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OVERCOMING MARKET PRESSURES: COMPENSATION DESIGN THAT BALANCES COMPANY GOALS & INDUSTRY SHIFTS
Page 2
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Oftentimes when managers discuss pay with their employees, they encounter questions for which they may
not have an answer. Employees want to know that they are receiving fair pay for their contributions, so they
may wonder how their pay is linked to performance, how it compares to other salaries within the company, and
likewise, how it compares to similar positions outside the organization.
Answering these questions is important to retaining talent, which is why all organizations should be equipped
with a compensation design that balances company goals and industry shifts. Establishing a clear and
standardized compensation philosophy eliminates the guesswork when employees seek to find out why they
are being paid the way they are, and it also enforces transparency across the organization. Moreover, a well-
developed compensation strategy helps to support the execution of the business strategy while also maintaining
competitiveness.
With that said, designing a compensation strategy that balances internal and external factors requires the
consideration of many complex variables. In the coming pages, we’ll present ways for navigating these
challenges successfully, including:
How to link business strategy and compensation strategy
Key compensation principles to consider
Ways to develop a compensation philosophy and goals
Example methodology for designing a compensation strategy
How to maintain a competitive pay philosophy
Let’s begin by taking a look at how companies can use their business strategy as a starting point for developing
their pay philosophy.
Page 3
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Linking Business Strategy & Compensation Strategy
For a company’s compensation strategy to be effective, it must be linked to the overall business strategy.
Because compensation accounts for 30-60% of business costs, it is essential for organizations to identify the
drivers behind pay. For this reason, the foundational step of creating any solid compensation strategy is linking it
to the business strategy.
The business strategy informs the direction in which the organization is going relative to its overall environment.
It comprises both its short and long-range goals and objectives, and can encompass its SMART goals, pay for
performance objectives, or any other goal setting methodology the company utilizes.
Oftentimes, the jump from business strategy to compensation strategy is made without considering a crucial
middle part: the human resources strategy. This entails the organization’s overall plan for attraction, retention, and
motivation of employees, and should therefore not be overlooked when developing a compensation strategy.
The compensation strategy should include the principles that guide the design, implementation, and
administration of the overall compensation program (including pay and benefits). To choose the right
compensation approach, be sure to select a rewards system that supports and reinforces the strategy, goals, and
objectives of the business. The strategy must also respond to external pressures, using pay as an opportunity to
create a competitive advantage in the market. Additionally, because a business’s strategy is only as good as the
employees’ ability to execute it, the pay strategy should ultimately recognize and reward the performance that
drives results.
In the coming section, we’ll take a closer look at the key compensation principles that can be used to formulate
an effective pay strategy.
Page 4
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Key Compensation Principles
For the majority of organizations, the core
principles of compensation involve striking a
balance between paying in a way that is externally
competitive and internally fair. Yet, there are
many different interpretations of what is fair. For
this reason, it is critical to achieve clarity and
agreement among key stakeholders on how the
company should be paying its people. This will
ultimately inform your rewards philosophy.
A company’s rewards philosophy is driven by a
few key factors: its employee groups, including
generations, locations, and ethnicities; its business
segments and sectors; its business growth
aspirations; and, its business life cycle. While each
of these elements drives the rewards philosophy
in unique ways, one of the primary factors to look
at when designing a compensation plan is the
business’s life cycle.
A business may fall into one of the following
stages: launch, growth, shakeout, maturity, and
decline. Assessing which phase the business
serves as a critical building block of developing
a pay strategy. According to an HRsoft poll, 48%
of businesses are now in the growth phase, while
the maturity stage is a close second, with 42% of
companies in that category. A remaining 10% are in
the shakeout phase.
Because there are unique pressures and demands at each stage, compensation professionals must know where
their companies fall in order to develop pay plans that support the needs of the business at that moment in time.
The plan should answer the question: How do we tie in compensation to help the company through this particular
stage? While this is an ongoing question to which there is no simple, definitive answer, revisiting it regularly will
help to ensure pay decisions are always supporting the needs of the company. Forming your compensation
philosophy and goals can assist in this process, so we will discuss this step in the following segment.
Page 5
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Compensation Philosophy & Goals
A compensation philosophy aims to ensure pay is
market-competitive and aligned to the business
strategy. To support these two factors, there are six
components, or goals, of compensation philosophy:
Attract top talent from the market
Retain difference-makers
Inspire stellar performance
Compensation professionals must meet with senior executives to collect their insights on these key topics. It
is essential to “speak their language” when discussing pay and present the information that is most critical to
executives’ top priorities.
When forming compensation decisions, some external questions to consider might include:
Where does the company want to position itself relative to the broad and specific industry?
Keep in mind that compensation data may need to be reviewed outside of your specific niche. If you
are a nonprofit, for example, you may also need to factor in data from for-profit organizations, as the
transferrable skills of top talent may be similar despite the differentiating characteristics of organizations.
Who are our top competitors for business? Who are our top competitors for talent?
The answers to these two questions won’t necessarily be the same, so analyzing factors can help you
take a more competitive approach to recruiting and retaining top talent.
Are there geographical differences to consider?
Consider how pay might differ across various locations and types of communities, including major urban
cities versus rural locations.
When basing compensation decisions on internal factors, consider how pay might differ:
Pay competitively in global operations
Support the business strategy
Balance profitability, growth, and expense control
In the same role
In the same level or grade
In the same industry segment
In the same performance category
With an increasing demand for pay transparency, it is essential for companies to have a consistent methodology
for determining compensation. These factors can be used as a starting point and may serve as a framework for
discussions with senior management.
Page 6
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Compensation Philosophy Examples
According to an HRsoft poll, 60% of organizations have a written compensation policy statement. For those that
do not, reviewing examples may provide inspiration for developing a compensation philosophy that reflects a
company’s own unique business goals and corporate culture. Here is one sample of a compensation philosophy
to review:
COMPANY believes that it is in the best interest of both the organization and our associates to fairly pay our workforce
for the value of the work provided, within its financial ability to do so. It is our intention to use a competitive system
that will determine the current market value of a position based on the skills, knowledge, and behaviors required of a
fully competent job incumbent. The system will be objective and non-discriminatory. It must also be flexible enough
to ensure that the company is able to recruit and retain a highly qualified workforce.
Of course, a pay philosophy must be upheld through action. To translate the above philosophy into an actionable
process, here are the key steps which the company might take in this example:
The compensation system will price positions using local, national, and industry-specific survey data. We
will evaluate external equity, which is the relative marketplace job worth of jobs directly comparable to
jobs within _____.
All jobs will be placed in a hierarchy based on: 1) market rate, and 2) comparison to other jobs within _____
based on skills, knowledge, training required, experience, responsibility, and accountability
COMPANY intends to monitor the marketplace in which it competes for talent and when warranted, at
management’s discretion, increases may be made to the base pay of incumbents whose jobs are covered
by the scope of this policy.
Page 7
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Methodology
Following a prescribed process can help an
organization achieve a balanced compensation
design successfully. While each company may
need to tweak their methodology slightly to align
with their own specific requirements, this sample
method may be useful in helping you establish a
solid framework:
Phase 1: Internal Assessment
This initial analysis helps compensation
professionals develop a clear understanding of
business goals and ensures all parties, including
key stakeholders, are in agreement about how
compensation decisions will be made. Use the
following steps to perform an internal assessment:
Conduct management interviews
Review roles and responsibilities
Analyze current compensation practices
Analyze the performance management
program
Identify the competitive marketplace
Develop a communications strategy/
transparency
Compile a feedback report
Phase 2: External Assessment
As its name suggests, this phase requires
organizations to analyze external factors through
the following steps:
Select external benchmark jobs
Conduct competitive analysis
Determine the compensation structure
Compare employees’ compensation levels
Phase 3: Design of Incentive Plans (Short & Long Term)
In order for this phase to be executed properly,
companies should have a system for tracking
performance, as well as the effectiveness of their
incentive plans. That way, they can verify that the
plans they’ve developed are actually supporting
the business strategy as intended. Here are
suggested steps for Phase 3:
Determine appropriate levels of incentive
awards
Select performance measures
Determine the incentive formula
Present alternatives for consideration
Phase 4: Communication Plans
The final phase involves two steps for developing
plans so the compensation plan can be effectively
communicated to the workforce:
Update the compensation policy manual
Design communications meetings
Page 8
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Compensation and Performance Management Study
The overarching goal of the compensation strategy
is to make sure an organization has the right
amount of money necessary to motivate the types
of performance needed to achieve the business
strategy. To that end, compensation should also tie
into the overall performance management strategy.
Your practices must therefore be understood by
employees and based on hard, objective data. It is
essential to maintain an approach in which equal
pay is given for equal work. These critical objectives
can be achieved by:
Standardizing pay practices and basing the compensation system on benchmarks
Achieving internal parity
Providing competitive hiring scales
Reformatting or rewriting job descriptions
Creating a meaningful performance management tool
Many companies find rewriting their job descriptions to include more results-oriented and measurable
information is beneficial in their compensation planning activities. Instead of simply including the specific tasks
or duties of the job description, consider including why the duty is performed (or which results it aims to achieve)
and how the performance will be measured.
For example, for the role of marketing director in an assisted living facility, the roles and responsibilities might
look like this:
Facilitate the move-in process to build relationships with new residents, which will be measured by new
resident satisfaction
Ensure respite apartments are ready to show to ensure marketability, which will be measured by
apartment turnover
Develop and maintain a detailed marketing plan to great market share, which will be measured through
competitive market data
In the next section, we’ll review some final best practices for maintaining a competitive pay philosophy and
communication policy.
Page 9
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Maintaining a Competitive Pay Philosophy
Only 36% of employers have a formal compensation
communications program, according to an HRsoft
poll. However, this is something all organizations
should have, because a compensation plan is
only effective when the workforce understands it.
Developing a formal compensation communications
program provides employees with an understanding
of why pay decisions are made.
To develop a communication plan, compensation professionals should consider what transparency means in
their organizations. This will help them determine how much information will be shared and to whom.
In addition to developing a communications program, employers must also ensure they are continuously
maintaining competitiveness in their pay philosophy. Developing a compensation philosophy is not a “one and
done” activity; it must be revisited as the business strategy evolves to reflect current goals. At a minimum, the
compensation philosophy should be reviewed every two years to:
Confirm linkage with the HR and business strategies
Reevaluate where the company is in the business cycle (growth phase, maturity, etc.)
Assess industry trends
Raise and address any questions or issues before senior management does
Here are some best practices to keep in mind for designing, reviewing, and updating compensation programs:
Understand changes in job roles and responsibilities
Confirm job matching process for internal and external comparisons
Recognize that roughly half of jobs are typically more general industry while the other half is usually
industry-specific
Develop a planned timeline to do in-depth market survey matches with line management using selected
groups each year
Specialized compensation surveys are advantageous for employers because organizations are always changing.
Each year, there are new products or services which demand new skills and abilities. Market surveys do not
require a significant time investment to incorporate the jobs needed, but many organizations have a need
for more customized reporting. As such, using data from a specialized survey can help companies make pay
decisions based on accurate data.
Page 10
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Getting Started
To determine whether an organization truly needs
to reevaluate its compensation design, here are a
few questions for consideration:
Why do you want to design or redesign the
compensation program?
Why now?
How does this fit within your overall
business strategy?
What is the business strategy?
Where does this fit into the overall human
resources strategy in particular
If you don’t do it now, what are the risks?
What will happen?
Here is an example of how the typical project methodology might look from start to finish:
Internal assessment: review job descriptions and practices
External assessment: conduct and review compensation surveys
Job worth hierarchy: rank order from low to high
Salary ranges: set parameters for pay decisions
Compensation policy: ensure that it is fair and equitable
Pay-for-performance: set and review performance standards
Pay admin manual: review it to ensure consistent practices
Communicate: decide what to say and to whom
Implement the plan
Remember that the compensation plan should be transparent, relevant, and current. To align the plan precisely
with the needs and goals of the organization, compensation professionals must truly be students of their
operation. They must also connect the dots to the mission, values, and operational objectives. This will help to
ensure a comprehensive and effective pay policy.
Page 11
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
Summary
Many considerations for effective compensation
design have been covered within this guide.
Although weighing multiple internal and
external factors to achieve a balanced, effective
compensation plan can be complex, it can be
broken down by following a standard process. While
each company should tailor its approach to fit its
specific demands, here are some key takeaways
that are helpful across all industries and types of
business:
Know your business.
Identify the driving factors behind your company’s decision to redesign its compensation plan.
Understand distinguishing characteristics of your company, including the business strategy, its current
phase in the business cycle, and how your performance management and HR strategies will fit into your
compensation strategy.
Analyze the current state of your compensation program.
Assess where your company is paying compared to the market by performing benchmarking. Determine
to what degree outside factors will influence your pay decisions.
Meet with senior management.
Ensure coherence among key stakeholders in terms of what is fair and which outcomes are expected to
be achieved through the compensation plan.
Develop a compensation philosophy statement.
Make sure that the statement supports the organization’s mission and its overall business strategy.
Communicate the plan.
Make sure managers are prepared to discuss compensation decisions to reinforce the desired behaviors
and business results.
For many organizations, lack of information breeds mistrust among employees. By designing your compensation
strategy in a way that balances company goals and industry shifts, you will have a defensible basis which can be
used to explain why compensation decisions are made. While employees may not always agree with every pay
decision that is made, becoming more transparent with a balanced and standardized approach to compensation
is a powerful way to earn the trust and respect of the workforce.
Page 12
Overcoming Market Pressures: Compensation Design that Balances Company Goals & Industry Shifts
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and
allocation of merit, bonus and equity awards to drive manager and employee engagement.
About the Contributor
Don McDermott | D. G. McDermott Associates
Don McDermott is a recognized authority in the field of compensation with
over 30 years of related experience as both an internal and external consultant.
He has an MBA from Fairleigh Dickinson University and a B.A. from St. Mary’s
Seminary and University. Don served as a National Officer of the WorldatWork/
American Compensation Association and President of the New York Compensation
Association. WorldatWork/American Compensation Association have granted
Don its highest award, Life Membership, for his contributions to the field of
compensation. Prior to his consulting experience, Don held senior positions
in human resources and compensation and benefits at Bankers Trust Co., NL
Industries, Gulf & Western Industries, and M&T Chemicals, Inc.
Resources
HRsoft is the trusted global leader in compensation management
software whose COMPview solution is proven to control and
simplify the full process and allocation of merit, bonus and equity
awards to drive manager and employee engagement.
Phone: 866.953.8800 | Email: [email protected] | Web: hrsoft.com
Phone: 732-842-8634 | Email: [email protected] | Web: www.dgm.com