Compensation Strategies in Changing Labor and Economic Environments
The EisnerAmper Compensation Resources team shares some of the compensation challenges businesses are facing due to inflation, understaffing and potential economic slowdown in this Solution Session. Leaders will learn actionable solutions to address them such as structured pay, defining compensation levels, and staying away from one-size-fits-all packages.
Mary Rizzuti:It has been said that compensation is both art and science. We have certainly been living that in the work we've done. My name is Mary Rizzuti and I'm a partner with EisnerAmper Advisory Group. I'm the practice leader for compensation resources, compensation consulting firm, serving clients across many industries in all aspects of compensation consulting. Joining me today are my colleagues, Diana Neelman and Gene Camm, both senior directors on our team. Welcome.
Gene Camm:Thank you.
Diana Neelman:Thank you.
So we've been doing a lot of work in the compensation consulting space. What used to be a nice to have is now a need to have, we see organizational leaders at the top of the organization becoming involved in compensation when many times it was just human resources. We've seen also a strategy around getting some formalization around policies and procedures that didn't exist before. Pay transparency, pay equity, hybrid workforce, remote workforce, and distributed workforce are all top of mind. We're going to be discussing many of those as triggers for compensation, strategy development. Diana, tell me a little bit about your work in the base pay administration.
DN:So, we do a fair amount of work in base pay administration for all levels of employees within an organization. Part of it is the benchmarking is to ensure that the market values that we're providing them align with their compensation philosophies. And so we provide them with guidance as far as what the market bears for their positions.
MR:And I guess we would also need to talk about the hybrid workforce. So Gene, yeah, what happens then when we're trying to decide how to develop the salary structure?
GC:So you get into different geographic differentials and the organizations have different philosophies on how they're going to handle the structure. Kind of really what we've seen as a mainstay is that organizations are really looking to pay what the value is as opposed to, okay, if persons living in Manhattan and that cost of living is a little bit different than someone who's living in Atlanta, Georgia. So taking a look in developing policy around how organizations are going to handle that, whether they're going to maintain one salary structure or whether they're going to put a geographic differential on top of the structure after the initial structure's built.
MR:And I think when we first went to the remote workforce, we saw companies saying, "Well, maybe we should just pay where they sit." Then we saw them go to, "Well, let's pay regionally." Then we saw them go, "Let's go to headquarters." Now we're seeing a mix of that, but also doing maybe a national structure with the metro adjustment because those are the higher cost of living. Do you build your structures that way, Diana?
DN:Yes, and I actually work with a client recently who made a conscious decision to have a national structure because they were looking to expand their remote workforce throughout the United States, and they also set their minimum wage to the highest minimum wage that is in the country, which is Washington, DC.
MR:Interesting. So that goes to really comp philosophy. So back in the day, we had comp philosophy as part of all of our projects, and it was really probably the quickest part of the project, but we're seeing now a lot more time spent on the philosophies. Gene, talk a little bit about that.
GC:Yeah, you're 100% correct. I mean, what used to be kind of an add-on as part of our project has really become a project in itself. And organizations are realizing that they really need to funnel down from what their culture and what they're trying to establish, especially when you start looking at the great resignation or the talent wars that are out there. So organizations are really heavily emphasizing what their compensation philosophy is. And although they may not necessarily share it with all their employees, it's something that their executive team or their leadership team really values and they lean on.
MR:And then I also believe that we're seeing a little bit more concentration on that career development, pay for performance, merit increase, and all of those philosophies. Would you agree that companies that didn't have structured programs structured philosophy struggled more in what we've just witnessed?
DN:Absolutely. They really didn't know which direction to go in from a compensation standpoint. What to put into fixed pay, when to what to put into variable pay. As they started to look at their programs and look into professionalize what they have, they started with that compensation philosophy to be able to provide the guidepost of what they're going to put into each area. But it also lends to culture. Organizations sometimes are very much tuned into providing protections for employees. So they do look at what the benefits package is. So it's really an entirety of the package, the total rewards perspective.
GC:And to that point, we've seen clients that have had no structure in the past, and it was really discretionary. So essentially, as long as they felt their total compensation was competitive at the end of the year, they were comfortable. And what's going on is that as some companies start to struggle or they're not hitting their performance, that variable piece of compensation has shrunk. So there's a larger gap between what the base pay is compared to what their total compensation package is. So developing a structure around that is really important.
MR:Right. Because how would they have known that? And then also from a pay equity perspective, if you don't have a structure, you can't look at your entire organization and make that determination. So when we talk about the variable pay, I think with the economy and the volatility of what we are expecting in 2023, companies are now looking at their variable pay. Gene, you do a lot of work there. Tell us a little bit about what's going on.
GC:I do. And there's kind of a mindset shift really when you start talking about that variable component or the annual bonus or the quarterly incentive. And really what you're starting to see are organizations shorten down the measurement period. So going from what used to be an annual bonus plan is now being evaluated and looked at on a quarterly basis. And that does a couple things. Number one, it keeps the attention of the individuals motivated. It also shortens the life cycle of the period of time that's being measured. And we've also built out annual makeup. So if for example, they fall short in quarter one or quarter two, but at the end of the year they hit their annual quota, they have a makeup to be able to earn back those commissions or the incentive portion of what their compensation piece is.
MR:And isn't that different than what we saw five, 10 years ago? It used to be if you hit it, you got paid. If you didn't hit it, you didn't get paid. So I see a softer approach to more employee centric.
GC:Yeah. I think it's become a kinder, gentler organizational feel. Really what we've seen in the marketplace, too is where CEOs and head of HRs have had to go to the board of directors and ask for additional funding because the bonus pool hasn't been funded this year. And they realize that, hey, if we don't take care of some of our key employees, they're going to go work across the street, or they're going to go work for another organization that's going to offer them 10, 15, $20,000 more in base guaranteed compensation. So we are seeing where some of our clients have gone back to the board and asked for additional funds to be able to take care of those employees.
MR:And then when there isn't a board of director, then what?
MR:Then you really have to find the money.
GC:Right. I mean, it's the CEO, it's fighting with the CFO, it's looking at other areas where we may be able to cut, whether it's technology or equipment, but to be able to really take care of the employees from a compensation perspective because it's the single most important thing for any individual employee.
MR:And when you talk about cutting Diana on the hybrid side, when they're creating hybrid positions. So we saw that probably in 2008, 2009, are you seeing that again?
DN:Starting to see that come back again, as companies are looking to their staffing situations and maybe not adding positions back that have turned over, they're looking to employees to take on additional roles. So we're starting to see some of that, those core responsibilities expanding. So it becomes even more important to understand what the market is for those distinct responsibilities so that they're compensated appropriately and within the salary structure.
MR:And that would, I guess, lend itself to either a premium or some kind of a blended rate?
MR:And again, that's where I guess the art and science. So we have the science with the data, the art is really how do you then address the hybrid?
MR:And then on the variable pay, so I guess sales comp would also be affected as well?
GC:Yeah, sales comp's an animal onto itself. We're seeing organizations really try to align the total company success with the individual salespeople success. So for example, where an organization may have paid off of top line sales, they're looking saying, "Well, my transportation costs have increased, my cogs have increased, and although you're still making money salesperson A, the organization's margins have shrunk." So we're seeing plans shift more to a gross profit and pay as a commission as a percentage of that.
Some of the other things we're really seeing that are interesting from the sales perspective is really qualitative measurements being put in.
GC:So where a person's total compensation or their variable piece, 75% of that may be tied directly to a sales figure. The other 25% is being measured either on how's the organization doing, how's my team doing? Or how am I behaving? And what measurements am I doing? Am I aligning myself to the culture or am I just that top performer not caring about my team or anybody else? And that what you hit there is an agency conflict where the goals of the organization conflict directly with the goals of what an individual contributor is really providing.
MR:I had seen that I would say maybe five or six years ago, Diana and I worked on something together, and at that time they were full commission, and this organization was very committed to putting a behavioral component in a commission plan. And at that time it was unheard of. There was a lot of pushback, but they felt that just because you were a top producer, it didn't mean you were a top employee and they wanted to marry the two. And so I thought that that was pretty interesting. It was successful. It was certainly change management to get it across the finish line, but it worked. It worked. So those that were not in alignment with the company goals from a culture perspective, either self-selected out or got more in line with what was going on.
GC:And I think that's the tie back to culture and the importance of culture. Over the last couple of years with folks working from home culture meant a little bit less. But now as folks are re-engaging, they're going back to the workforce, culture's really at the forefront of a lot of executives' minds. And how do you uphold that culture? And what's a premium of, hey, you have to have this if you're going to be successful in this organization. And I'm a believer that culture devour strategy. So if you have the right upfront culture, then you're going to be more successful than a person who may not fit the culture of the organization.
MR:And this is something entirely new for 2023, because culture was, again, check the box type of thing. But now they're challenged. So we have a remote workforce, we have a hybrid workforce, and then we have people that are in the office five days a week that weren't typically. And so there is a lot of focus now on the culture part of this.
DN:Absolutely. And really just to continue the discussion about the qualitative metrics, it's not only about sales compensation, it's for any incentive plan, particularly when a company is implementing more of a pay for performance focus on their incentive compensation and their transitioning into more goal-based pay, there still needs to be a qualitative because employees are getting used to it. They're not sure how they fit into the organization, even though every employee can impact organizational performance. So those qualitative metrics around mission focus, vision focus, team building, again, those are complimentary to a sales compensation plan as well.
GC:And we also see that in annual performance reviews and your 90-day introductory review, your annual check-in that you're seeing those qualitative metrics kind of flow through. And when we design performance appraisals for some of our clients, we're including those types of metrics as well.
MR:And then on the flip side, we're seeing also quantitative for top to bottom of the house. So we've had clients that said, "We don't care if it is a individual contributor, a task-oriented position, we need to set some quantitative goals so that everybody understands what they're doing here, why they're doing it, and that in fact, they have an impact on the bottom line." So that's also a shift that we're seeing going forward with a lot of time spent on goal setting.
GC:What we're also seeing a lot of is that organizational alignment. So in the past where an annual incentive plan or a bonus plan may have been 50% based upon your individual contribution and 50% based upon the company contribution, we're seeing more of a funnel approach where it goes through the company's performance first, and then that determines the overall size of the pool. And then from there, it layers out and looks at each individual person or department to see what their contribution is or what piece of the pie they're actually going to get.
MR:And then that goes also to education. So I see that as a prediction going forward. A lot more time spent on education, educating managers on how to do performance evaluation, educating employees on how they're compensated, trying to build trust and confidence on this again, pay transparency regulations that are popping up in all states doesn't necessarily mean that everyone across the board shouldn't be working towards some pay transparency. Now there's the balance between we don't need to know what everybody makes in an organization, for sure, but how did you come to what I'm earning? And the next question is always, what's my next step within the organization? So that goes to career progression, career leveling, job leveling, supported by the structure, but Gene, you've done a lot of that too. And I see also competency models making a comeback. That was something 10 years ago, we did a lot of those. That was quiet for a bit. I'm seeing more competency models pop up as well.
GC:Yeah, absolutely. And you talk about leveling. So for example, you have a position such as software engineer. You could have a person who's right out of college performing that role, or you could have a 20-year veteran who's performing that role. If they're lumped into that same structure and pay, you're going to have a very wide band. So what we've been doing is assisting our clients going through and creating competency models to say, okay, a level one software engineer has this set of skills. A level two has this set level three and a level four. And as you progress through those competency models and check the box that they have these attributes, then they're able to move up in the salary structure.
MR:And then there's also that career development, professional development that again, gets put into the comp philosophy and it keeps employers honest to the comp philosophy and investing in their employees. We're seeing something called internal recruiting. So in order to keep people within the roof and not let them leave for a different job, they're making a concerted effort to recruit internally. And these competency models allow for that and facilitate that. Any other predictions?
DN:I think we're going to continue to see the hybrid positions come back, which lends itself to ensuring that job descriptions are accurately portraying the position so that not only can you communicate with the expectations of the role are, but that you can be able to assign an appropriate compensation level to that.
GC:Yeah, I think the leveling is going to continue, I think career progression, career modeling, career pathing, so that individuals can see kind of the direction of which they have the opportunity within this organization. It may not be a straight ladder up, it may be a ladder up and then over to a different functional area and then back up again.
MR:We're also seeing that lateral movement also. So for individuals that have, I think, a threshold of how high they can go with their position, we're seeing even seniority that if you're here five years, you hold one spot in the salary structure, if you're here 10 years. So that there is lateral progression also. And that's worked very well in the manufacturing industry, in any kind of consumer type help desk, customer service where there isn't a whole lot of growth within the position, but rather give them lateral growth, at least for seniority purposes.
GC:Yeah. And then you talk about other things that we see are going to potentially happen. I look at it and say the last couple of years has really been an employee market. I think with whispers of the recession, I think it's going to slowly drift. And instead of being an employee market, I think it's going to become more of a balanced market and then tipping over to more of an employer market towards the end of the calendar year.
MR:So the work that compensation resources does, centers in the privately held space, the not-for-profit space, and a little bit in the publicly traded space, much of what we've spoken about is really global. But let's talk a little bit about the differences. So what do you see as a global issue between not-for-profits and for-profits and individual?
DN:So Mary, with the not-for-profit clients that I'm working with, they've gone beyond what their particular industry is for a comparison and have looked to others that can be sources for talent. So for example, community health centers, they used to only want to compare themselves against their peers, but they're now looking to compare themselves to hospitals because in their neighborhood, they're exchanging nurses within that industry. Same goes with credit unions, they are non-profit organizations, but because of leadership demands, they need to look within the financial services sector, which is for-profit, for benchmarking.
GC:Yeah, that's exactly right. I mean, we're seeing that, and it comes back to the talent wars. It's no longer just isolated based upon the industry that you're working in it. It's really where am I competing for talent in the marketplace? Because I need to have a handle on, hey, what's Google paying even though I'm not Google because I'm competing in the market or they're located down the street from where I am. So we're seeing really across different industries, across different media, whether it's not-for-profit, for-profit, and even some of our publicly traded organizations, I mean, they're looking at it from a peer perspective and developing a peer group and understanding who's in their marketplace and who and what they're paying and makeup of base compensation, incentive compensation, long-term incentive compensation is really touching all across all industries right now.
MR:And that's something we didn't touch on is the long-term incentive piece of the compensation package. So it used to be a publicly traded company gave a stock component to the total compensation package. We're seeing more and more interest in having that in the privately held space as well. Phantom stock, cash based plans, we're looking at our publicly traded peers in order to come up with what that value is. But turning that into something that aligns to the privately held company is really where the challenge comes from.
GC:And privately held companies, essentially, they want to protect their interests. So they don't want to give away equity in the organization and voting shares and have to worry about changing the structure of the organization. So implementing a phantom stock option plan, for example, is one way that they can do that, and they can offer that long-term incentive without worrying about giving up equity or giving up voting or having a partner in the room with them.
MR:Right. So another layer of creativity that goes into that science of compensation.
DN:Right. And Mary, even among the non-profit clients that we work with, they can mimic a long-term incentive plan among for-profit organizations through supplemental executive retirement plans or some other contribution to income replacement for retirement.
MR:But the biggest challenge there are the public optics of making sure that compensation is reasonable and within the guardrails of what regulations allow from a reasonableness perspective. So again, lots of moving parts in what we do, lots of history. I mean, individually, we have over 20 years of experience, both in human resources and compensation. So I think that we have a lot more tales to tell going forward. Thank you, Diana and Gene, for the collaboration. I think we have shared a lot of history and a lot of predictions for 2023. And thank you all for joining us. Compensation is a strategy, and we hope that you keep that top of mind for your 2023 business plan. Thank you.
Transcribed by Rev.com
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