balancing salaries and incentive pay
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“Balancing Salaries and Incentive Pay”
22
Balancing Guaranteed vs. Variable Pay
What is the right mix of pay between salaries and incentives?
It can be a juggling act Too much focus on
salaries carries a high company cost with no promise of performance
Too much focus on incentives may be perceived as too risky for employees
33
Balancing Guaranteed vs. Variable Pay
Incentive plans too commonly fail How should incentives be aligned to your
employee demographics to generate a higher return on investment?
How do you maximize your rewards philosophy?
Salary
Per-for-
mance Incen-tives
Sales Incen-tives
Growth IncentivesCore Health & Wel-
fare Plans
Executive Benefit Plans
Qualified Re-tirement Plans
Nonqualified Re-tirement Plans
SalariesCompetitive with market standards?Tied to strong performance management process (merit)?Managed within a flexible but effective structure?
Performance IncentivesTied to productivity gains?Clear, achievable and meaningful?Self-financing?
Sales IncentivesChallenging yet achievable?Reinforcing the right behaviors?Differentiating your offering?
Growth IncentivesLinked to a compelling future?Supporting an ownership mentality?Securing premier talent?Core BenefitsResponsive to today’s employee marketplace?Allocating resources where most needed?Evaluated to eliminate unnecessary expense?
Executive BenefitsFlexible enough to address varying circumstances?Communicating a unique relationship?Reducing employee tax expense?
Qualified Retirement PlansGiving employees an opportunity to optimize retirement values?Operated with comprehensive fiduciary accountability?Avoiding conflicts and minimizing expenses?
Nonqualified Retirement PlansOptimizing tax-deferral opportunities?Aligning long-term interests of employees with shareholders?Structured to receive best possible P&L impact?
An Aligned Compensation
Strategy
55
What is Your Pay Mix? Most companies aim to pay “at market”
What is “at market” pay? If everyone paid the exact same way would that
give you a competitive advantage in hiring and retaining talent?
What is it about your pay programs that make you unique?
What might be right for you may not be right for others
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Lets assume an Accountant should be paid between $45,000 and $47,500
How much of that should be salary and how much should be variable should be decided internally
Are either of these company less “competitive” than any other?
Professional Accountant
Base Salary Incentives
Total Cash
Comp
Option A 44,000 1,000 45,000
Option B 42,500 4,000 46,500
Option C 40,000 7,500 47,500
Sample Pay Mix
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Sample Pay Mix
Option A - Conservative Has an advantage around base
salary Has higher fixed costs
Option B - Moderate Middle ground for both salaries
and incentives
Option C - Variable Has a competitive advantage
around incentives and Total Cash Comp
Risk when no incentives paid
Professional Accountant
Base Salary Incentives
Total Cash
Comp
Option A 44,000 1,000 45,000
Professional Accountant
Base Salary Incentives
Total Cash
Comp
Option B 42,500 4,000 46,500
Professional Accountant
Base Salary Incentives
Total Cash
Comp
Option C 40,000 7,500 47,500
88
Conservative Pay Profile
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Profile
Conservative High Moderate Low Moderate Moderate
Provides a high degree of employee security at the expense of variable pay
High base salaries and Moderate incentivesGenerally offers moderate level of core benefits
Cash friendly stable organizationGenerally attractive to a younger employee population
Can inhibit the hiring of “high performers” Rewards performance through merit/promotion
May have difficulty recruiting executive or key employees
99
Moderate Pay Profile
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Retirement
Moderate Moderate Moderate Moderate Moderate Moderate
Provides a middle of the road approach to payBase salaries at middle of marketSome upside incentive potential
Performance rewarded moderatelyAttracts a diverse employee population
Rewards performance through multiple facetsTries to provide a balanced approach without any distinguishing
element of pay
1010
Variable Pay Profile
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Retirement
Variable Low High High Moderate Moderate
Provides a high degree of upside earning potential with higher level of risk
Base salaries at low end of the marketRewards tied directly to business performance
Entrepreneurial mindset – less cash friendlyAttracts high performers, frightens risk averseRewards performance through incentive pay
Promotes high level of value sharingAttracts entrepreneurial leadership through long-term awards
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Pay Mix Considerations
Demographics Younger/Nonexempt employees value predictable
pay Prefer higher salaries and lower total cash
compensation Entrepreneurial/Mature employees want upside
pay potential Will accept lower salaries with higher total cash
opportunity Usually seek both short and long-term
incentives Diverse employee populations may require
different focus on pay at different levels Usually accommodated within compensation
structure/salary ranges
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Owner/Shareholder attitudes on pay Public vs. Privately held companies tend to have
different pay mixes Privately held companies tend to place more pay
in variable programs Public companies have the capital to pay higher
salaries Public companies may offer equity to offset salary
or incentive pay Public companies can be limited to additional
shareholder/fiduciary concerns around pay Nonexempt organizations also share restrictions
around pay mix
Pay Mix Considerations
1313
Pay Mix Considerations
Capital High salaries provide ease in hiring talent but
carry heavy fixed costs During poor performance years, high salaries
can be a heavy burden High incentives offers a way of self-funding
compensation based on company performance When performance objectives are not hit and no
incentives are paid, this philosophy carries a big turnover risk
Ultimately, your pay mix needs to correspond to your business plan
1414
How is Your Investment Allocated?
What does your total pay mix look like? Does it link employees to your business plan?
Why is your compensation budget allocated the way it is today?
Is your total compensation allocation producing unintended consequences (spiraling compensation expenses, turnover, inability to attract talent, etc.)?
Is there a more cost efficient way to manage your compensation dollars while aligning more tightly with your business objectives?
The mix of incentives is usually the easiest place to start correcting your mix
1515
Create a Compensation Philosophy
Best practice is to frame up your philosophy into a written statement
All elements of rewards should be identified (Salaries, incentives,
State where pay is targetedWe pay salaries __________
a) At the top of marketb) At the middle of the marketc) Within market, however we do not lead the market
Our incentives are ________d) At the top of markete) At the middle of the marketf) Within market, however we do not lead the market
1616
Why a written statement?
1. Becomes a common narrative2. Can be shared with existing employees as
well as new recruits3. Gets managers on the same page4. Identifies your competitive advantage5. Creates a consistent framework for rewards6. Your philosophy statement becomes your
Constitutional Rewards Charter
1717
Align Pay to the Philosophy
Salary ranges and incentive targets are commonly set and maintained using market data: ERI PayScale Towers Watson Mercer Industry surveys
Ensure you have access to some market data
1818
Using Market Data
Market data can help create salary ranges
Market data should be interpreted via your philosophy Conservative, Moderate, Variable
25th 50th 75thMercer - Accountant Sr 49,837 57,498 63,141
Market Data
1919
Market Data + Philosophy
Conservative – High Salary
Moderate – Mid Salary
Variable – Low Salary
25th 50th 75thMercer - Accountant Sr 49,837 57,498 63,141
Market Data
25th 50th 75thMercer - Accountant Sr 49,837 57,498 63,141
Market Data
25th 50th 75thMercer - Accountant Sr 49,837 57,498 63,141
Market Data
2020
Create a Total Compensation Structure
Min Mid Max1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 151,167 201,556 251,945 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 122,065 162,753 203,442 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 104,864 139,818 174,773 20.0% 25% 100% 0% 5% $6,127 25 5 5,0005 80,952 101,190 121,428 15.0% 5% $6,127 25 5 5,0006 67,842 84,803 101,763 15.0% 5% $6,127 15 5 7 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 46,027 57,533 69,040 10.0% 5% $6,127 15 5 9 41,835 49,217 56,600 5.0% 5% $6,127 15 5
10 35,494 41,757 48,021 5.0% 5% $6,127 10 5 11 31,507 37,067 42,627 5.0% 5% $6,127 10 5 12 24,145 28,406 32,667 5.0% 5% $6,127 10 5 13 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 17,354 20,417 23,479 0.0% 5% $6,127 10 5
Annual Car Allow
Grade/Band Sick Days
Salary RangeBonus Target
% Phantom Stock AO
Supplemental Life Insurance
Deferred Comp Eligible
Deferred Comp Max
Match
401k Match Max %
Vacation Days
% Phantom Stock FV
% Phantom Stock AO
Health, Dental,
Life
2121
Who Are You Hiring?
Baby Boomers – Born between 1946 -1964 Generation X – Born between 1965 - 1979 Millennials – Born in the 1980’s and 1990’s
Demographic identities are extremely influenced by the world they grew up in
Disclaimer: I will be intentionally painting employee demographics with one overly-broad brush. These statements will not hold true for all individuals in these three general classifications. This overgeneralization is intended to provide directional guidance on pay for these subgroups.
2222
Baby Boomers
2323
Baby Boomers
Raised by World War II Survivors Parents worked in manufacturing,
agriculture, or retail jobs Encouraged to attend Universities
(premium) Focused on having fewer/longer term roles
within organizations Dominate senior leadership roles Understand the increased cost of health
care Typically eyeing retirement
Many retired early and have rejoined the job force
2424
Generation X
2525
Generation X
MTV generation/Latchkey generation Two parents in the workforce
First to have access to home computers College/university was strongly encouraged Incorrectly labeled as “slackers” by
preceding generations Strong entrepreneurship mindset More likely to be 1099 than other gens
Married Later/Fewer kids Took a few jobs to get comfortable Professional and Mid-Manager jobs
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Generation Y
2727
Millennials Grew up with technology in the house
(home computers, internet, cell phones) Values teamwork, ingenuity, and creativity Was told that college/university was a
necessity Many struggled to get jobs after graduation Many prevailing myths
Not all living in Mom’s basement Starting to have families More likely to stay in the same job as
previously assumed Values individuality and being recognition
2828
Pay Strategy
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Profile
Conservative
Millennial High Moderate Low Moderate Moderate
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Retirement
ModerateGen X Moderate Moderate Moderate Moderate Moderate
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Retirement
VariableBoomer Low High High Moderate Moderate
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Theoretical Solution Structure your rewards
around your Compensation Philosophy
Example: “My business is a regional call
center hiring predominately college students and recent college grads.” (Millennials)
“We are a professional investment management firm hiring mostly experienced licensed financial planners.” (Gen X)
“I’m looking to hire extremely experienced legal professionals.” (Boomers)
3030
In reality… Rarely, is your
workplace demographic so pure
Your senior leadership team is probably in a different demographic than your staff accountant
As a result, their financial goals are probably very different
Maintaining one Compensation Philosophy can be challenging
3131
In reality…
Philosophy Min Mid Max1 Variable 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 Variable 151,167 201,556 251,945 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 Variable 122,065 162,753 203,442 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 Moderate 104,864 139,818 174,773 20.0% 25% 100% 0% 5% $6,127 25 5 5,0005 Moderate 80,952 101,190 121,428 15.0% 5% $6,127 25 5 5,0006 Moderate 67,842 84,803 101,763 15.0% 5% $6,127 15 5 7 Moderate 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 Conservative 46,027 57,533 69,040 10.0% 5% $6,127 15 5 9 Conservative 41,835 49,217 56,600 5.0% 5% $6,127 15 5
10 Conservative 35,494 41,757 48,021 5.0% 5% $6,127 10 5 11 Conservative 31,507 37,067 42,627 5.0% 5% $6,127 10 5 12 Conservative 24,145 28,406 32,667 5.0% 5% $6,127 10 5 13 Conservative 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 Conservative 17,354 20,417 23,479 0.0% 5% $6,127 10 5
Annual Car Allow
Grade/Band Sick Days
Salary RangeBonus Target
% Phantom Stock AO
Supplemental Life Insurance
Deferred Comp Eligible
Deferred Comp Max
Match
401k Match Max %
Vacation Days
% Phantom Stock FV
% Phantom Stock AO
Health, Dental,
Life
3232
Common Trend
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Profile
Conservative
Millennial High Moderate Low Moderate Moderate
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Retirement
ModerateGen X Moderate Moderate Moderate Moderate Moderate
Profile Base PayShort-Term Incentives
Long-Term Incentives
Core Benefits Retirement
VariableBoomer Low High High Moderate Moderate
3333
Why Incentives?
All demographics appreciate incentives Millennials – Partnership Gen X – Entrepreneurial minded Boomers – Hoarding cash for retirement
Most incentive plans do not deliver on a level that all demographics can appreciate and relate to
3434
Market CompensationTrends
Incentive programs are more common than ever
2014 World at Work study showed that 99% of publicly traded companies have incentive plans
Between 2011 and 2013 private companies with incentives plans have grown from 95% to 97% prevalence
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Incentives Are A Good Bet Good for organization to put emphasis on
incentive pay Performance Requirements Not Guaranteed
Provides alignment with big picture objectives When properly structured incentives create a
partnership mentality
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Why Do Incentive Plans Fail?
Traditional Incentive plans They seek to change/set behaviors They rob employees of their creative input They reward for completion of small tasks
instead of achieving big picture results They aren’t tied to overall company results/lack
line of sight They are either too discretionary or too
quantitativeBOTTOM LINE:
Traditional Incentive plans are philosophically broken.
They are not perceived as empowering a partnership mentality
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Merriam-Webster Definitions
Bonus – An extra amount of money that is given to an employee
Commission – An amount of money paid to an employee for selling something
Incentive –Something that incites to determination or action
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Traditional View of Incentives
“If I put a carrot in front of you, you will do what I want you to do”
At its heart, when structured inappropriately, incentive plans are perceived as manipulative
Employees agree to be manipulated for money
3939
A Better Approach
“We are part of a team. If we all work together we will generate greater success. That success will be shared with everyone in our incentive plan.”
When structured appropriately, incentive programs should be perceived a partnership.
4040
Partnership
Millennials do not value the traditional “employee” and “employer” relationship
Perceived as a subservience model “Do what I say and I will pay you”
All demographics prefer a sense of “Partnership,” working together towards a common goal
Partners rewarded differently than employees
4141
Simplified Plan Design Simplifying incentive plan
design Incentive plans have
historically been very metric driven
Potentially creates conflict of interest Should I do what’s in the
Company’s best interest or should I just worry about performing
my goals? Should I be paid because the
company succeeded or because I accomplished a list or tasks?
4242
Basic Structure
Plan funds at different levels based on achievement of company goals
The incentive pool is then disproportionately shared with employees Higher level employees
receive a higher portion of the incentive pool
Employee performance can “modify” the payout
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Advantages Easy to understand All employees are tasked with achieving
high level goals No micromanaging No conflict of interest Simple to administer
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Silent Communications What does your salary
philosophy communicate? Employee Value
What do incentives communicate? Performance
Don’t assume your employees understand this
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Employee Awareness How much do your employees know
about pay? How much do you want them to know
about pay? For a long time, employers benefited
from keeping pay practices behind closed doors
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Automobile AwarenessHow much do you know about your
car?How much should you know about
cars?For a long time, mechanics benefited
from keeping automobile maintenance behind closed doors
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Do You Trust Your Mechanic?
Why do people not trust their mechanics? Because until recently you have had to take
their word Why should your employees trust you
around pay? Compensation is just as important to your
employees as transmission fluid How do you instill trust in your
compensation practices: Transparency
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Communications
Communicate your rewards philosophy (Compensation Philosophy Statement)
Communicate your incentive plan goals/metrics regularly
Communicate actual rewards (Total Compensation Statement)
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Perception is Key
2015 PayScale Study• The main predictor of both “satisfaction” and
“intent to leave is whether employees feel they are paid fairly.
• Even when people’s compensation was in line with their value in the job market, two-thirds believed they were underpaid. Of that huge group, about 60% reported low job satisfaction, and said they plan to look for a new job within six months.
• By contrast, the researchers found that, even at companies that pay below-market wages, if employees know why they’re paid less than they could probably earn elsewhere, 82% say they’re “satisfied” with their jobs and plan to stick around.
- Fortune Magazine, October 10, 2015, “How Pay Transparency Can Keep People from Quitting”
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Return on Investment
Pay is not a cost Pay is an investment Every good investment should have an
equal or greater return Proper alignment of salary and incentive
programs ensures that you have a desired return
1) Create a Philosophy2) Align to Market3) Communicate
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Balancing Salaries and Incentives
Salaries and incentives are the cornerstone of your pay programs
Not an exact science Identifying your key
compensation philosophy, aligning pay accordingly, and communicating effectively is only way to win this balancing act.
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