building your compensation road map
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IPMAWestern Region Human Resources Conference
April 27, 2011
Dianne Burt-Green, CCP, SPHRMBL Group, LLC
Building Your Compensation Road Map
Introductions!
Dianne Burt-Green, CCP, SPHR MBL Group, LLC
(503) 224-7249 x13 dianne@mblgroup.com www.mblgroup.com
Conference Attendees Name / Title Organization Job responsibilities
Road Map Agenda
Compensation Fundamentals
Key Signals of System “Distress”
Guiding Principles of a Compensation Philosophy and Strategy
Building a Compensation Philosophy & Strategy
Mapping Your Compensation Project
Hazards to Watch Out For
First . . .
Show of hands:
You have responsibility for the compensation system
You have a formal background in compensation
Drew the “short straw” and have no background in compensation but are responsible for the discipline
Compensation Fundamentals
position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable budget revenue target index survey data cut job evaluation classification total rewards position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable budget revenue target index survey data cut job evaluation classification total rewards position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable time
A Few Words about the Fundamentals
o Strategico Powerfulo Creativeo Systematic
o Complexo Mysteriouso Tediouso Divisive
The Compensation Discipline
Compensation Is:Check ( ) oneo An “Art” o A “Science”
Strategic
A strategic compensation system forms a visible link
between organizational objectives, strategies and business metrics, while balancing the expectations of its employees with the costs to the employer,
AND
Be fluid and flexible enough to meet changing economic and market conditions.
Powerful
As a system, compensation is: Communicating your culture and values as an
organization
Driving (and incentivizing) employee behavior
One of largest items on your financial statements (if not the biggest)
Creative
Every compensation system is unique! Directly tied to organizational culture, industry,
size, complexity
Each organization, even within the same industry, may have distinct goals which vary the system
Identifying how your goals will drive your structure requires innovation & ingenuity
Systematic
Designing compensation programs does require a logical methodology How and why design decisions are made
There is a framework, either explicit in published guidelines or understood by administrators
Ensures an equitable and defensible system
5 Reward Categories
Direct financial rewards (pay) Indirect financial rewards
(intrinsic/extrinsic benefits) Work content (the work itself) Careers (long term opportunities for
development / advancement) Affiliation (the feeling of belonging)
Key Signals of
System Distress
“Distress” Signals
Time
Metrics
Labor Market
Motivational Goals
Distress #1: TIME
Unchanged compensation plan Number of years, decades, millenniums since
compensation system underwent total review
HR / Compensation / Total Rewards Staff Resources Staff as “fire fighters” vs. “innovators”
Distress #2: METRICS
External Internal Ability to PayoTime to hire oCompa-ratio o BudgetoSalary offers oCompression o Benefits as a % of payroll
o Cost of turnover o Tenure/ Retentiono Market Index
o Salary distribution by division, dept, mgr, location
o Complaints
o Variable costs vs. fixedo Awards tied to organization
resultso Communicationo Compliance: salary
differences by gender, age or minority status
o Revenue / Operating Budget per employee
What do the Metrics tell us?
Distress #2: METRICS
Ensure evaluation & understanding of metrics
Benchmark your metrics against your region, industry and comparable organizations
Track your metrics over time
Distress #3: LABOR MARKET
What is the labor market doing? Economy Political environment Availability of talent
Variable in job categories; while some jobs have a flood of candidates others jobs have a scarcity of talent
Ease of obtaining comparable data
Distress #4: MOTIVATIONAL GOALS
Strategic Alignment Values of the organization / values of the
workforce Performance, productivity
Clarity and communication Transparency of the system Ease of administration
Guiding Principles
of Compensation
Philosophy
Compensation Philosophy . . .Who has one?
WorldatWork’s Compensation Programs & Practices research report (9/2010): 9 out of 10 organizations report having a
compensation philosophy 61% have a written philosophy 29% have an unwritten philosophy 42% reported that all or most of employees do not
understand the compensation philosophy
Compensation Philosophy . . .Why have one?
Foundation and guide for future compensation decisions Intentional practices Direct actions strategically in good times and bad times
Clear, consistent understanding and communication You, Executives, Employees, Elected
Officials, Union – On the same page!
Compensation Philosophy . . .What it should explain?
Who the organization defines as its competitors for labor
How the organization prefers to set pay levels for its various titles compared to market
What the balance is between internal equity and the external marketplace
What role performance plays
What role incentives play
The amount of transparency
Setting the Foundation
Building (or re-building) your philosophy sets the foundation for: Determining the needs and outcomes of your total compensation
system
Building the right mix of compensation components for your organization
Evaluating your compensation system through periods of change
Elementals of the Foundation
External EquityIn
tern
al Eq
uity
Ability to Pay
Mar
ket r
ates
& tr
ends
, eco
nom
ic fa
ctor
sW
orkforce, organization & industry factors
Budget, balance sheet & organization success
Where Your organization
Is
Where the Market Is
One Size Does Not Fit All . . . .
A Strategic Compensation Philosophy:
o Links to the unique factors of your organization
o Bonds to your values & culture
o Accounts for the overall market, industry and workforce
o Inseparable from your ability to pay
Not a “Best Practice”, your “Inspired Practice”
Compensation Philosophy &
Strategy in a
Public Sector
Organization
Differences between Public & Private Sector
Perception vs. Reality People speak as if there are distinct differences
Private sector = product innovation, operational excellence, nonprofit, publicly traded, business differentiation, market based, performance based, stock option rich
Public sector = homogeneous group w/o organizational variations, seniority based, general increase, entitlement style
Reality is compensation systems in public sector are varied; some reflect current private sector practices
The “Key”
The “key” to the successful development of a compensation philosophy/ strategy, in the public or private sector, is to follow a process from the initial business case through program implementation
Sponsorship
Sponsorship must be at the organization’s Senior most level Tie process to full Executive team vs. any one
Executive May take years and a charismatic Executive
Anticipate influence at the political level May stop or re-direct initiative (sometimes in a totally opposite
direction) Anticipation of this element may “justify” ultra conservative approach
which will offend no one, but accomplish little
4 Stage Process
1. Business Case2. Due Diligence3. Philosophy / Strategy Development4. Implementation
Step 1: Business Case
Research the business / organization and its workforceo Identify stakeholders (Besides management and employees):
Union? Political bodies? Media? Public? Peer organizations?
oIdentify why compensation strategy is critical to future organizational success
oCareful “costing” to include systems or process improvements
Step 2: Due Diligence
Create project team Comprised of individuals influential enough to “champion” the project
both within and outside the organization Guided / facilitated discussions
Stakeholder communications are critical, but must be carefully orchestrated
Too little information leads to apathy; too much information may lead to analysis paralysis
Determine what resources are necessary and what systems, policies and procedures will be affected
Assess your compensation system today What is working? What is not? Is the system well defined? Does staff understand the compensation system? Does the compensation system link pay to performance?
Longevity to pay? Skills to Pay? What are the goals of the Total Compensation System
Step 2: Due Diligence
Link to your organizationWhat stage is your organization in today?
Step 2: Due Diligence
Linked to your organization Who is your workforce?
Competition for talent Motivational drivers Perceptions of staff Investments in hiring,
orientation, training Turnover costs Union impact Generational influences
Step 2: Due Diligence
Bond to your culture & valuesWhat is your culture?
o Individual Pay for Performance or Team Based Payo Emphasis on base? Incentive? Benefits? Or all?o Emphasis on flexibility or structureo Reward performance, innovation, productivity, tenureo Transparent or closed systemo Ability to administer (simple, complex)
Step 2: Due Diligence
Bond to your culture & valuesWhat are your values?
o Work/life balanceo Family focusedo Stability o Career growtho Flexibilityo Living wageo Wellness
Step 2: Due Diligence
Step 2: Evaluating the external marketWhat (or who) do you benchmark to? Who are your market comparables?
o Geography: Local / Regional / Nationalo Industry Sector: Public? Private? Both?o FTE Sizeo Revenue / Operating Budget
General Rule:Where you recruit from / Where do you loose talent to
Step 2: Due Diligence
Positioning to marketLead, Match or Lag
What is the relationship to your Total Compensation Package? Should the market position be the same for each compensation
component of your system? Base Pay Variable Pay Benefits
Should the market position be the same for all employee groups? Vary by function (i.e., production, design, administration) Vary by level (entry vs. experienced)
Step 2: Due Diligence
Take Comfort
If at any point, you find the project and/or process is not ideal, take comfort, it never is.
Remember this is both an Art and a Science.
Carry on because once the development of a strategy is initiated, you will find it is difficult to stop the momentum.
The relationships you develop with the project members and stakeholders are the key to success.
Press on!
Break Time!
Step 3: Philosophy / Strategy Development
Written statement of philosophies, objectives and standards Not specifics on design or administration detail
Defines all the major elements of total compensation and how they will support the business strategy Base pay Additional cash Benefits TOTAL COMPENSATION Perquisites
Draft strategy “tested” stakeholders
“Sample” Total Compensation Philosophy
The City of Wagga Wagga, Department of Adorable Animals, is a newly created public agency focused exclusively on serving the needs of koala bears. We recognize that the people at the agency are our primary asset and our principal competitive advantage. To achieve the organization’s mission, we must attract, retain and motivate a highly qualified and competent workforce. Accordingly, we target our base pay at the market median (50th percentile) for other public agencies, while remaining internally equitable.
Wagga DoAA will utilize organization-wide, performance based incentive programs to supplement our base pay such that the average direct compensation will approximate market median + 5% (55th percentile) of cash compensation vs. our defined competitor group when our overall financial performance meets or exceeds target.
In addition to direct cash compensation, Wagga DoAA will provide a comprehensive benefits package for our employees to include health and welfare and income security. We value the components of the work experience including a positive and healthy work environment that addresses the physical and emotional well-being of employees and their families and is consistent with Fortune Magazine’s “100 Best Companies to Work For.” Total rewards shall not exceed 60% of Wagga DoAA annual revenues, including statutory benefit contributions.
Step 4: Implementation
Detailed assessment of existing programs, processes and CBA’s to determine how well they fit with the new strategy
Implementation / Budget Impact Analysis No compensation system works if you can’t afford it Caution about quick hits or low hanging fruit
May only result in confusing comp processes that do not gel well with overall system
Detailed listing of desired changes along with timelines, costing and measures of success Changes to CBA may take form of long-term negotiating agenda
Step 4: Implementation
Stay strategic by setting system goals first
No one is allowed to re-write the philosophy / strategy unless business conditions change
Keep the Total Compensation Philosophy “front and present” As you address balance sheet actions In reaction to the recession In recovery from the recession
Your Total Compensation Philosophy
Establish, Revitalize your Total Compensation Philosophy Set the foundation which will guide your decisions
A Strategic Framework which is Your Size: Linked to your organization,
industry and workforce Communicates your culture
and values Within your ability to pay
Mapping Your
Compensation Classification
Project
Tools for the Trek
Internal A Champion Data, data, data . . .
Org chart Budget / financial information Job descriptions Employee census data Employee Opinion / Climate Survey results
Time (and more time) Technical capabilities to perform analysis &
design programs
External Salary Surveys Industry Benchmarking Compensation Consultant?
When to Hire a Consultant
When the organization needs: Independent third-party objectivity Security / confidentiality Insight into the organization’s competitive market HR expertise to supplement in-house staff resources An expert opinion in a litigation support role Where internal or external resources are lacking
When internal resources are spread too thin, or when the nature of the initiative would benefit from an external perspective / voice
How to Choose a Consultant
Determine your specific needs: RFP / RFQ process
Formal process not mandatory, but is useful exercise to clearly articulate the needs of the organization and ensure that all prospective consultants and the organization are on same page about deliverables
Identify Pool of Experts Approach this as if you were hiring a top Executive
Background checking including industry experience, client lists, references, area of specialty, length of time in business
Web search to identify 6-8 “semi-finalists” to submit proposal
How to Choose a Consultant
Narrow the field Review proposals for
consultants: Methodology / approach to the
project Technical expertise Reputation Availability / stability Fee structure
Beware low-ball bidders
Interview the finalists Once the list is narrowed, it is
important to: Meet the project team
Beware bait-n-switch Evaluate consultant’s technical
capabilities; discuss real time challenges
Assess overall “personality” and “chemistry”
Check references
What Makes a Good Consultant
The value of independence: Direct link to the Client
Who owns the project? Either the Board or management, but not both Opinions without conflict of interest
Consultancies without multiple lines of business within a Client Knowledge Transfer
Ability to provide transparency and insight into the processes vs. “feeding tube” for future consulting services
Executive Session As findings and recommendations emerge, ability to conduct executive
session to answer questions Provide Expertise with Integrity
Consultant Bonus Points
Once the field is narrowed, “extra credit” for these qualities:
Ability to hear your concerns and deliver a customized solution Ability to earn and protect their role as trusted adviser Partner vs. vendor Passion for the profession Written and oral deliverables professionally prepared Well prepared Thought leader; proactively staying abreast of issues
Consultant Follow-through
Once chosen, the likelihood of the consultant’s success hinges on:
Providing clean data Giving honest feedback Introducing consultant to key players Acting on consultant’s recommendations
If advice is not feasible, work with consultant on alternative creative solutions
The best consultants truly care about the client and the success of the project – it’s their reputation after all!
When to Engage Stakeholders
Elected Officials
Senior Leadership
Management / Staff
Union
1. Buy-in / approvalIdentify leadership championIdentify strategic goals
2. System authorityPublic support
3. Participation (job descriptions)Setting expectations
4. Education / CommunicationNegotiationsFinalization
5. Training
Hazards to
Watch Out
For
Hazards To Watch Out For
“Don’ts” Compromise a “principle-driven” compensation system
It is essential to use consistent guidelines for all staff
Make compensation decisions in isolation without considering the interaction between compensation, benefits and intrinsic rewards as important components of the organization’s compensation philosophy
Distribute any documents to staff or elected officials without first carefully scrutinizing each and every word
Hazards To Watch Out For
“Don’ts” Allow for conflicting communications or vague / simplest
explanations such as “Compensation made this decision”
Communicate the mechanics of the system without communicating the philosophy, strategy and goals of the system
Hazards To Watch Out For
“Dos” Document your system design
Reference for future updates Foundation for challenges or claims
Anticipate that changes will occur regularly in the compensation system Review salary ranges annually along with merit budgets and incentive
plans Continually seek out new ways to propose new programs
Hazards To Watch Out For
“Dos” Expect to manage programs sometimes based on data and
sometimes based on principles; inequities will exist, and it is important to identify and minimize them
Ensure that the information provided is clear and specific
Provide training to all who will work to manage the system
Thank You!
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