?

Or perhaps it is simply that Senior Management is shouting at you?

Whatever the catalyst, at this early identification stage you will have a sense of likely problem areas (i.e., out-of-date procedures, lack of standards, policy gaps, poor documentation, training issues, etc.).  Analyze the likely causes (actions that feed the problem) and consider what practices or policies the organization should modify or stop outright, and what activities or programs you need to start.  Then write them down.  Identify those policies or practices that may be causing harm and need to be reviewed, and then which new initiatives would alleviate the problem(s) and strengthen your organization.  You will need to focus on these weak areas, as such components of your pay programs become the baseline for your future efforts.  Do not lose sight of them.

Knowing you need to take action is a big step, but only the first.

Next up - Step #2: Develop a Compensation Strategy

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats. 

Image: Creative Commons photo by alancleaver

What's in it for Them?

I think it’s fair to say that 2010 will be an interesting year for compensation professionals.  A majority of companies froze salaries in 2009 and salary budgets remain modest in 2010.  At the same time, job satisfaction is at an all-time low and more than half of employees recently surveyed are planning to look for new opportunities. 

Although companies are always trying to do more with less, one might argue that it has never been so important to spend with intent.

We are already starting to see changes in compensation practices and the success of those changes will depend on two things: 1) The quality of the design; and 2) How the new practices are communicated.

When under pressure to make investment decisions with limited resources, it is human nature to centralize decision making and increase process overhead in order to increase the predictability of investment decisions.  After all, when it comes to spending a lot of money on people, decision makers want to understand the value they get for their investment and minimize risk as much as possible.

However, there’s an old saying in software design: If their eyes glaze over when you’re explaining how it works, it’s too complex.  This rule is not absolute but it’s a good rule of thumb.

The same holds true for designing compensation practices.  On the one hand, there are a lot of factors to take in to consideration, such as budgets, salaries, job level, performance, skills, potential, market data, location, etc.  Accommodating these factors requires a certain complexity.  On the other hand, it’s essential that managers and employees understand both what is being rewarded and how.  Too much complexity can be a barrier to understanding and people who don’t understand tend to fall back on what they know best, which is the opposite of embracing change.

Complexity aside, the best way to lure people out of their comfort zones is to show them what’s in it for them.  Just because people understand what’s in it for the business, it doesn’t follow they will act accordingly, as Margaret O’Hanlon reminded us in her recent post The Truth About Compensation Communications. 

If you want people to embrace change you have to help them connect the dots and see what’s in it for them.  'Do it this way or you're fired,' lacks the inspirational appeal that leads to real change so we may want to dig deeper for that value proposition.  In fact, helping people connect the dots should be the primary goal of compensation communication. 

An executive once sent an email to a group of experienced sales professionals explaining why it was in their own best interests to keep detailed and accurate pipeline information:

• He acknowledged that they were extremely busy, that the last thing anyone wanted was more management overhead and that data entry is not anyone’s idea of fun. 

• He then explained the consequences of poor data management practices to the sales professionals themselves – namely, if management couldn't trust the data to predict business outcomes, they would be reluctant to hire or invest in the people and infrastructure the sales team needed to continue to be successful.  Which in turn would mean less take home pay for the sales folks. 

• He closed with thanks for their fantastic efforts and a personal commitment to support them in any way he could.

That is one of my favorite examples of how effective communication can make the difference between adopting and resisting a new process.  Not surprisingly, this email galvanized the sales team into action, which was the intended result. 

Thinking about revisiting or redesigning your compensation practices in 2010?  Here's my advice: Keep it simple, or as simple as possible.  And don't forget to help people understand what’s in it for them.

Picture courtesy of Rutgers.

Laura Schroeder is the Product Manager for Compensation Solutions at Workday, headquartered in Pleasanton, CA.  She has more than twelve years of experience designing, developing, implementing and evangelizing Human Capital Management (HCM) solutions in the US, Asia and Europe.   Her articles and interviews on HCM topics have been published in national and European trade journals.  She currently lives in Munich, Germany and enjoys reading, writing and spending time with friends and family.

The Truth about Compensation Communications?

Want to have a lively discussion with a colleague at this point in our economic travails? Bring up the topic of compensation communications. At least that was my experience this week at the Bay Area Compensation Association. “The Truth about Compensation Communications” was the title of the program. The membership requested the topic, and here are some of the lessons that participants told me they’ve learned in the past few months.

Underestimate the power of your organization’s culture at your peril. It’s unrealistic to expect managers to differentiate merit increases if your organization’s culture says, “Don’t rock the boat.”  True, most of us are uncomfortable conducting pay for performance discussions, but that’s only part of the challenge that HR faces if you are in a culture where people shrink from speaking candidly. When you’re designing your compensation practices, be sure that they’re more than a good idea. Be realistic about whether your managers can pull them off.

Just because people understand, doesn’t mean that they act. HR tends to do a pretty reliable job at explaining how our compensation practices work, but that doesn’t seem to be enough to move managers or employees out of their comfort zone. Let’s take a lesson from our work on Wellness. Have you noticed that it’s easier to entice people to read about losing weight, working out, stopping smoking, than it is to get them to do it? If you want to encourage people to act, you can’t be passive yourself – sending emails and showing PowerPoints. You have to recognize:  The need for discussion so people can internalize new ideas; the challenge of finding out what motivates those specific individuals to act; the insight and commitment it takes to help them stay engaged.

Our people are just glad to have their jobs – and that makes us worried. I’ve run into the following contradiction, “Our employees didn’t complain about their increases.They’re just happy to have a job. But research shows that upwards of 30% of them want to leave as soon as the job market opens up.” (Sometimes I wonder whether it’s the HR practitioner who actually wants to exit, but no matter.)

Here’s my take. If this is the mood in your organization, why aren’t you working to get all those employees reengaged? I’d encourage you to turn this into a pressing initiative which actively involves managers. Otherwise, all those employees may want to leave because they know something you won’t admit – the organization is running out of steam.

We’re not, but I thought we were supposed to be (trying to be) transparent. People are worried about the concept of transparency when it comes to compensation. I say that’s a good thing. To make my point, we talked about the example of the IRS. They seem to strive to be transparent, writing copious notes on hundreds of regulations. And yet few would give the IRS a communications award.  Compensation is difficult to understand for many reasons. Working for clarity – rather than providing information on easily misconstrued technicalities – is what the Compensation Café team has been encouraging.

Margaret O’Hanlon is founder and principal of re:Think Consulting.  She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results.  Margaret brings deep expertise in total rewards communication to the dialogue at the Café; before founding re:Think Consulting, she was a Principal in Total Rewards Communications with Towers Perrin.  Margaret earned her M.S. and Ed.S. in Instructional Technology at Indiana University.  Creative writing is one of her outside passions.

Mission Critical Skills: The Haves & The Have Nots

I posted recently about the harsh realities of the marketplace and the tough-to-swallow fact that all skill sets are not equal in the eyes of the labor market.

It may not be a happy fact, it may not be "fair", but it's a reality I think will only loom larger in the times to come.  Business success in our fast moving, knowledge based and technology driven world will become more and more dependent on certain types of human talent.  The lucky holders of that talent will be able to command a premium price for their skills, and the rest of us will look on with envy.

Related to this is a concept that is pushing to the forefront of base salary management.  It is the idea that base salary decisions can no longer hang simply on the traditional merit matrix variables of individual performance and position in range, but must increasingly reflect the need to invest in talent that is critical to the success of the organization's mission.

My brief discussion of mission critical talent in yesterday's Workforce webinar (Making Compensation Work in 2010 and Beyond) generated a lot of questions - more than we were able to get to in our allotted Q&A time.  Some of them focused on the approach and process for figuring out which skills are critical for a particular organization; others reflected concern about the impact of this delineation on the workforce.  What about the "have nots" who still do important work for the organization?  Won't they be demotivated to learn they've been excluded from a category defined as "mission critical"?

My response, where I relayed the story of a client who very aggressivly promoted (to all employees) their plan to pay a premium for mission critical skills, felt (to me) somewhat short of hitting the mark - and I've been doing some reflection today.

I think this is an important talent management question going forward.  The market is going to keep doing  what the market does best: sort through talent supply and demand, and drive up the price of those skills most critical to the most organizations.  We must figure out how best to respond to this from the standpoint of our organizations' talent needs, but we must do so in a truthful, forward-thinking and compassionate manner.

I believe 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. 

But more than that - wouldn't it be in everyone's best interest if we took it a step further?

What if we not only identified and tracked the skills and competencies critical to our organizations - today and into the future, but also communicated this regularly to our employees?  What if we regularly shared specific information on the kinds of education and certification steps it would take for employees to retool in these areas?  What if we tailored our tuition reimbursement and even flexible work options to support an employee's pursuit of these credentials?  Offered internal apprenticeship or mentoring connections to help them along that path? And made this a part of every performance management discussion?

This so that every employee who complains about the unfairness of not having and being paid for mission critical skills could be pointed to a coordinated set of resources to help them make the necessary investment in themselves to get there.

Wouldn't that, in fact, be a very smart investment for the employer as well?

I'm certain that there are forward-thinking organizations out there already on the cutting edge of this practice.  I'd love to hear about them.

Lots more to say about the concept of mission critical skills and the role they will play in reward - and overall talent management - programs going forward, but that's all I've got today!

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time.  Follow her on Twitter at @annbares.

AIG Employees Set to Receive "The Short End of the Stick."

According to a recent article in the Wall Street Journal, AIG Pay Plan: Rank and Rile, American International Group, Inc. (AIG), is launching a forced distribution system for it's employees' variable pay plan.  The company, a TARP recipient who was harshly criticized by the Pay Czar for last year's retention bonuses paid to it's staff, is struggling to repay more than $90 billion dollars in taxpayer loans.

AIG's CEO, Robert Benmousche utilized this kind of system when he was the CEO of MetLife Inc. from 1998 to 2006.  His strategy now is to "pay the best people for their performance." In town hall meetings with employees over the past few months, he's told employees that he wants them to be paid competitively and fairly for their work.  "We ought to have enough flexibility to make sure that if you shoot the lights out in a given year, we have enough variability to give you a big increase for that year," he declared in 2009.

In a recent interview, he continued by explaining that the company also needs to "better differentiate performance in order to show the American public we are not just giving money away." General Electric Co. under its' infamous former CEO, Jack Welch, implemented a forced distribution system designed to weed out under-performing employees over time. 

Forced distribution systems tend to be loved by accountants for their ability to control costs, and hated by HR and compensation professionals because they destroy morale, further sabotage employee's trust in management, and mock meaningful compensation systems.

Ravin Jesuthasan, leader of the talent-management consulting practice for Towers Watson, says a forced ranking system can change a corporate culture and "help drive consistency across large organizations.  He believes the approach can help in turnaround situations by helping to foster more accountability, but could be risky if "not communicated well or if links to consequences like compensation and employment are not properly thought through."

As we know all too well from experience, most of these plans are poorly communicated, leaving the line supervisor with no one to blame but higher-up management.  Of course, that message is communicated directly to the employee to justify the zero increase in pay and poor performance rating. 

This kind of forced distribution is particularly troubling when a defined "business unit" is consistently well-managed, high-performing in comparison to others, or of a smaller size.  That's when this forced distribution system can produce disastrous results in terms of employee engagement and retention.

Under AIG's proposed plan, thousands of employees will be rated on a scale of 1 to 4 based on their performance relative to their peers, with their variable compensation determined by their rank. The top 10% of performers will receive "far more relative to their peers."  Approximately 20% of the employees will be rated a "2," and 50% will be rated as a "3."  Employees who rate as a "2" or "3" are expected to have performed "well or within expectations" and will receive commensurate variable compensation.

The bottom group of the "4" level ranking will be assigned to 20% of eligible employees, who will then receive lower levels of variable pay.  These employees are not expected to be asked to leave the organization upon receipt of the lowest level for rating performance.

Years ago when I worked in HR for a mortgage bank owned by Ford Motor Company, we used a forced distribution rating for evaluating performance and assigning merit pay increases.  While I'm sure it did control costs, it was a nightmare from a HR perspective.  I'll never forget managers struggling with assigning a false rating to an employee, particularly when they deserved a higher ranking.  Not only did the employee receive a fake rating, it went into their personnel file and resulted in either a reduced or no increase in pay.  The next chance the employee would have to change their performance rating would be in a year hence.

As an employee on the short end of that stick, I wouldn't have put up with it; that's for sure!

One of my recent CC posts was on the topic of how the world of work will change in 2010 and beyond....full of lofty, more idealistic ideas about empowered employers who actually treat employees as adults, with dignity and respect.  Who puts up with this kind of garbage in 2010? 

I realize that AIG is in deep financial straits requiring extraordinary efforts in the short-term to save the company.  Given that fact, maybe use of a forced distribution system is necessary to control costs and appease Kenneth Feinberg and the Feds.  But it sure doesn't sound like a good idea over the long-term.

I expect that AIG will find itself in the troubling position of not being able to attract quality employees down the road when the labor market recovers.  And you guessed it, then they'll have to pay above market rates in order to secure talent for the organization. I wonder if the executive team has a longer horizon built into their variable pay plans for controlling compensation expenses....and who will get the short end of the stick in that group?  Wanna make a bet?

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

Flickr photo courtesy of csftonline.

Compensation & Performance Management: The Cause of All Your Woes?

I recently read a very interesting (and long) blog post about the coming obsolesce of performance and compensation management as we know it because that’s what caused the recent market collapse.  Poorly designed and/or poorly executed compensation and performance management plans can certainly contribute to causing many of the issues listed in the article.  However just as a compensation or performance management plan could never serve as a panacea for all of company’s woes, it could also never be the one item that causes all of those woes. 

There was one quote in the article that touched on the fact that compensation plans cannot replace sound management.  Although the author was using it to drive home his point that we should essentially throw out all current compensation plans because they won’t ever work.  “[A]ny organization believing it can solve its attraction, retention, and motivation problems solely by its compensation system is probably not spending as much time and effort as it should on the work environment--on defining its jobs, on creating its culture, and on making work fun and meaningful.”  All of this matters and contributes to the employment value proposition, but interestingly enough, money also matters.  I once read (although I can’t remember where now) that top performers aren’t necessarily motivated by money, but they do see it as their scorecard, their proof that their contributions are valued.  So I don’t think we’re going to be able to take compensation plans out of the picture anytime soon.

The article denounces incentive compensation plans focused on incentivizing individuals for risky behavior as the basic cause of the current recession.  A well designed incentive compensation plan recognizes when an individual should be incentivized versus when a team should be.  A well designed plan also targets specific behaviors and/or results to be incentivized.  A well executed incentive plan is evaluated to determine if the results match the intended results and quickly addresses any unintended consequences with course corrections.   Plans cannot just be put in place and never looked at again.  Plan design and execution is a cycle that does not end once the first roll-out occurs.

 

Another issue raised in the post was the way that merit increases are handled.  “With little money to distribute, the motivational effects of merit pay increases should be open to question.”  I absolutely agree, and have written about my concerns of spreading the shrinking merit budget too thin before.  However, using the available funds in a targeted fashion, to insure that the highest performance contributors receive the largest rewards, sends a very clear message to all employees.   

Finally, performance management isn’t about providing a review score and increase as the post indicates.  Performance management consists of regular and ongoing conversations.  This is again a management issue, not just a program design issue.  We must give managers the right tools, including the training, to provide meaning performance feedback to help individuals to reach their goals and continually hone their skills.

This article posed some really interesting questions.  But the fallacy in the logic seemed to be the assertion that compensation and performance management problems caused all of the business problems, while stating that they can’t solve all the problems.  I would say that they can’t solve or cause all of the problems, although they can contribute to solutions, and problems if designed or executed poorly.  Perhaps this post can be used as a good primer on what not to do in compensation or performance management.

Darcy Dees, CCP works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has worked with RBR for nearly 10 years helping to develop many of the compensation and performance management programs the company uses today.  She spends what little free time she has hiking and reading.
The opinions expressed here are the personal opinions of Darcy Dees. Content published here is not monitored or approved by Rock Bottom Restaurants, Inc. before it is posted and does not necessarily represent the views and opinions of Rock Bottom Restaurants, Inc.

How Much, You Say?

Whenever  I ask a client to explain their company's ROI from employee compensation, from paying their employees, they always seem to react with a blank stare.  Is that because the question is unique, confusing or simply an issue they hadn't considered before?  Perhaps no one has ever asked them.

Eventually though, they will stumble through an answer.  What do they usually say?  Something about turnover, that not many people are leaving, so things must be working okay.  If I push a little, they will hand me the good-old reduced merit increase story or perhaps quote a recent general adjustment or lower payroll rise percentage.  Unless prompted by more probing questions it is fairly common for senior managers to consider their compensation expense challenge as only the incremental cost of doing business.

This means that when it comes to the matter of monitoring or controlling such costs the "pool" of money under discussion is only the annual increase budget.

If you compare your company's employee payroll against the impact of reducing the annual merit budget by even one full percentage, you will see just how far off the mark the respondent was.

However, I would submit to you that every dollar spent for employee labor is a compensation expense.  Using that premise a company's labor costs will balloon to over 50% of their revenue (excluding benefits).  In that environment the cost of the annual pay rise pales by comparison.

Trying a different tact

When I ask that client whether their compensation program is working for them, I usually get served back that same befuddled look.  Eventually they will again bring up their turnover statistics, as if somehow that percentage (if being used as a metric in the first place) has a 1:1 correlation to compensation program success.

It doesn't.

Managers are commonly ill-equipped to understand the dynamics of their compensation costs, never mind monitor and control them.  This is not surprising though, given that their cadre of newly minted managers are routinely given authority to spend the company's money (hiring, promotion, pay rises, etc.) without the benefit of any managerial training.  Often time these new managers don't make decisions in the best interest of the company, but more commonly on the basis of subjective emotions, a desire to be liked, an exercise in personal power or for a host of other reasons that may or may not relate to an individual's actual job performance.

Of course, the net result from these well-intentioned amateurs is a rising fixed expense of running the business - in the form of uncontrolled payroll costs.

This can be a huge problem for any organization, but you won't get management to face the challenge and take the concrete and perhaps painful steps to improve until they are finally  led to understand what constitutes the controllable employee cost of operating the business - and how to impact that expense.

Ignorance of the law is not a valid defense, I'm told.  Perhaps we should challenge our leadership, our management, to actually manage what could be the company's single largest expense item.

It can be done.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats. 

Image: Creative Commons photo by tao_zhyn

Moving Away from Job Based Pay

Most companies today use a job based approach to compensate employees, derived from a combination of market analysis, job level and skills.  There’s a lot to be said for job based pay, which is fairly straightforward to administer and help protect companies from fair pay lawsuits. 

The flip side is that job based pay is expensive, since salaries typically represent a fair whack of total operating costs.  It’s also inefficient, because companies pay for people instead of business results. 

Clearly, it is people who drive business results, but from a purely financial point of view job based pay is like buying the bathwater with the baby.  And the recent economic recession has forced companies to examine alternatives.

I am a strong believer that people matter to business and that high performing knowledge workers are not interchangeable, unless processes are so standardized that diversity and inspiration are no longer possible.  But the economic reality is that although we need certain types of work to get done by skilled people, it may not make business sense to pay a premium for exclusive rights to those people.  Or to pay for skills and experience that aren’t tied to any business outcome.

The end of 2009 saw a notable rise in contingent labor.  In 2010, despite some promising hints of economic recovery, employers remain cautious about hiring new employees and this will very likely continue as companies get used to a new employment model with seemingly lower overhead.  The labor market is evolving, whether we like it or not.  Our challenge over the next few years is to figure out how to pay for business value rather than ‘jobs’ and do so in a way that doesn’t sacrifice workforce engagement.

Paying for business outcomes is a well-understood concept when it comes to sales incentives.  Successful sales people tend to be highly engaged individuals and few people question the high commissions earned by top salespeople because everyone can see the value they add to the bottom line.

Why can't we apply a similar rewards model to other areas of the business?  Well, for one thing, the business applications companies use to manage talent still lag when it comes to assessing the impact of work on the bottom line.  Moreover, some types of work lend themselves to this more easily than others.  For example, a person who develops training materials might be compensated a certain percentage based on units of training sold but it might not make sense to reward, say, a nurse based on revenue generated.

And let’s face it, in fields where intellectual capital is a competitive advantage, high performing companies have it pretty good, paying fixed base salaries with the odd discretionary bonus while pocketing the rest.  Why should they move to a more results-based pay system? 

Because the times they are a-changin’.  Time Magazine predicts that by 2019 40% of the workforce will rent out their skills.  Business applications are getting better at measuring how much various kinds of work contribute to the bottom line.  Meanwhile, ideas of ‘teams’ and ‘collaboration’ are also being turned on their heads as new technologies are introduced that don’t require people to sit together in order to work together. 

Basically, companies and workers alike are going to have less security and more choices.  It's already starting.  For example, in response to growing demand, Web sites and temp agencies have sprung up all over the place to help companies rent talent instead of buying it, generally for a fixed hourly or project rate. 

So far this trend hasn’t really impacted compensation professionals because contractors are viewed as expenses rather than overhead.  However, once the proportion of contingent workers in the workforce reaches a critical mass businesses and companies will be forced to look at new rewards models to keep contingent workers engaged.

Why?  Because running a business with 40% of your workforce contracted from a local temp agency that also serves your competition... see where I'm going with this?

Renting talent may be the wave of the future but temporary workers will have even less incentive than employees to feel passionate about your company's success...unless, of course, there’s something in it for them. 

New model, same principles.

Picture courtesy of Ames True Temper.

Laura Schroeder is the Product Manager for Compensation Solutions at Workday, headquartered in Pleasanton, CA.  She has more than twelve years of experience designing, developing, implementing and evangelizing Human Capital Management (HCM) solutions in the US, Asia and Europe.   Her articles and interviews on HCM topics have been published in national and European trade journals.  She currently lives in Munich, Germany and enjoys reading, writing and spending time with friends and family.