Compensation Considerations for Manufacturing and Distribution Companies

February 08, 2022

In this episode of ManuFacts & Perspectives, Travis Epp, Partner-in-Charge of the Manufacturing and Distribution Group speaks with Mary Rizzuti, Managing Director of Compensation Resources and Diana Neelman, Director with Compensation Resources, an EisnerAmper Group Company. They discuss various compensation considerations that impact both the retention and attraction of employees to a Manufacturing and Distribution company.


Transcript

Travis Epp: Hello, and welcome to ManuFacts and Perspectives in EisnerAmper's podcast series. I'm your host, Travis Epp, partner in charge of our manufacturing and distribution group. Joining me today from Compensation Resources are Mary Rizzuti, Managing Director, and Diana Neelman, Director. Compensation resources is an EisnerAmper group company. The manufacturing and distribution industry has been impacted significantly by the COVID-19 pandemic. While the supply chain and movement of raw materials and finished goods often is the main headline, the pandemic has also had extreme impacts on the labor market. Increased wages, government incentives, the preference by many to work from home, as well as other factors have led to the great resignation and significant disruptions in the labor force. I am looking forward to the observations that Mary and Diana have on this topic that is top of mind for manufacturing and distribution entities. To begin with Mary, how have your M&D clients been addressing hiring and retention issues?
Mary Rizzuti: Well, I would say in two words, carefully and creatively. For instance, one of our clients was struggling to get individuals to even show up for an interview, so they started offerings spot bonuses to applicants just to show up for the interview. Well, of course that practice didn't last too long because I don't have to tell you what was happening. They were also experiencing applicants accepting positions and not showing up on their first day without any communication. While they think they filled a position, on the day that the individual is supposed to start, they really have an open position. At the warehouse and production level, we've set up progressive increase models for warehouse workers, where they receive an hourly increase every other month, even if it's 25 cents an hour, for the first year of employment.

MR: They may bring individuals in that market, but then continually invest in those who stay with the company, and this has proven to be a positive impact on the retention for this particular company. At the management level, it's really become the great negotiation. They're negotiating on salary titles, bonus payouts, and even where and how the work gets done. Companies are starting with market data when setting up the pay, but also recognize that there has to be a good deal of flex based on negotiations. And then of course, we start to then look at current incumbents and address salary compression, internal equity. Compensation now has become really an ongoing process more than a once or twice a year review.
TE: What are smaller manufacturing companies doing to attract and keep the right talent from a compensation standpoint, particularly when competing with larger companies in their region?
Diana Neelman: Travis, that's a great question. Before we jump into a discussion around compensation, let's talk first a little bit about items outside of compensation. We are seeing some of our clients looking towards as far as recruiting new talent is to tech schools so that this is an opportunity to get them in on the ground level and offer them an opportunity to contribute their skills and their talent to the organization. Many of our clients are also taking a more deliberate approach to creating that strong culture and providing a safe and supportive working environment. We had a client some years ago that had a group of employees within their warehouse that brought their own lunch, and they didn't feel comfortable sitting in the cafeteria because they weren't buying lunch there. They would go into their cars and eat their lunch, and whether the weather was good or bad, that's where they enjoyed their lunch.

From a cultural standpoint, that really didn't fare very well for the employee experience. What the company ended up doing was creating a lounge for them so that they could eat indoors. They could eat together. And this really made a positive impact on the culture. Again, when we talk about culture, whether it's good or it's bad, the word gets around. Talking a little bit, Travis, about what you said earlier on the great resignation, MIT just put out a research report about what creates attrition and while compensation was one element, it was actually toxic culture that outweighed that 10 times. Really creating that culture can be very powerful to an organization, but we can't ignore compensation, so the COLA increased at 5.9% has certainly put many companies on watch and created some pressure for them to catch up in this new marketplace.

MR: And Diana, think also about companies that may have historically been giving very modest or below market increases over the past, say, three years. And now they're faced with a labor market push, this 5.9% COLA. The incumbents could be as much as 25% below market, so it's certainly impactful. We're also seeing an appetite for providing some form of performance pay at the production level. We recognize that sometimes it's difficult to measure performance at that level. We're seeing some focus on work ethic and rewarding for attendance, punctuality, clear communication to reward an impactful employee. Also, increasing communication across the departments and within departments has shown to increase engagement, which in turn, then increases retention.
DN: Right. And actually that performance pay does go up the hierarchy as well. We have some smaller manufacturers that don't have a structure around compensation and performance. What they're looking to implement is not only their salary grades, but some sort of career progression, like what's being put in place for the production employees, and a structure around bonuses, particularly for the mid-level manager. The promotional opportunities, the bonus opportunities, those all provide a strong link of performance and pay. And some of those metrics don't necessarily have to be quantitative, but they could be qualitative as well.
MR: And then really think about the sales comp side. I had a client who was enjoying increased revenue, which was great. The sales people were also enjoying significant commission growth, but what they didn't realized when we reviewed their plan was that they weren't increasing market share. Because of increased prices, and having a one tiered approach to commission, which was revenue growth, the sales people were actually earning more money for less market share. We went in. We tweaked the program a little bit and made sure to address it. What we are experience really is a very fluid environment. Gone are the days where you draft a sales comp plan and it renews year after year. We're looking at reviews twice a year, just to make sure that it aligns with the business goals.
TE: It definitely seems like the HR departments of many of these M&D companies are busier and busier than they've ever have been. It's necessary to look at this on a continuing basis. What pay initiatives are manufacturing clients considering in the near future?
DN: Travis, what we are supporting our clients with is not only just salary structure development, providing some parameters around pay, but encouraging employers to look at cross training for their positions, particularly on the production floor. Increasing their bench strength, giving employees the opportunity to enhance their skillset, motivating them to learn a new skill and applying that skill, so that it impacts the company in a positive manner. Other companies are looking towards their benefits. It's not just about pay, but it's about the complete experience. The benefits is a piece of that.

There are some smaller manufacturing companies that we work with that use their benefits offering as a significant part of the total rewards package. They may pay a significant amount or the full amount of the contribution on the benefits, or they may provide profit sharing. There are other pieces that could be very important to the employee. But again, this also requires that human resource departments look at their benefits offerings on an ongoing basis and finding opportunities to enhance those. Of course, we have to think about from the financial perspective, the affordability of this increased payroll and the increased costs. Our clients are looking to make adjustments in order to face these challenges in this new compensation model.
MR: When you think about adjustments, certainly pricing increase comes to top of mind, but there also has to be a mindset, initially at least, to accept reduced profits. I think increased wages will result in a more engaged workforce and hopefully in turn increases productivity. There's going to be some phasing in and phasing out of reduced profits, but companies are reevaluating really how work is done across all industries and senior leadership is tuned into new and better ways to run their businesses. Again, the hope is that there'll be a leveling off between an increased payroll and increased profits.
TE: I think quite often, a lot of employees focus on their base pay, but other than base pay, what strategies can manufacturing companies use to enhance retention?
DN: Companies can look at two different elements to help with attraction and retention. One would be a signing bonus for new employees coming on board. The second for retaining employees would be some sort of retention bonus.
MR: We're also seeing interest in professional development, both internal training and investment in educational investment career pathing within the organization, tuition reimbursement, childcare resources. One interesting thing is we had a client that offered gym memberships to their population. Most of them were family people. They had young children. Nobody was really interested in having a gym membership. They switched that benefit to tuition reimbursement. The engagement increased retention increased dramatically. We've seen companies try to implement something that they read or heard about, only to find out they couldn't really execute on it because certain factors were unique to their organization. It's extremely important to make sure that whatever programs we are seeing as a trend, we want to make sure it aligns with the organization. What we have learned over our many years of consulting is that there is more than one correct answer to many of these questions.
TE: Thank you both so much for speaking with us today. This is an extremely hot topic and compensation resources is a very valuable part of EisnerAmper and our manufacturing and distribution group. And thank you for listening to this episode of ManuFacts and Perspectives, an EisnerAmper's podcast series. Visit EisnerAmper.com for more information on this topic and a host of other topics and join us for a next EisnerAmper podcast when we get down to business.

Transcribed by Rev.com

About Mary A. Rizzuti

Mary Rizzuti is the Managing Director of Compensation Resources, an EisnerAmper Company and has experience in compensation and human resources consulting.

About Travis Epp

Travis Epp is EisnerAmper’s Partner-in-Charge of the Manufacturing and Distribution Group, with nearly 30 years of experience in public practice and private industry. Travis focuses on private companies in the middle market.

About Diana Neelman

Diana Neelman is a Director with Compensation Resources, an EisnerAmper Company.

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