By Plateau Systems
The recent recession brought one of the most significant reductions ever experienced in the U.S. workforce, along with unparalleled cost cuts, including a slowdown in salary increases, a record number of salary freezes and wholesale reductions in pay.
Although these extraordinary measures helped many organizations survive this economic crisis, the consequences for these actions are just beginning to be felt in three key areas:
- Retention: Although Baby Boomer employees may need to delay retirement to repair the recession’s damage to their stock portfolios, these employees are less likely to be a retention risk. Younger employees are. According to a recent Deloitte survey, only 37 percent of Generation X employees and 44 percent of Generation Y employees plan to stick with their current employer as the job market improves.
- Productivity: Unlike previous recessions, U.S. worker productivity has soared during the current recession and the outlook for sustaining this trend looks positive – if businesses can continue motivating employees.
- Growth: Prior to the recession, only 20 percent of executives said more than three-fourths of employees in their entire workforce understand the company’s strategy and what is needed to be successful in their industry. To drive the growth necessary to sustain the recovery, businesses will need to take steps to align individual effort with organizational goals.
Today, it’s urgent for businesses to adopt compensation practices that will improve retention, productivity and growth during the recovery. What are the best practices for an organization to act on now to ensure that its compensation planning bolsters retention and hiring as the economy improves? What tools are available to them to act on those practices? This paper identifies five best practices that enable companies to fine-tune their compensation practices management to keep them competitive and poised for growth.
NO. 1: LINK STRATEGIC BUSINESS GOALS TO EMPLOYEES’ DAY-TO-DAY EFFORTS
Do your employees understand what your organization’s most crucial business goals are? If your employees don’t understand how strategic business goals are connected to their work every day, your business performance may be suffering.
According to Bersin & Associates research, individual employees should have defined performance measures, such as goals, competencies and job accountabilities, that relate to revenue targets, production targets and other key performance indicators from the organization’s business plan. Some goals should be specific to an individual. Other goals – sometimes called “cascading goals” – should be aligned with corporate or organizational objectives. This approach recognizes individual needs while ensuring alignment and accountability with organizational objectives.
Prior to the recession, this connection was tenuous at best. Accenture research from 2006 showed that just 20 percent of executives surveyed said more than three-fourths of employees in their entire workforce understand the company’s strategy and what is needed to be successful in their industry. After the layoffs and cost cutting during the recession, employee engagement has suffered. Nearly half (49 percent) of employees surveyed by Deloitte in 2009 were considering leaving their job after the recession. When asked about the most significant factor that would cause them to change jobs after the recession, 36 percent of employees said “lack of compensation increases.”
Although many business leaders typically believe that compensation ranks lower on the list of reasons to leave an organization than supervisor, company and work environment, Deloitte research shows that compensation is still a main motivator for employees in the wake of the recession – a finding that is consistent across generations. Compensation isn’t the only factor in encouraging retention, but for many employees, compensation is still often the clearest and most definitive message an employee will get from their organization that they are valued.
At the same time that employees are becoming more interested in financial incentives, more organizations also are interested in linking business goals to employee performance through incentive-based compensation. As the economy moves from recession to recovery, companies are realizing it’s a great time to reevaluate their compensation practices. Organizations are laser focused on managing their fixed costs, and variable pay offers the flexibility to pay based on the financial success of the company.
As compensation consultant and HR thought leader Ann Bares wrote at the end of last year, the recession has brought about a sea change in the world of compensation – fixed salaries and merit increases are on the way out, variable and incentive compensation is increasing. As of 2009, 59 percent of organizations in the U.S. have enterprisewide variable compensation based on business results. And these efforts correlate with performance – Watson Wyatt research shows that high-performing companies (measured as those with greater profit over time) have 20 percent more employees with differentiated compensation of 1.5 times or greater over their peers.
However, the door swings both ways on this change. Employees may welcome pay for performance because it is measured against quantifiable data and not a supervisor’s subjective opinion, but employees need ongoing visibility into their progress. Bares writes: “Employees whose pay is increasingly tied to the success or failure of projects, business units and even entire organizations will increasingly demand the information and help they need to track and understand that performance.”
Employees need to feel that they can affect their destinies. That alone can make the difference between a 5 percent attrition rate and a 25 percent attrition rate. Putting compensation tools in the hands of employees makes them more effective and makes them feel more empowered.
Figure 1: Respondents by generation: Most effective retention initiatives
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Employee group
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No. 1 Ranking
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No. 2 Ranking
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Generation Y (under 30)
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Additional Compensation (49%)
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Additional bonuses or financial Incentives (49%)
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Generation X (30-44)
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Additional bonuses
or financial incentives (48%)
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Additional compensation (44%)
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Baby Boomers (45-64)
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Strong leadership (41%)
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Additional bonuses or financial incentives (40%)
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Veterans (65+)
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Additional compensation (43%)
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Additional benefits (i.e. health and pensions) (31%)
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NO. 2: USE INCENTIVE PAY TO DRIVE RETENTION AND INNOVATION
In the post-recession economy, growth will require innovation. Deloitte research shows that the vast majority of executives understand that innovation is either very important or important to their company now (84 percent) and will be a year after the recession ends (82 percent) and three years into the future (85 percent).
Encouraging innovation will require effective compensation strategies that include both short- and long-term incentives. From a compensation marketplace perspective, short-term incentives are more retrospective and long-term incentives are more forward-looking. Short-term incentives reward performance that influences the company’s financials for that year. Long-term incentives focus on equitable rewards that typically will vest over time – stock options, stock grants and deferred compensation. As the economy moves forward into recovery, both are important tools to keep workers engaged.
Engaging workers and driving innovation is top of mind for executives today. An overwhelming majority of executives (88 percent) fear they will not have the necessary talent to lead their innovation programs after the recession. Nearly half (48 percent) of these executives said bonuses or other financial incentives tied to innovation are essential to retain key employees. Employees seem to agree that compensation can drive retention. A recent survey showed that additional compensation and additional bonuses were the top two reasons for employees to stay with their current organization and the lack of additional compensation and bonuses were two of the top three reasons for leaving their current organization.
Amy Dines compensation product manager for Pleateau Systems, points out that bonuses that are awarded at management discretion after a successful year are far less effective than incentive programs based on performance objectives that employees can track throughout the year.
“We are seeing more short-term variable pay programs increase and many longer-term stock-based programs shrinking,” Dines said. “There’s more of a sense that not everyone values equity and maybe cash really is king.”
Organizations are also aware that a compensation program needs enough flexibility to fine-tune base pay, Incentive pay, bonuses, stock grants, and other compensation elements in a way that motivates different employee groups.
At the lower levels of the organization, there should be more emphasis on individual performance and at the higher end, more emphasis on achieving corporate goals. If you take an administrative assistant and offer an incentive based on revenue that may not be very motivating because they may feel they have little control over revenue.
“However, if you tell a person that 75 percent of their bonus is based on individual contributions and 25 percent based on revenue, that’s a well-designed plan that balances everyone’s needs,” Dines said.
_ Figure 2: Factors that would cause surveyed employees to leave or stay with their organization
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Reason To Go
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Reasons To Stay
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Additional Compensation - 27 percent
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Additional compensation – 43 percent
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Job advancement/career progress – 27 percent
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Additional bonuses – 41percent
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Additional bonuses – 23percent
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Leadership strength/trust – 28 percent
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Leadership strength/trust – 22 percent
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Job advancement/careeer progress – 28 percent
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Support/recognition from supervisors
or managers -_20 percent
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Support/recognition from supervisors
or managers -_25 percent
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NO. 3: BE AWARE OF WHAT THE MARKET WILL BEAR
What should you be paying employees today? Businesses need a way to understand what a position is worth – especially because the recession may have changed what the market will bear. People with key skills will always be in demand. Market pricing is even more important when the market is shifting and you are trying to attract and retain key employees. If you really want a candidate to accept a job and not just game your offer against another employer, you need to know what the market will pay for that position.
Past recoveries have produced a flurry of salary adjustment activity – a frantic pattern of “catch up” as the labor market turned, recruiting activity and market pay levels picked up steam, and organizations scrambled to keep their salaries competitive. That appears to be the case with this recession; in a recent study from Buck Consultants, 30 percent of the 180 U.S. employers surveyed indicated that they plan to use market-based salary adjustments to retain their top performers.
Multiple salary structures allow organizations to have the flexibility to respond to changing market conditions and ensure that pay levels for groups of jobs are competitive externally and equitable internally. Access to data allows businesses to make informed decisions and can help managers support or deny raises. Figure 3 shows that 43 percent of organizations surveyed offer a single salary structure. Also, few of the organizations offer salary structures that vary based on job function or location.
Compensation management technology allows businesses to have insight into how much a position should be paid based on job title, experience and location. These tools also offer visibility into base compensation and incentive compensation levels. Where you don’t want to be is having 10-year veterans seeing that they can easily get a 20 percent increase to go to work for a competitor. Without the automation to support more complex and variable salary structures with real-time visibility into market data, many organizations may find themselves severely hindered as they try to retain high-performing employees.
With compensation, you really don’t want an employee to come to a company because of money or leave because of money. You kind of want to take compensation out of the picture so they don’t think about it, but you want to avoid paying too much.
Figure 3: Single vs. multiple salary structures
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Single
Structure
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Multiple
Structures
Differing By
Job Function
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Multiple
Structures
Differing By
Location
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Multiple
Structures
Differing By
Job & Location
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Others
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All Companies
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43 percent
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21 percent
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19 percent
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15 percent
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15 percent
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Job Level
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Executives
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58 percent
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18 percent
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12 percent
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8 percent
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8 percent
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Directors/Managers
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43 percent
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21 percent
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19 percent
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15 percent
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15 percent
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Professional
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38 percent
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22 percent
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20 percent
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18 percent
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18 percent
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Hourly nonexempt
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34 percent
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21 percent
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24 percent
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18 percent
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18 percent
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NO. 4: EQUIPPING MANAGERS WITH TOOLS FOR SUCCESS
Line managers need to be engaged in the process of driving retention, productivity and growth. The front line for any performance and compensation practice is the manager, but they need the right tools to support conversations about compensation. However, too many organizations shut managers out of the process, giving them little input other than perhaps to hand out modest merit increases. Managers need to feel empowered to make decisions and feel that their input adds value to the process.
Compensation management technology provides managers with tools that help them manage and administer compensation and incentivize high performance. Employee performance should be measured against quantifiable criteria; objective data reduces misunderstandings (and compliance risks). Compensation management technology engages managers in the process and benefits them in other ways, including:
- Increasing manager visibility to their direct reports at every level
- Providing managers with reports that offer the necessary information to create competitive plans and monitor business impact
- Enabling adherence to established budgets
- Reducing human error on manual entries that can be as high as 30 percent
- Allowing manager recommendations that can be governed by software to remain within guidelines
- Uploading final approved pay changes automatically to the HRIS
- Saving hundreds of work hours each review cycle, allowing managers to spend more time doing revenue-generating work
- Shortening the window from performance evaluation to paycheck impact
“Eliminating paper helps managers focus on having meaningful interaction with the employee,” said Kevin Simpson, compensation project manager for Plateau Systems. “The employee needs to feel a sense of dialogue – and good dialogue – with the manager so they can build a relationship. It’s hard to build a relationship if the employee feels the manager has no real authority to make decisions. All the tools are nice to have, but the dialogue is the prerequisite.”
NO. 5: TIE COMPENSATION PRACTICES TO PERFORMANCE, SUCCESSION AND LEARNING
Compensation cannot exist in a vacuum. Instead, it must be integrated across the talent management spectrum. However, Bersin & Associates estimates that more than 90 percent of performance and talent management software systems are not integrated with a compensation system. Without integration with performance management, succession management and learning, paying for performance is not possible.
The value of integration is also one that an organization can see on its bottom line. Companies with integrated talent management experience revenues per employee that are 26 percent higher than companies without an integrated strategy.
- Performance: Employees are hungry for personal development. Creating individual goals that are aligned with business strategy is only the first step. Performance should also be aligned with a core set of competencies and assessed on a regular basis. Employees must clearly understand how their effort has an impact on the organization and on their individual compensation. Top performers must see a meaningful difference in their compensation, and average performers must understand how they can improve their performance and their compensation.
- Career & Succession: Succession needs to be a framework for talent, and it isn’t just for senior executives anymore. Companies that want to thrive during the recovery need to understand which critical positions drive their business success today and which high-potential employees could be tomorrow’s leaders. Businesses need to pay these employees today, but they should also build career paths that will increase contribution and compensation. Organizations also need to build talent pools of these key employees to sustain growth during the recovery.
- Learning: Employees who fall short of performance goals need the opportunity to learn the skills that allow them to earn incentives. Integrated talent management makes it easy for managers to assign training to address skills gaps or areas where performance is falling short.
CONCLUSION
Businesses that want to be prepared for growth during the recovery must take proactive steps now to build effective compensation solutions that encourage retention, productivity and growth. The old “peanut butter” approach of spreading compensation increases evenly is a roadmap for employee dissatisfaction, disengagement and poor business results. Employees must understand that they can have an impact on the success of the company and that if they are partners in the success of the business, they will be compensated accordingly.
To build an effective compensation strategy for the recovery, it is crucial for organizations to link strategic business goals to employees’ day-to-day efforts to increase revenue and profit during this time of transition. Also, incentive pay can drive retention and innovation, which can create a work environment that keeps employees engaged. Retention initiatives will also receive a boost if an organization is aware of what the market will bear for specific in-demand skill sets.
Above all, managers need the tools that reduce the amount of paper involved in the process, minimize administrative headaches and facilitate meaningful interaction with employees, Also, compensation should be seamlessly integrated into the full range of talent management initiatives for an organization, including performance, succession and learning.
As the economy moves into recovery, the time is right to revisit and reinforce your organization’s approach to compensation management. Choose your path wisely, and connect compensation to results.
About Plateau Systems
Plateau Systems is the industry’s premier provider of enterprise-class SaaS talent management suites. Major global corporations and government agencies, including General Electric, the U.S. Air Force and Capital One Services are using Plateau’s integrated talent management solutions to improve productivity and facilitate strategic workforce initiatives around learning, performance, compensation and career and succession management. Plateau is widely recognized throughout the industry for its commitment to customer satisfaction, forward-thinking vision and for consistently delivering best-in-class functionality. Founded in 1996, Plateau is headquartered in Arlington, Va., and has offices across the United States, Europe and Asia Pacific. For more information about Plateau, visit www.plateau.com.
